Item 1.Business
Arctic Cat Inc. (the "Company"), based in Thief River Falls, Minnesota, operates in a single industry segment and designs, engineers , manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, as well as related parts, garments and accessories. The Company markets its products through a network of independent dealers located throughout the contiguous United States and Canada, and through distributors representing dealers in Alaska, Europe, the Middle East, Asia and other international markets. The Arctic Cat brand name has existed for more than 30 years and is among the most widely recognized and respected names in the snowmobile industry. The Company trades on the Nasdaq National Market under the symbol ACAT.
Industry Background
Snowmobiles. The snowmobile, developed in the 1950's, was originally intended to be used as a utility vehicle, but today the overwhelming majority of the industry's sales are for recreational use. Between the late 1950's and early 1970's, the industry expanded dramatically reaching a peak of over 100 manufacturers and a high of almost 495,000 units sold to retail customers in North America in 1971. Gasoline shortages, significant gasoline price increases, high interest rates and recessions in the middle to late 1970's through the early 1980's contributed to a significant industry downsizing. Today the number of major industry participants has decreased to four.
Industry-wide snowmobile sales to retail customers in North America were approximately 189,000 units for the 2000 model year. The Company believes these sales were due, in part, to a number of factors such as an expanded system of public and private snowmobile trails, a rapidly growing market among the "baby boomer" generation, product innovations that have improved ride, performance and handling, organized snowmobile clubs which promote the sport and ongoing snowmobile replacement. Since 1971, approximately 5,896,000 snowmobiles have been sold in North America, and the Company estimates that over 85 percent of current industry sales are to retail customers who own, or previously owned, a snowmobile.
The industry consolidation that occurred in the mid-1970's through the early 1980's has left four major participants in the North American market: Arctic Cat, Bombardier (Ski-Doo), Polaris and Yamaha. The Company believes the industry consolidation has contributed to improved industry profit margins and closer monitoring of industry inventory levels. The Company believes there are currently more significant barriers to entry into the snowmobile market than existed in the 1970's. These barriers include increased brand loyalty, long-standing dealer and distributor networks and relationships, limited engine sources, manufacturing and engineering expertise and higher initial start-up costs.
Information in this document regarding the worldwide and North American snowmobile market is derived from the International Snowmobile Manufacturers Association. Non-North American sales for the industry are estimated to account for less than 10% of worldwide sales; specific yearly information, with respect to worldwide sales, is not considered by the Company as sufficiently consistent or reliable for presentation in this report. All industry information is based on a model year ending March 31, which is the same as the Company's fiscal year-end, unless otherwise stated.
All-Terrain Vehicles (ATVs). The ATV industry evolved from the three-wheel model that was developed in the early 1970s to the four-wheel models that are sold today. ATVs are generally one person vehicles used for a variety of off-road uses. The most popular ATV use is general recreation, followed by hunting/fishing, farm/ranch use, hauling/towing, transportation, and commercial uses. From 1970 to 1986, the number of three and four-wheel ATVs sold in the United States continued to grow until peaking in 1986 with approximately 535,000 units sold during that calendar year. From 1987 to 1991, the number of ATVs sold declined to a low of approximately 151,000 units. Since 1992, sales have gradually climbed until reaching approximately 545,292 units in 1999. Major competitors in the industry include Honda, Yamaha, Kawasaki, Polaris and Suzuki.
Personal Watercraft (PWC). On October 7, 1999, Arctic Cat announced that it was exiting the personal watercraft (PWC) business effective September 30, 1999. The Company recorded a pre-tax charge of $26.2 million related to the discontinuation of its Tigershark line of PWCs. This charge includes the cost of closing down the production line, and supporting dealers' efforts to sell remaining PWC inventory and service existing PWC customers.
Arctic Cat entered the personal watercraft business in 1993, during a time of rapid industry growth. North American sales peaked at about 210,000 units in 1995, only two years after the Company entered the market, and have declined every year since. By the 1999 model year, the market had dropped by half, to only 110,000 units. While the Company was uncertain how far the industry would continue to fall, at recent levels, the personal watercraft market was not profitable for Arctic Cat or its dealers. Major competitors in the industry included Yamaha, Bombardier (Sea-Doo), Polaris and Kawasaki. The Company does not believe the industry will see significant growth in the near future and therefore further investment could not be justified. The Company, believes this decision will strengthen Arctic Cat as it refocuses management's time and the Company's significant financial resources on the profitable and strong snowmobile business, and profitable and rapidly growing ATV product line.
Products
Snowmobiles. The Company produces a full line of snowmobiles, currently consisting of 32 models, marketed under the Arctic Cat brand name, and designed to satisfy various market niches. The 2000 Arctic Cat models carry suggested U.S. retail prices ranging from $3,599 to $10,999, excluding a children's model which is sold at a suggested U.S. retail price of $1,799. Arctic Cat snowmobiles are sold in the United States, Canada, Scandinavia and other international markets.
The Company's 2000 year snowmobile models are categorized as High Performance, Trail Performance, Powder, Luxury Touring, Family Trail, Family Touring and Sport Utility. The Company markets: High Performance Arctic Cat snowmobiles under the names Thundercat, ZRT, and ZR; Trail Performance Arctic Cat snowmobiles under the name ZL; Powder snowmobiles under the name Mountain Cat; Luxury Touring models under the names Triple Touring and Pantera; Family Trail snowmobiles under the name Z; Family Touring snowmobiles under the name Panther; and Sport Utility models under the name Bearcat. In addition, to encourage family involvement in snowmobiling, the Company offers snowmobiles designed especially for small children, marketed under the Z120 name.
The Company believes the Arctic Cat brand name enjoys a premier image among snowmobile enthusiasts and that its snowmobiles have a long-standing reputation for quality, performance, style, comfort, ride and handling. Arctic Cat snowmobiles offer a wide range of standard and optional features which enhance the operation, riding comfort and performance. Such features include hydraulic disc brakes and a technologically advanced front suspension. Arctic Cat is the only company in the industry that offers an electronic fuel injection (EFI) system on its snowmobiles. In 1999, the Company developed a new corporate brand "ACT"(TM) (Arctic Cat Technology) in order to recognize and leverage its industry-leading technology and engineering. The above named features as well as other future exclusive Arctic Cat innovations will carry this new ACT brand. Additional features on certain models include electronic engine gauges and indicator lights, electric starters, handlebar and thumb warmers, reverse gears, 2-up seats, mirrors, custom windshields, hitches and luggage racks as well as other features. These features may also be purchased separately from independent Arctic Cat dealers as accessories.
Arctic Cat's on-going commitment to both high performance and its retail customers has led the Company in a series of "firsts". In 1988, the Company and Suzuki introduced a new line of compact, lightweight, liquid-cooled twin cylinder engines. In 1990, the Prowler was the first snowmobile to offer a new double-wishbone suspension. With its high performance 1991 Wildcat model, the Company became the first in the industry to offer a 700cc electronic fuel injection engine. In 1992, the Arctic FasTrack, extra-long travel rear suspension was introduced on several high performance models. In 1993, the Company became the first to offer a 900cc, 3 cylinder snowmobile, called the Thundercat. In 1997, Arctic Cat offered the first batteryless EFI system and in 2000 unveiled the first useable four-stroke snowmobile. Arctic Cat believes that its leadership in innovation, technology, style and performance has been demonstrated by its models being voted "Snowmobile of the Year" by Snowmobile, Snowgoer and Sno West magazines with respect to the EL Tigre 6000 in 1984, the Wildcat 650 in 1988, the Prowler in 1990, the EXT Special in 1991, the ZR 440 in 1994, the Powder Special EFI and the ZR 600 EFI in 1998. In 1999, the ZR 500 EFI received the "Best in Class" award and the Powder Special 500 EFI received "Sport Mountain Sled of the Year". In 2000 Snowmobile magazine rated the following machines "Best in Class": Thundercat, ZRT 600, ZR 600 and Z370.
Arctic Cat believes that it has been able to grow in the worldwide snowmobile retail sales due to its emphasis on new product development. A new model has been introduced by the Company nearly each year since its formation, and in recent years new models have been among the Company's best sellers. In the 2000 model year, approximately 85 percent of the Company's snowmobile sales were from models or model variations not available three years earlier.
All-Terrain Vehicles (ATVs). In December 1995, the Company introduced its first ATV, the Bearcat 454 4X4, which provided many industry-leading features such as exclusive rocker-shifter, full floor boards, and a 50-inch wheelbase. Since that time, the Arctic Cat ATV line has grown to include seven models: the Arctic Cat 500 4x4 automatic and the following manual models: Arctic Cat 500 4x4, Arctic Cat 400 4x4, Arctic Cat 400 2x4, Arctic Cat 300 4x4, Arctic Cat 300 2x4, and Arctic Cat 250 2x4. These heavy duty models feature aspects ensuring ease of handling and agility over rough terrain. Features like independent front suspensions, hydraulic disc brakes, hi-low range and a plentiful 4.25 gallon fuel tank, all make Arctic Cat ATVs consumer friendly. The 2000 Arctic Cat ATV models carry suggested U.S. retail prices ranging from $3,799 to $3,999.
Arctic Cat believes its ATVs are renown for their power and durability and are well received within the market. For model year 1998, the Arctic Cat 300 was named "Editors Choice" by Sports Afield and "Best In Class" by ATV Magazine. For model year 1999, ATV Magazine named the 300 4x4 as "Best in Class" and the 500 4x4 as the Editors Pick for "Best-for-Work" machine. Farm Industry News gave Arctic Cat 2000 models the FinOvation Award for having the greatest reader interest.
Personal Watercraft (PWC). Similar to Arctic Cat snowmobiles, Tigershark PWC were a blend of performance, durability and style, with attention to comfort and economy. In fiscal 2000, the Company offered seven 1999 models to cover major market segments in the current PWC market ranging in U.S. retail price from $4,899 to $8,299. For the High Performance market, the Company offered the TS 770 R and TS 1100 R, two-passenger models designed for superior performance and optimum power. Three Family Touring models were, including the TS 770 L, TS 900 L and TS 1100 Li, three-passenger models designed for ample power and handling with the capacity to tow skiers or water toys. For the Economy market the Company offers the TS 640 and TS 770 both two-passenger models built for exceptional quality and stability. The Company exited the PWC business in September 1999.
Parts, Garments and Accessories. The Company is the exclusive provider of genuine Arctic Cat snowmobile, ATV and Tigershark, parts, garments and accessories. Included are replacement parts for Arctic Cat snowmobiles, items to upgrade a snowmobile such as an electric start kit, a reverse gear kit and a two-speed transmission kit, as well as accessories such as mirrors, windshields, luggage racks, backrests, two-person seats, saddlebags, bumpers, gauges, tail light protectors and snowmobile covers. Other items include maintenance supplies such as oil and fuel additives, clutch and carburetor parts, track studs and carbide runners, shocks and springs, accessory fuel tanks, vinyl protectant, touch-up paint, hood and windshield cleaners, windshield defogger and engine storage preservers. Tigershark parts and accessories include impellers, grates, bilge pumps, batteries, covers, mirrors, oil and beach dollies. Arctic Cat ATV parts and accessories include winch kits, plow kits, portable lights, utility bags as well as maintenance supplies such as brake fluid, fuel de-icer, anti-freeze, and fuel stabilizers. The Company also sells generators under the "Arctic Cat" label.
The Company offers snowmobile garments for adults and children under the "Arcticwear" label. Suits, jackets, pants and accessory garments are offered in a wide variety of styles and sizes combining fashion with functional utility designed for the demands of snowmobiling and other winter activities. The Arcticwear line of clothing also includes crew neck sweaters, pull-overs, riding gloves, hats, fog-resistant face shields, helmets, boots, duffel bags, jerseys and T-shirts. The colors and designs of many of these items are coordinated with specific Arctic Cat snowmobile models.
The Company offered Tigershark garments under the "Sharkwear" label. Included in the stylish line are neoprene and lycra wet suits, goggles, sunglasses, coolers, duffle bags, water shoes and gloves, T-shirts, sweatshirts, jackets, golf shirts, shorts and towels. The Company has discontinued this line of products due to its exit from the PWC business.
The Company offers ATV garments under the "Arcticwear ATV Gear" label. This line of clothing is geared toward function and comfort and includes suits, jackets, gloves, boots, helmets, sweatshirts, T-shirts, and caps.
The Company has in the past, and may in the future, consider adding other products consistent with its manufacturing and marketing expertise.
Manufacturing and Engineering
Arctic Cat snowmobiles and ATVs are manufactured at the Company's facilities in Thief River Falls, Minnesota. The Company paints hoods and produces other parts for its Arctic Cat snowmobiles and ATVs in Madison, South Dakota. The Company also has a facility in Bucyrus, Ohio which houses its service parts, garments and accessories distributor operations. The Company has strategically identified specific core manufacturing competencies for vertical integration and has chosen outside vendors to provide other parts. The Company has developed relationships with selected high quality vendors in order to obtain access to particular capabilities and technologies outside the scope of the Company's expertise. The Company designs component parts often in cooperation with its vendors, contracts with them for the development of tooling, and then enters into agreements with these vendors to purchase component parts manufactured utilizing the tooling. In its vertically integrated operations, the Company manufactures hoods, foam seats and seat covers and machines, welds and paints other components. The Company then completes the total assembly of its products at its facilities in Thief River Falls. Manufacturing operations include digital and computer-automated equipment to speed production, reduce costs and improve the quality, fit and finish of every product. The Company believes that all raw materials used in its manufacturing process and all component parts, with the exception of engines and carburetors, are available from multiple alternative vendors on short notice at competitive prices.
Since the Company's inception, its snowmobile engines have been manufactured by Suzuki Motor Corporation ("Suzuki") pursuant to a supply agreement which is automatically renewed annually unless terminated. While notice of termination of the supply agreement may be given annually, effective cessation of supply would take at least one model year due to the contractual notice requirement. The Company's PWC and ATV models also incorporate engines manufactured by Suzuki.
The Company and Suzuki have enjoyed an excellent relationship since the Company's inception. Suzuki purchased approximately 31% of the Company's then outstanding capital stock in July 1988, prior to the Company's initial public offering, and is currently the Company's largest shareholder with approximately 30% of the Company's outstanding capital stock. If Suzuki were ever to cease supplying engines to the Company, such an interruption could materially and adversely affect production. The Company believes it could take up to two model years for a new engine supplier to be in a position to manufacture the Company's specially designed engines.
Since the Company began production, it has followed a build-to-order policy to control inventory levels. Under this policy, the Company only manufactures a number of machines equivalent to the orders received from its dealers and distributors, plus a small number of uncommitted machines used for new dealer development, in-house testing and miscellaneous promotional purposes. Speculative production and excessive inventories in certain periods during the 1970's and early 1980's contributed to significant price discounting in the snowmobile industry. Since the consolidation of the snowmobile industry in the mid-1970's through the early 1980's, speculative production in the industry has been reduced and dealer inventories have remained consistently below historic peak levels. The Company believes dealer inventory levels of non-current Arctic Cat model snowmobiles, PWC and ATVs have regularly been and are currently among the lowest in the industry.
Most sales of snowmobiles to retail customers begin in the early fall and continue during the winter. Orders by dealers and distributors for each year's production are placed in the spring following a series of dealer and distributor meetings. Snowmobiles are build-to-order commencing in the spring and continuing through late autumn or early winter. Since its inception, the Company has experienced a low level of snowmobile order cancellations. Approximately 30% to 40% of the Company's snowmobiles have historically been sold to retail customers prior to the end of October, long before the season's snow conditions are known.
Retail sales of ATVs occur throughout the year with seasonal highs occurring in the spring and fall. As with the snowmobiles, the Company produces ATV units on a build-to-order basis. The Company builds ATVs throughout the year to coincide with dealer and consumer demands.
Sales of PWC to retail customers generally began in the spring and continued during the summer. Orders by dealers and distributors for the Company's model line were placed in the fall, following dealer and distributor meetings. The PWC were then built to order commencing in the fall and continuing through the early spring.
The Company is committed to an ongoing engineering program dedicated to innovation and to continued improvements in the quality and performance of its products as well as product diversification. The Company currently employs 117 individuals in the design and development of new and existing products, with an additional 34 individuals directly involved in the testing of snowmobiles, and ATVs in normal and extraordinary conditions at the Company's test track. In addition, snowmobiles and ATVs are tested in conditions and locations similar to those in which they are used. The Company uses computer-aided design and manufacturing systems to shorten the time between initial concept and final production. For 1998, 1999 and 2000, the Company spent approximately $10,273,000, $9,545,000 and $9,872,000, or 2.0%, 2.0% and 2.0%, of net sales for the year, on engineering, research and development, all of which was Company sponsored. In addition, utilizing their particular expertise, the Company's vendors regularly test and apply new technologies to the design and production of component parts.
Sales and Marketing
The Company's products are currently sold through an extensive network of independent dealers located throughout the contiguous United States and Canada, and through distributors representing dealers in Alaska, Europe, the Middle East, Asia and other international markets. See Note L of Notes to Consolidated Financial Statements for discussion of international sales. To promote new dealerships and to service its existing dealer network, the Company also employs sales representatives throughout the United States and Canada to represent its products.
The Company's dealers enter into an annual renewable contract and are required to maintain status as an authorized dealer in order to continue selling the Company's products. To obtain and maintain such status, dealers are required to order a sufficient number of snowmobiles and/or ATVs to service their market area adequately. In addition, the dealers must perform service on these units and maintain satisfactory service performance levels, and their mechanics must complete special training provided by the Company. Dealers are also required to carry an inventory of genuine Arctic Cat parts and accessories. As is typical in the industry, most of the Company's dealers also sell some combination of motorcycles, marine products, lawn and garden products and other related products. Approximately 50% of the Company's dealers sell only Arctic Cat snowmobiles, versus multiple brands of snowmobiles. Relations with dealers are generally considered excellent.
The Company utilizes exclusive distributors outside the contiguous 48 United States and Canada to take advantage of their knowledge and experience in their respective markets and to increase market penetration of its products. Each distributor is subject to a distribution agreement which stipulates an exclusive territory for a term ranging from one to three years with specified minimum sales and service requirements for their territory. In fiscal 1997, the Company began marketing its complete product lines to Canadian dealers. The Company believes that marketing directly through dealers brings the Company closer to its Canadian customers, which enables improved service and more competitive prices on snowmobiles, ATVs and parts, garments and accessories. Canadian sales are made in Canadian dollars, a major portion of which is financed through certain Canadian financial institutions. Sales outside North America are made in U.S. dollars and most are supported by irrevocable letters of credit.
The Company's marketing efforts are comprised of dealer, distributor and customer promotions, advertising and cooperative programs with its dealers and distributors. Each year, the Company and its distributors conduct dealer shows in order to introduce the upcoming year's models and to promote dealer orders. Marketing activities are also designed to promote directly to consumers. Products are advertised by the Company in consumer magazines and through other media. In addition, the Company engages in extensive dealer cooperative advertising, on a local and national level, whereby the Company and its dealers share advertising costs. Each season the Company produces promotional films, product brochures, point of purchase displays, leaflets, posters and banners, and other promotional items for use by dealers. The Company also participates in consumer shows and rallies with dealers and sponsors independent drivers who participate in races throughout the world. In order for its dealers and distributors to remain price competitive and to reduce retail inventories, the Company will from time to time make available to them rebate programs, discounts, or other incentives. The Company publishes and mails, four times a year, the Pride magazine to all registered owners of its products.
The Company places strong emphasis on identifying and addressing the specific needs of its customers by periodically conducting dealer and consumer focus group meetings and surveys.
The Company warrants its snowmobiles, PWC, and ATVs under a limited warranty against defects in materials and workmanship for a period ranging from six months to one year from the date of retail sale or for a period of 90 days from the date of commercial or rental use. Repairs or replacements under warranty are administered through the Company's dealers and distributors.
Since 1985, the Company has entered into an annual arrangement with certain financial institutions to provide floor plan financing for the Company's North American dealers. These agreements improve the Company's liquidity by financing dealer purchases of products without requiring substantial use of the Company's working capital. The Company is paid by the floorplan companies shortly after shipment and as part of its marketing programs the Company pays the floorplan financing of its dealers for certain set time periods depending on the size of a dealer's order. The financing agreements require repurchase of repossessed new and unused units and sets limits upon the Company's potential liability for annual repurchases. The aggregate potential liability was approximately $11,100,000 at March 31, 2000. No material losses have been incurred by the Company under these agreements, which are terminable by either party upon 30 days notice. The Company has also guaranteed approximately 50% of the amounts financed by its dealers with one of the finance companies. At March 31, 2000, the Company's maximum level of exposure under this guarantee is approximately $73,589,000. No material losses have been incurred by the Company under this agreement.
Competition
The snowmobile and ATV markets are highly competitive, based on a number of factors, including performance, styling, fit and finish, brand loyalty, reliability, durability and price. The Company believes Arctic Cat snowmobiles and ATVs are highly regarded by consumers in all of these competitive categories. Certain of the Company's competitors are more diversified and have financial and marketing resources which are substantially greater than those of the Company.
Regulation
Both federal and state authorities have vigorous environmental control requirements relating to air, water and noise pollution that affect the manufacturing operations of the Company. The Company endeavors to insure that its facilities comply with applicable environmental regulations and standards. Various states and other governmental agencies have also promulgated safety regulations regarding the use of snowmobiles, PWC and ATVs. The Company has supported laws and regulations pertaining to safety and noise abatement. The Company believes that the adoption of any pending laws or regulations would not negatively affect its products to any greater degree than those of its competitors.
California has recently enacted legislation setting emission standards for ATVs and the federal government has finalized legislation setting emission standards for a number of vehicles including PWC. Currently, the Company's ATVs meet the emission standard requirements in California. The federal government has also enacted legislation mandating emission standards for PWC beginning in 1999 with annual reductions in the emission standards through the year 2006. The Company's 1999 models were engineered and tested to meet emission standards. The Company has signed an agreement with Outboard Marine Corporation (OMC) to supply it's FICHT(TM) Fuel Injection system in order to ensure compliance with these emission standards for the 1999 model year, the last year of PWC production. The Company supports balanced and appropriate programs that educate the customer on safe use of its products and that protects the environment. Although currently the snowmobile industry is not regulated by any federal or state legislation (see discussion below), the Environmental Protection Agency (EPA) has initiated the regulations process to regulate snowmobile and ATV engines. A final ruling is expected no earlier than September of 2001 affecting the 2004 or 2005 model years.
The EPA has promulgated rules involving more stringent emissions standards for two-cycle engines. Such engines are used on the Company's snowmobiles and PWC. The Company currently is unable to predict whether such legislation will be enacted and, if so, the ultimate impact on the Company and its operations. However, the Company is currently evaluating several alternatives to comply with the proposed legislation.
Certain materials used in snowmobile and ATV manufacturing that are toxic, flammable, corrosive or reactive are classified by the federal and state governments as "hazardous materials." Control of these substances is regulated by the EPA and various state pollution control agencies, which require reports and inspection of facilities to monitor compliance. The Company's cost of compliance with environmental regulations has not been, and is not expected to be, material. The Company's manufacturing facilities are subject to the regulations promulgated by, and may be inspected by, the Occupational Safety and Health Administration.
The Company is a member of the International Snowmobile Manufacturers Association (ISMA), a trade association formed to promote safety in the manufacture and use of snowmobiles, among other things. The ISMA is currently made up of Arctic Cat, Bombardier (Ski-Doo), Yamaha, and Polaris. The ISMA members are also members of the Snowmobile Safety and Certification Committee (SSCC), which promulgated voluntary safety standards for snowmobiles. The SSCC standards, which require testing and evaluation by an independent testing laboratory of each model produced by participating snowmobile manufacturers, have been adopted by the Canadian Department of Transport. Following the development of the SSCC standards, the U.S. Consumer Products Safety Commission denied a petition to develop a mandatory federal safety standard for snowmobiles in light of the high degree of adherence to the SSCC standards in the United States. Since the Company's inception, all of its models have complied with the SSCC standards.
Tigershark personal watercraft conform to applicable United States Coast Guard (USCG) standards and Society of Automotive Engineers, Inc. (SAE) recommended practices.
The Company is a member of the Specialty Vehicle Institute of America (SVIA), a trade association organized to foster and promote the safe and responsible use of specialty vehicles manufactured and/or distributed throughout the United States of America. The Company is also a member of the Canadian All-Terrain Vehicle Distributors Council (CATV), a council of similar function. In addition, the Arctic Cat ATV conforms to certain U.S. Consumer Product Safety Commission standards.
Effects of Weather
While from time to time lack of snowfall in a particular region of the United States or Canada may adversely affect snowmobile retail sales within that region, the Company works to mitigate this effect by taking snowmobile orders in the spring for the following winter season and by working with its dealers to move snowmobiles out of a region with light snowfall to another region with heavier snowfall. Nonetheless, there is no assurance that weather conditions will not materially effect the Company's future sales of snowmobiles or ATVs.
Employees
At March 31, 2000, the Company had approximately 1,400 employees including 250 salaried and 1,150 hourly and production personnel. Due to the seasonal nature of sales and the Company's production schedules, prior to the introduction of the PWC and ATV, approximately 60% of hourly personnel worked only during the spring through the late fall production period. However, during the past five fiscal years, most employees remained employed throughout the year to produce the Arctic Cat ATV and the now discontinued PWC. The Company's employees are not represented by a union or subject to a collective bargaining agreement. The Company has never experienced a strike or work stoppage and considers its relations with its employees to be excellent.
Intellectual Property
The Company makes an effort to patent all significant innovations that it considers patentable and owns numerous patents and know-how which relate to production of its snowmobiles, ATVs and other products. Trademarks are important to the Company's snowmobile, ATVs and related parts, garments and accessories business activities. While from time to time the Company becomes aware of the unauthorized use of its trademarks, particularly in the sale of promotional items, the Company has a vigorous program of trademark enforcement to eliminate the unauthorized use of its trademarks, thereby strengthening the value of its trademarks and improving its image and customer goodwill. The Company believes that its "Arctic Cat " registered United States trademark is its most significant trademark. Additionally, the Company has numerous registered trademarks, trade names and logos, both in the United States and internationally.
Item 2.
Item 2. Properties
The Company owns its manufacturing facilities and executive offices in Thief River Falls, Minnesota. The facilities consist of approximately 498,000 square feet of manufacturing, office and warehouse space on 49.5 acres, including approximately 417,000 square feet devoted to manufacturing, and approximately 81,000 square feet devoted to office and administrative uses. The Company also owns a separate building on land contiguous to the manufacturing facilities and executive offices. The building consists of approximately 60,000 square feet on two floors of which the Company utilizes approximately two-thirds for its sewing production of Arcticwear garments and snowmobile seats.
The Company owns three separate parcels of undeveloped land adjacent to its Thief River Falls property totaling approximately 94.8 acres. This property is used by the Company in some of its testing activities and remains available for future expansion.
The Company owns a 37,000 square foot building located in Madison, South Dakota, which is used to paint hoods and produce parts for the Company's Arctic Cat snowmobiles and ATVs. The Company also owns a 220,000 square foot facility in Bucyrus, Ohio, to house its service parts, garments and accessories distribution operations. The Company believes the Bucyrus facility's proximity to central shipping hubs and close access to Canada provides decreased delivery times to the majority of its dealers.
Item 3.
Item 3. Legal Proceedings
Accidents involving personal injury and property damage occur in the use of snowmobiles, PWC, and ATVs. Claims have been made against the Company from time to time. It is the Company's policy to vigorously defend against these actions. The Company believes that the cases in discovery are adequately covered by reserves and product liability insurance. Although the Company from time to time has been named as a defendant in lawsuits involving product liability claims against Arctic Enterprises, Inc. on the theory that the Company is a successor of Arctic Enterprises, Inc., the Company is not a successor of Arctic Enterprises, Inc. and has never been found liable in any such lawsuits. The Company is not involved in any other legal proceedings which are considered to have the potential for a materially adverse impact on the Company's business or financial condition.
Product liability insurance is presently maintained by the Company on a "per occurrence" basis (with coverage being provided in respect of accidents which occurred during the policy year, regardless of when the related claim is made) in the amount of $10,000,000 in the aggregate, with a $1,000,000 self-insured retention. The Company believes such insurance is adequate.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 4(A). Executive Officers of Registrant
Name Age Position ______ _____ __________ William G. Ness 62 Chairman of the Board of Directors Christopher A. Twomey 52 President and Chief Executive Officer Mark E. Blackwell 47 Vice President--Marketing Terry J. Blount 57 Vice President--Human Resources Timothy C. Delmore 46 Chief Financial Officer and Secretary Ronald G. Ray 51 Vice President--Manufacturing Roger H. Skime 57 Vice President--Research & Development Ole E. Tweet 53 Vice President--New Product Development
Mr. Ness has been Chairman of the Board of Directors of the Company since its inception in 1983. He is also a director of Northern Woodwork (specialty furniture manufacturer), a director of Northern State Bank, Itasca Bemidji Incorporated, and May Corporation.
Mr. Twomey has been President and Chief Executive Officer of the Company since January 1986 and a director since 1987. He has held various executive officer positions with the Company since 1983. Mr. Twomey is currently serving as a director of The Toro Company.
Mr. Blackwell has been Vice President--Marketing since May of 1992 and has over 18 years of marketing experience in the recreational vehicle field. Previously he served for five years as Marketing Director for American Suzuki Motor Corporation, including responsibilities in the motorcycle and marine divisions.
Mr. Blount has been Vice President--Human Resources since August of 1996. Mr. Blount has over 30 years of Human Resource experience in the manufacturing field. Prior to joining the Company, Mr. Blount worked as Vice President-Human Resources at Washington Scientific Industries since 1981.
Mr. Delmore has been Chief Financial Officer of the Company since 1986 and has been Corporate Secretary of the Company since 1989. Mr. Delmore, a CPA with seven years of prior public accounting experience, joined the Company in 1985 as Controller.
Mr. Ray has been Vice President-Manufacturing since April of 1992 and has over 30 years of manufacturing experience. Before joining Arctic Cat he served eight years as Vice President of Manufacturing for a Minnesota based company.
Mr. Skime has been Vice President--Research and Development of the Company since its inception in 1983 and has been employed in the snowmobile industry for 39 years.
Mr. Tweet has been Vice President of New Product Development and General Manager of the Marine Division since May 1992. Prior to that, he had been the Company's Vice President-Marketing since its inception in 1983 and has been employed in the snowmobile industry for 35 years.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded on the Nasdaq National Market under the Nasdaq symbol "ACAT". Quotations below represent the high and low closing sale prices as reported by Nasdaq. The Company's stock began trading on the Nasdaq National Market on June 26, 1990.
Years Ended -------------------------------------------- March 31, 2000 March 31, 1999 -------------- -------------- Quarterly Prices High Low High Low ---- ---- ---- ---- First Quarter $10.00 $ 7.75 $10.25 $ 8.69 Second Quarter $10.50 $ 8.88 $ 9.88 $ 8.50 Third Quarter $10.50 $ 8.63 $10.88 $ 8.38 Fourth Quarter $10.31 $ 9.75 $10.50 $ 7.69
As of June 12, 2000, the Company had approximately 587 stockholders of record, including the nominee of Depository Trust Company which held 14,855,565 shares of common stock.
On March 2, 1992, the Company initiated a $0.0267 per share regular quarterly dividend. The quarterly dividend was increased to $0.0355 per share on March 2, 1993 and subsequently increased to $0.0467 per share on March 2, 1994. The Company has paid a quarterly dividend of $0.06 per share since February 2, 1995.
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Item 6.
Item 6. Selected Financial Data Years Ended March 31, (in thousands, except per share amounts)
2000 1999 1998 1997 1996 ____ ____ ____ ____ ____ Income Statement Data: Net sales $484,011 $480,348 $504,206 $468,595 $404,996 Cost of goods sold 363,458 357,137 368,688 351,249 308,946 ________ ________ ________ ________ _________ Gross profit 120,553 123,211 135,518 117,346 96,050
Selling, general and administrative expenses 114,845 90,280 97,840 83,282 72,473 ________ ________ ________ ________ ________ Operating profit 5,708 32,931 37,678 34,064 23,577
Interest income 4,591 2,933 1,837 1,798 2,228
Interest expense - (27) (59) (109) - ________ ________ ________ ________ _________
Earnings before income taxes 10,299 35,837 39,456 35,753 25,805
Income taxes 2,678 12,722 14,007 12,692 9,159 ________ ________ ________ ________ _________
Net earnings $ 7,621* $23,115 $ 25,449 $ 23,061 $ 16,646 -------- -------- -------- -------- --------- -------- -------- -------- -------- --------- Net earnings per share Basic $ 0.30* $ 0.84 $ 0.88 $ 0.78 $ 0.56 Diluted $ 0.30* $ 0.84 $ 0.88 $ 0.78 $ 0.56
Cash dividends per share $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.24 -------- ------- ------- -------- --------- -------- ------- ------- -------- --------- Weighted average shares outstanding Basic 25,535 27,632 28,974 29,476 29,661 Diluted 25,586 27,668 29,059 29,653 29,928
* During fiscal 2000 the Company announced that it was exiting the personal watercraft (PWC) business effective September 30, 1999. Fiscal 2000 results include a pretax charge of $26.2 million ($16.9 million after tax) or $0.66 per share for certain costs related to the discontinued PWC business. The charge consists of $21.5 million of exit related costs. In addition, other PWC related charges include a $3.1 million change in estimate and $1.6 million in other costs. ___________________________________________________________________________
As of March 31, 2000 1999 1998 1997 1996 Balance Sheet Data (in thousands)
Cash & short-term investments $ 108,277 $ 95,208 $ 58,545 $ 50,740 $ 44,002 Working capital 132,072 142,039 142,243 131,604 130,142 Total assets 246,535 240,146 229,718 217,967 207,996 Long-term debt -- -- -- -- -- Shareholders' equity 162,558 175,479 177,505 166,738 156,193 ___________________________________________________________________________
QUARTERLY FINANCIAL DATA (unaudited) (in thousands, except per share amounts) Total First Second Third Fourth Year Quarter Quarter Quarter Quarter Net Sales ______ ______ ______ ______ ______ 2000 $484,011 $86,928 $205,507 $109,009 $82,567 1999 480,348 88,651 193,382 109,750 88,565 1998 504,206 85,467 196,846 139,808 82,085
Gross Profit 2000 $120,553 $21,715 $ 48,806 $ 33,414 $16,618 1999 123,211 21,951 53,264 31,523 16,473 1998 135,518 21,392 55,315 41,056 17,755
Net Earnings (Loss) 2000 $ 7,621 $ 1,861 $ 2,172 $ 4,311 $ (723) 1999 23,115 1,529 19,039 4,278 (1,731) 1998 25,449 872 19,904 6,193 (1,520)
Net Earnings (Loss) Per Share 2000 - Basic & Diluted $ 0.30 $ 0.07 $ 0.08 $ 0.17 $ (0.03)
1999 - Basic & Diluted 0.84 0.05 0.68 0.16 (0.06)
1998 - Basic & Diluted 0.88 0.03 0.68 0.21 (0.05)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Fiscal 2000 was a year of numerous accomplishments for Arctic Cat. ATV sales increased 46% as Arctic Cat outpaced the ATV industry's double-digit growth. ATV growth continues to diversify the Company's sales mix. One third of all sales are now from ATV's. During the year Arctic Cat made a strategic decision to exit the PWC business to enhance focus on the fast growing ATV business and snowmobile business. Due to weather conditions the snowmobile market decreased for the third year in a row. However, given normal snow and Arctic Cat's excellent product line, the Company believes snowmobile sales will begin growing again in fiscal 2002. Also during the year the Company repurchased 1.5 million shares of Arctic Cat stock and reduced inventories by nearly 11% or $7 million. Since 1996 the Company has repurchased nearly 5,000,000 shares of Arctic Cat stock under various repurchase programs.
Results of Operations 2000 vs. 1999
During fiscal 2000 net sales increased 0.8% to $484,011,000 from $480,348,000 in fiscal 1999. ATV unit volume increased 44.2% offset by a 13.3% decrease in snowmobile unit volume, a 69.2% decrease in PWC unit volume and a 7.6% increase in dollar sales of parts, garments and accessories. The Company believes the continued increase in its ATV sales is due both to enthusiastic dealer and consumer reception of the Arctic Cat ATV and growth in the ATV market. Snowmobile unit volume decreased because of lower dealer orders related to warmer than usual weather during the prior winter season. PWC unit volume decreased because of the Company's decision to exit the PWC business.
Gross profit decreased 2.2% to $120,553,000 in 2000 from $123,211,000 in 1999 and the gross profit percentage decreased to 24.9% from 25.7% in 1999. These decreases are due to exit and related costs associated with the PWC business.
Selling, general and administrative expenses increased 27.2% to $114,845,000 in 2000 from $90,280,000 in 1999. The increase is mainly due to $18,627,000 of exit costs associated with the discontinued PWC business. These charges mainly consist of items such as consumer incentive programs, write-offs of equipment and tooling, and costs related to the Company's dealers. Year-to- date operating expenses also increased due to costs of $2,410,000 relating to legal and other matters. The remainder of the increase is attributable to increased ATV marketing expenses related to higher sales levels. Without the exit costs associated with the discontinued PWC business operating expenses would have increased 6.6% to $96,218,000 from $90,280,000 compared to the same period last year. As a percent of net sales, year-to-date operating expenses, excluding PWC exit costs would have been 19.9% compared with 18.8% for the same period last year.
Operating profits decreased 82.7% to $5,708,000 in 2000 from $32,931,000 in 1999. As a percent of net sales, operating profits decreased to 1.2% in 2000 compared to 6.8% in 1999 (see gross profit and operating expenses discussion).
Net earnings decreased 67.0% to $7,621,000 or $0.30 per share on a diluted basis, as compared to net earnings of $23,115,000 or $0.84 per share on a diluted basis for fiscal 1999. Net earnings as a percent of net sales were 1.6% and 4.8% in 2000 and 1999, respectively. Without the exit costs and related costs associated with the discontinued PWC business, year-to-date net earnings would have been $24,520,000 or $0.96 per diluted share, as compared to net earnings of $23,115,000 or $0.84 per diluted share, for the same period last year.
1999 vs. 1998
During fiscal 1999 net sales decreased 4.7% to $480,348,000 from $504,206,000 in fiscal 1998. ATV unit volume increased 32.3% offset by a 13.2% decrease in snowmobile unit volume, a 52.8% decrease in PWC unit volume and a 1.4% decrease in dollar sales of parts, garments and accessories. The Company believes the continued increase in its ATV sales is due both to enthusiastic dealer and consumer reception of the Arctic Cat ATV and growth in the ATV market. As expected, snowmobile unit volume decreased because of lower dealer orders related to warmer than usual weather during the prior winter season. PWC unit volume continued to decrease in response to an industry-wide softening in consumer demand, although the Company believes dealer inventories are at very manageable levels.
Gross profit decreased 9.1% to $123,211,000 in 1999 from $135,518,000 in 1998. Gross profit percentage decreased to 25.7% from 26.9% in 1998, as ATV sales, which yield lower margins than snowmobiles, became a larger percentage of the sales mix, and warranty expenses increased for snowmobile and PWC.
Selling, general and administrative expenses decreased 7.7% to $90,280,000 in 1999 from $97,840,000 in 1998. This was primarily due to lower PWC marketing expenses. These decreases were offset by increased ATV marketing expenses related to increased sales. As a percent of net sales, selling, general and administrative expenses were 18.8% in 1999 compared to 19.4% in 1998.
Operating profits decreased 12.6% to $32,931,000 in 1999 from $37,678,000 in 1998. As a percent of net sales, operating profits decreased to 6.9% in 1999 compared to 7.5% in 1998 (see gross profit and operating expenses discussion).
Net earnings decreased 9.2% to $23,115,000 or $0.84 per share on a diluted basis, as compared to net earnings of $25,449,000 or $0.88 per share on a diluted basis for fiscal 1998. Net earnings as a percent of net sales were 4.8% and 5.0% in 1999 and 1998, respectively.
Liquidity and Capital Resources
The seasonality of the Company's snowmobile production cycle and the lead time between the commencement of snowmobile and ATV production in the early spring and commencement of shipments late in the first quarter have resulted in significant fluctuations in the Company's working capital requirements during the year. Historically, the Company has financed its working capital requirements out of available cash balances at the beginning and end of the production cycle and with short-term bank borrowings during the middle of the cycle. The Company believes current available cash and cash generated from operations will provide sufficient funds to finance the Company for the foreseeable future or twelve months.
Cash and Short-Term Investments
Cash and short-term investments were $108,277,000 at March 31, 2000 compared to $90,208,000 at March 31, 1999. The Company's cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the Company's snowmobile and spring ATV production cycles begin. The Company's investment objectives are first, safety of principal and second, rate of return.
Working Capital
The Company has an unsecured credit agreement with a bank for the issuance of up to $75,000,000 of documentary and stand-by letters of credit and for working capital. Total working capital borrowings under the credit agreement are limited to $30,000,000. The total letters of credit issued at March 31, 2000 were $15,930,000, of which $15,009,000 was issued to Suzuki Motor Corporation for engine purchases. During fiscal 1996 and 1998, the Company's Board of Directors authorized the repurchase of a total of 3,000,000 shares of common stock. Since 1996, the Company's Board of Directors has authorized the repurchase total of 4,500,000 shares and an additional $30,000,000 in shares of common stock. During 2000, 1999 and 1998, the Company invested $14,411,000 , $18,493,000 and $8,392,000 to repurchase and cancel 1,500,800, 2,049,114, and 834,900 shares.
In 2000, the Company invested $11,200,000 in capital expenditures. The Company expects that fiscal 2001 capital expenditures, including tooling, will be approximately $12,500,000. The Company believes that cash generated from operations and available cash will be sufficient to meet its working capital, regular quarterly dividend, share repurchase program and capital expenditure requirements for the foreseeable future or twelve months.
The Company has agreements with certain finance companies to provide floor plan financing for the Company's North American dealers. These agreements improve the Company's liquidity by financing dealer purchases of products without requiring substantial use of the Company's working capital. The Company is paid by the floor plan companies shortly after shipment and as part of its marketing programs the Company pays the floor plan financing of its dealers for certain set time periods depending on the size of a dealer's order. The financing agreements require repurchase of repossessed new and unused units and set limits upon the Company's potential liability for annual repurchases. The aggregate potential liability was approximately $11,100,000 at March 31, 2000. No material losses have been incurred by the Company under these agreements, which are terminable by either party upon 30 days notice. The Company has also guaranteed approximately 50% of the amounts financed by its dealers with one of the finance companies. At March 31, 2000, the Company's maximum level of exposure under this guarantee is approximately $73,589,000. No material losses have been incurred by the Company under this agreement. The Company believes current available cash and cash generated from operations provide sufficient funding in the event there is a requirement to perform under this guarantee.
Inflation and Exchange Rates
Inflation is not expected to have a significant impact on the Company's business. The Company generally has been able to offset the impact of increasing costs through a combination of productivity gains and price increases.
During fiscal 2000, 32% of the Company's cost of sales were purchased from Japanese yen denominated suppliers. The majority of these purchases were made from Suzuki Motor Corporation who supplies engines for the Company's snowmobiles and ATVs. The Company has an agreement with Suzuki Motor Corporation for snowmobile and PWC engine purchases to share the impact of fluctuations in the exchange rate between the U.S. dollar and the Japanese yen above and below a fixed range contained in the agreement. This agreement renews annually. During fiscal 2000, the exchange rate fluctuation between the U.S. dollar and the Japanese yen had a modest negative impact on its operating results. From time to time the Company utilizes foreign exchange hedging contracts to minimize the impact of exchange rate fluctuations. At March 31, 2000, there were foreign exchange contracts outstanding, totalling $15,304,000.
Sales to Canadian dealers are made in Canadian dollars with the U.S. dollar serving as the functional currency. During fiscal 2000, sales to Canadian dealers comprised 14.5% of total net sales. During fiscal 2000, the exchange rate fluctuation between the U.S. dollar and the Canadian dollar had a slightly positive impact on operating profits. The Company did not hedge for this exchange rate fluctuation.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements. This Report on Form 10-K, as well as the Company's Annual Report and future filings with the Securities and Exchange Commission, the Company's press releases and oral statements made with the approval of an authorized executive officer, contain forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to: product mix and volume; competitive pressure on sales and pricing; increase in material or production cost which cannot be recouped in product pricing; changes in the sourcing of engines from Suzuki; warranty expenses; foreign currency exchange rate fluctuations; product liability claims and other legal proceedings in excess of insured amounts; environmental and product safety regulatory activity; effects of the weather; overall economic conditions; and consumer demand and confidence.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to certain market risk relating to changes in interest rates and foreign currency exchange rates. Information regarding foreign currency exchange rates is discussed within "Management's Discussion and Analysis -- Inflation and Exchange Rate" and footnote A to Financial Statements. Interest rate market risk is managed for cash and short-term investments by investing in a diversified frequently maturing portfolio consisting of municipal bonds and money market funds that experience minimal volatility. The carrying amount of available-for-sale debt securities approximate related fair value and the associated market risk is not deemed to be significant.
Item 8.
Item 8. Financial Statements and Supplementary Data
Financial Statements, Notes, and Report of Independent Certified Public Accountants appear on pages through.
Quarterly financial data appears in Item 6.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information included under the heading "Election of Directors" and "Beneficial Ownership of Capital Stock-Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 3, 2000, is incorporated herein by reference.
Pursuant to instruction 3 to Item 401(b) of Regulation S-K, information as to executive officers of the Company is set forth in Item 4(A) of this Form 10-K.
Item 11.
Item 11. Executive Compensation
The information included under the heading "Executive Compensation and Other Information" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 3, 2000, is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information included under the heading "Beneficial Ownership of Capital Stock" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 3, 2000, is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions, appearing under the heading "Executive Compensation and Other Information-Certain Transactions" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on August 3, 2000, is incorporated herein by reference.
PART IV Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of report
1. Financial Statements.
The following consolidated financial statements of the Company and its subsidiaries are filed as part of this Form 10-K:
Form 10-K Page Reference (i) Consolidated Balance Sheets as of March 31, 2000 and 1999
(ii) Consolidated Statements of Earnings for the three years ended March 31, 2000, 1999 and 1998
(iii) Consolidated Statements of Shareholders' Equity for the three years ended March 31, 2000, 1999 and 1998
(iv) Consolidated Statements of Cash Flows for the three years ended March 31, 2000, 1999 and 1998
(v) Notes to Consolidated Financial to Statements
(vi) Report of Independent Certified Public Accountants
2. Schedules filed as part of this Form 10-K:
None
3. Exhibits Method of Filing
3(a) Amended and Restated Articles of Incorporation (3) of Company
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 Norwest Bank Minnesota, N.A., dated September 5, 1991 (incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A filed with the SEC on September 9, 1991).
10(a) 1989 Stock Option Plan, as amended (3)
10(b) 1995 Stock Option Plan, as amended (3)
10(c) Purchase/Supply Agreement dated as of (1) March 1, 1985 between Suzuki Motor Co., Ltd. and the Company, and related Agreement on Implementation of Warranty Provision.
10(d) Form of Employment Agreement between the (1) Company and each of its executive officers
10(e) Floorplan Repurchase Agreement dated (1) July 13, 1984, between the Company and ITT Commercial Finance Corp.
10(f) Floorplan Repurchase Agreement dated as (1) of June 15, 1988, between the Company And ITT Commercial Finance, a division Of ITT Industries of Canada, Ltd.
10(g) Discretionary Revolving Credit Facility, (3) dated as of June 6, 1997, between the Company and Norwest Bank Minnesota, National Association.
21 Subsidiaries of the Registrant (2)
23 Consent of Independent Certified Public Accountants(2)
27 Financial Data Schedule-March 31, 2000 (2)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March 31, 2000.
(c) Exhibits
Reference is made to Item 14(a) 3.
--------------------------------------
(1) Incorporated herein by reference to the Company's Form S-1 Registration Statement (File Number 33-34984).
(2) Filed with this Form 10-K.
(3) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of June, 2000. ARCTIC CAT INC.
/s/Christopher A. Twomey _______________________________ Christopher A. Twomey President, Chief Executive Officer and Director (Principle Executive Officer and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/William G. Ness June 29, 2000 ___________________________ ___________________ William G. Ness Chairman of the Board and Director
/s/Christopher A. Twomey June 29, 2000 ___________________________ ___________________ Christopher A. Twomey President, Chief Executive Officer and Director (Principle Executive Officer)
/s/Timothy C. Delmore June 29, 2000 ___________________________ ___________________ Timothy C. Delmore Chief Financial Officer (Principle Financial and Accounting Officer)
/s/Robert J. Dondelinger June 29, 2000 ___________________________ ___________________ Robert J. Dondelinger, Director
/s/William I. Hagen June 29, 2000 ___________________________ ___________________ William I. Hagen, Director
/s/John C. Heinmiller June 29, 2000 ___________________________ ___________________ John C. Heinmiller, Director
/s/Gregg A. Ostrander June 29, 2000 ___________________________ ___________________ Gregg A. Ostrander, Director
/s/Kenneth J. Roering June 29, 2000 ___________________________ ___________________ Kenneth J. Roering, Director June 29, 2000 ___________________________ ___________________ Takekazu Kaito, Director
Arctic Cat Inc. CONSOLIDATED BALANCE SHEETS March 31,
ASSETS 2000 1999 CURRENT ASSETS Cash and equivalents $ 60,028,000 $51,413,000 Short-term investments 48,249,000 43,795,000 Accounts receivable, less allowances 18,348,000 23,263,000 Inventories 61,669,000 68,644,000 Prepaid expenses 2,880,000 2,925,000 Deferred income taxes 18,975,000 12,220,000 __________ __________ Total current assets 210,149,000 202,260,000
PROPERTY AND EQUIPMENT - AT COST Machinery, equipment and tooling 71,936,000 75,500,000 Land, buildings and improvements 16,861,000 15,548,000 __________ __________ 88,797,000 91,048,000 Less accumulated depreciation 52,411,000 53,162,000 __________ __________ 36,386,000 37,886,000 __________ __________ $246,535,000 $240,146,000 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 27,318,000 $ 23,665,000 Accrued expenses 49,777,000 33,244,000 Income taxes payable 982,000 3,312,000 ---------- ---------- Total current liabilities 78,077,000 60,221,000
DEFERRED INCOME TAXES 5,900,000 4,446,000
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, 17,327,975 in 2000; 18,828,775 in 1999 173,000 188,000 Class B common stock, par value $0.01; 7,560,000 shares authorized, issued, and outstanding 76,000 76,000 Retained earnings 162,309,000 175,215,000 __________ __________ 162,558,000 175,479,000 __________ __________ $246,535,000 $240,146,000 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these statements.
Arctic Cat Inc. Consolidated Statements of Earnings Years Ended March 31,
2000 1999 1998 ----------- ----------- ----------- Net sales $484,011,000 $480,348,000 $504,206,000 Cost of goods sold 360,623,000 357,137,000 368,688,000 Watercraft inventory writedown 2,835,000 - - ___________ ___________ ___________ Gross profit 120,553,000 123,211,000 135,518,000
Selling, general and administrative expenses 96,218,000 90,280,000 97,840,000 Watercraft exit costs 15,147,000 - - Watercraft asset impairment 3,480,000 - - ___________ ___________ ___________ Operating profit 5,708,000 32,931,000 37,678,000
Other income (expense) Interest income 4,591,000 2,933,000 1,837,000 Interest expense - (27,000) (59,000) ___________ ___________ ___________ 4,591,000 2,906,000 1,778,000 ___________ ___________ ___________
Earnings before income taxes 10,299,000 35,837,000 39,456,000 Income tax expense 2,678,000 12,722,000 14,007,000 ___________ ___________ ___________
Net earnings $ 7,621,000 $23,115,000 $25,449,000 ----------- ----------- ----------- ----------- ----------- ----------- Basic and diluted net earnings per share $ 0.30 $ 0.84 $ 0.88 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average shares outstanding
Basic 25,535,000 27,632,000 28,974,000 Diluted 25,586,000 27,668,000 29,059,000 ---------- ----------- ----------- ---------- ----------- ----------- The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
Arctic Cat Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended March 31,
2000 1999 1998 ---------- ---------- ---------- Cash flows from operating activities $ 7,621,000 $23,115,000 $25,449,000 Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 10,569,000 12,486,000 13,369,000 Deferred income taxes (5,301,000) (3,261,000) (517,000) Watercraft inventory writedown, exit costs and asset impairment 21,462,000 - - Changes in operating assets and liabilities, net of effect of watercraft charges: Trading securities (5,009,000)(10,566,000) 11,670,000 Accounts receivable 4,915,000 6,954,000 (2,824,000) Inventories 1,689,000 19,505,000 (1,647,000) Prepaid expenses (305,000) (1,154,000) (153,000) Accounts payable 3,303,000 2,994,000 (915,000) Accrued expenses 3,207,000 6,277,000 1,697,000 Income taxes (2,330,000) 5,423,000 1,727,000 --------- --------- --------- Net cash provided by operating activities 39,821,000 61,773,000 47,856,000
Cash flows from investing activities Purchase of property and equipment (11,219,000)(10,535,000)(13,699,000) Sale and maturity of available-for-sale securities 555,000 552,000 1,070,000 Purchase of available-for-sale securities - - (1,321,000) --------- --------- --------- Net cash used in investing activities (10,664,000) (9,983,000)(13,950,000)
Cash flows from financing activities Proceeds from issuance of common stock - - 827,000 Repurchase of common stock (14,411,000)(18,493,000) (8,546,000) Dividends paid (6,131,000) (6,648,000) (6,963,000) --------- --------- --------- Net cash used in financing activities (20,542,000)(25,141,000)(14,682,000) --------- --------- --------- Net increase in cash and equivalents 8,615,000 26,649,000 19,224,000
Cash and equivalents at beginning of year 51,413,000 24,764,000 5,540,000 --------- --------- --------- Cash and equivalents at end of year $60,028,000 $51,413,000 $24,764,000 --------- --------- --------- --------- --------- --------- Supplemental disclosure of cash payments for income taxes $11,168,000 $12,191,000 $15,797,000 --------- --------- --------- --------- --------- --------- The accompanying notes are an integral part of these statements.
Arctic Cat Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000, 1999 and 1998
Note A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Arctic Cat Inc.(the "Company") operates in a single industry segment and designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, and related parts, garments and accessories principally through its facilities in Thief River Falls, Minnesota. The Company's products are sold through a network of independent dealers and distributors located throughout the United States, Canada, Scandinavia and other international markets.
Use of Estimates: Preparation of the Company's consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. Actual results could differ from the estimates used by management.
Principles of Consolidation: The consolidated financial statements include the accounts of Arctic Cat Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash Equivalents: The Company considers highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of commercial paper and put bonds and are stated at cost, which approximates market value based upon quoted market prices. Cash equivalents totaled $65,468,000 and $57,432,000 at March 31, 2000 and 1999.
Fair Values of Financial Instruments: Due to their short-term nature, the carrying value of current financial assets and liabilities approximates their fair value.
Short-Term Investments: Short-term investments include trading securities, with unrealized gains and losses included in net earnings, and available-for-sale securities, with unrealized gains and losses reported within shareholders' equity. Short-term investments are reported at cost, which approximates market value based upon quoted market prices. The Company utilizes the specific identification method in accounting for its short-term investments.
Inventories: Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method.
Property and Equipment: Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, using the units of production method for tooling and the straight-line method for all other property and equipment. Tooling is amortized over the life of the product, generally three years. Estimated services lives range from 15-20 years for buildings and improvements and 5-7 years for machinery and equipment. Accelerated and straight-line methods are used for income tax reporting.
Product Warranties: The Company provides for estimated warranty costs at the time of sale and accrues for specific items after the sale when their existence is known and the amounts are determinable. During fiscal 2000, the Company recognized a $3,100,000 change in the estimate of its warranty costs.
Insurance: The Company is self-insured for employee medical, workers' compensation, and product liability claims. Specific stop loss coverages are provided for catastrophic claims. Losses and claims are charged to operations when it is probable a loss has been incurred and the amount can be reasonably estimated.
Revenue Recognition: The Company recognizes revenue when products are shipped to dealers.
Research and Development: Research and development costs are expensed as incurred and are reported as a component of selling, general and administrative expenses. Research and development expense was $9,872,000, $9,545,000 and $10,273,000 during 2000, 1999 and 1998.
Advertising: The Company expenses advertising costs as incurred. Advertising expense was $17,225,000, $16,238,000 and $19,605,000 during 2000, 1999 and 1998.
Stock-Based Compensation: The Company utilizes the intrinsic value method of accounting for its employee stock-based compensation plans. Pro forma information related to the fair value based method of accounting is contained in Note K.
Net Earnings Per Share: The Company's diluted weighted average shares outstanding include common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 1,206,084, 1,363,236 and 892,380 shares of common stock with weighted average exercise prices of $11.47, $11.65 and $12.44 were outstanding during 2000, 1999 and 1998, but were excluded from the computation of common share equivalents because they were anti-dilutive.
Foreign Currency: The Company's sales and marketing activities with Canadian dealers are denominated in Canadian currency with the U.S. dollar serving as the functional currency. Assets and liabilities denominated in Canadian currency are translated using the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average foreign exchange rate in effect for the period. Exchange gains and losses are reflected in the results of operations.
The Company enters into forward exchange contracts to hedge purchase commitments denominated in Japanese yen for ATV engines. Gains and losses on the forward exchange contracts are deferred and included in the valuation of the acquired inventory as the forward exchange contracts hedge the underlying foreign exchange exposure. At March 31, 2000, the Company had open Japanese yen forward exchange purchase contracts with notional amounts totaling $15,304,000 maturing through April 2000. The Company does not enter into forward exchange contracts for trading purposes.
New Accounting Pronouncements: The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS")No. 133, Accounting for Derivative Instruments and Hedging Activities, which is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires entities to recognize derivatives in their financial statements as either assets or liabilities measured at fair value. SFAS 133 also specifies new methods of accounting for derivatives used in risk management strategies (hedging activities), prescribes the items and transactions that may be hedged, and specifies detailed criteria required to qualify for hedge accounting. Management believes the adoption of SFAS 133 will not have a material effect on the consolidated financial statements.
FASB Interpretation 44, Interpretation of APB Opinion 25 ("FIN 44"), was issued in March 2000. FIN 44 provides an interpretation of APB Opinion 25 on accounting for employee stock compensation and describes its application to certain transactions. FIN 44 is effective on July 1, 2000. It applies on a prospective basis to events occurring after that date, except for certain transactions involving options granted to nonemployees, repriced fixed options, and modifications to add reload option features, which apply to awards granted after December 31, 1998. The provisions of FIN 44 are not expected to have a material effect on transactions entered into through March 31, 2000.
NOTE B - SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of municipal bonds and money market funds and are classified as follows at March 31:
2000 1999 ---------- ---------- Trading securities $36,395,000 $31,386,000 Available-for-sale debt securities 11,854,000 12,409,000 ---------- ---------- $48,249,000 $43,795,000 ---------- ---------- ---------- ----------
The contractual maturities of available-for-sale debt securities at March 31, 2000, are as follows: $630,000 within one year, $8,453,000 from one year through five years, and $2,771,000 from five years through ten years. Gross realized and unrealized gains and losses related to available-for-sale securities were not material.
At March 31, 2000, $21,994,000 of the trading securities were invested in three money market funds. At March 31, 1999, $19,059,000 of the trading securities were invested in two money market funds.
NOTE C - INVENTORIES Inventories consist of the following at March 31: 2000 1999 ---------- ---------- Raw materials and sub-assemblies $20,669,000 $22,067,000 Finished goods 15,607,000 24,291,000 Parts, garments and accessories 25,393,000 22,286,000 ---------- ---------- $61,669,000 $68,644,000 ---------- ---------- ---------- ----------
NOTE D - ACCRUED EXPENSES
Accrued expenses consist of the following at March 31:
2000 1999 --------- --------- Marketing $12,158,000 $10,888,000 Compensation 6,802,000 8,622,000 Warranties 11,097,000 5,560,000 Insurance 5,400,000 4,952,000 Watercraft exit costs 10,893,000 - Other 3,427,000 3,222,000 --------- --------- $49,777,000 $33,244,000 --------- --------- --------- ---------
NOTE E - DISCONTINUED PERSONAL WATERCRAFT BUSINESS AND RELATED COSTS
On October 7, 1999, the Company annnounced that it was exiting the personal watercraft (PWC) business effective September 30, 1999 and recorded a charge of $21,462,000. The charge included $8,961,000 for consumer incentives to aid Company dealers in the disposition of their current inventory. Additionally, the Company analyzed all long-lived PWC assets in connection with this exit that indicated an impaired carrying value. The Company expects to utilize a portion of these assets in other production areas. All long-lived assets with no alternative use, totalling $3,480,000, were taken out of service and written off. Costs to dispose as well as any gain on sale of long-lived assets are expected not to be significant. The Company also analyzed inventories and recorded a charge of $2,835,000 to reduce the current carrying value to a net realizable value. The Company has not produced additional PWC units beyond the completed production of the 1999 model. Therefore, the Company identified inventories of $2,451,000 that will not be used beyond September 30, 1999 and has written off. The Company has also accrued $2,400,000 relating to other dealer matters. The Company has written off certain PWC technology of $700,000, and accrued $635,000 for other costs. The Company anticipates the majority of the PWC exit plan costs will be incurred by September 2000, although some exit costs will be incurred through September 2001.
The approximate net sales of the PWC product line was $4,425,000 for the year ended March 31, 2000.
During the period ending March 31, 2000, activity within the consumer incentives, other dealer matters and PWC technology, tooling and other exit costs were $1,992,000, $0, and $441,000. The remaining accrued expenses, included within the balance sheet caption other accrued expense, for these items at March 31, 2000 were $6,334,000, $2,400,000, and $1,524,000. There were no adjustments to the initial recorded accrual in conjunction with the PWC exit plan for the period ending March 31, 2000. Current activity includes consumer incentive paid to dealers and costs to dismantle non-production PWC assets and inventory.
NOTE F - FINANCING
The Company has a $75,000,000 unsecured bank credit agreement for documentary and stand-by letters of credit and for working capital purposes. Total working capital borrowings under the credit agreement are limited to $30,000,000. The credit agreement is due on demand and expires July 31, 2000, however, management believes they will be able to renew the existing line of credit under materially similar terms. Interest on the working capital borrowings is payable monthly at alternative interest rates, at the Company's election. The credit agreement contains certain covenants. At March 31, 2000, there were $15,930,000 of issued letters of credit outstanding and no working capital borrowings outstanding. Of the issued letters of credit outstanding, $15,009,000 were issued to Suzuki for engine purchases (see note H). Outstanding letters of credit will be repaid over the following seven months in accordance with the credit agreement and any such renewal.
NOTE G - RETIREMENT SAVINGS PLAN
The Company's 401(k) retirement savings plan covers substantially all eligible employees. Employees may contribute up to 20% of their compensation with the Company matching 100% of the employee contributions, up to a maximum of 3% of the employee's compensation. The Company can elect to make additional contributions at its discretion. Total Company matching contributions were $1,066,000, $964,000 and $851,000 in 2000, 1999 and 1998. There were no discretionary contributions made during 2000, 1999 and 1998.
NOTE H - RELATED PARTY TRANSACTIONS
The Company purchases engines and related parts from Suzuki Motor Corporation (Suzuki-see note K) in Japan. Such purchases totaled $120,505,000, $91,724,000 and $94,955,000 in 2000, 1999 and 1998. The purchase price of the engines and related parts is determined annually. The Company has an agreement with Suzuki for snowmobile engine purchases to share the impact of fluctuations in the exchange rate between the U.S. dollar and the Japanese yen above and below a fixed range contained in the agreement. This agreement renews annually.
The Company is dependent on Suzuki for the near term supply of its engines and related parts. An interruption of this supply could have a material adverse effect on the Company's operations.
Freight services and certain raw materials are purchased from companies where certain of the Company's directors are officers or significant shareholders. In 2000, 1999 and 1998, these transactions aggregated $7,612,000, $4,791,000 and $5,053,000.
NOTE I - INCOME TAXES
Income tax expense consists of the following for the years ended March 31:
2000 1999 1998 Current ---------- --------- ---------- - Federal $ 6,923,000 $14,313,000 $13,057,000 - State 1,047,000 1,670,000 1,467,000
Deferred (5,301,000) (3,261,000) (517,000) ---------- --------- ---------- $ 2,678,000 $12,722,000 $14,007,000 ---------- --------- ---------- ---------- --------- ----------
The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate for the years ended March 31:
2000 1999 1998 ---- ---- ---- Statutory income tax rate 35.0% 35.0% 35.0% State taxes 4.0 2.5 2.4 Tax exempt interest (5.1) (1.0) (0.7) Foreign sales corporation (6.7) (1.4) (1.3) Other (1.2) 0.4 0.1 ----- ----- ----- 26.0% 35.5% 35.5% ----- ----- ----- ----- ----- -----
The effective rate decrease for the year ended March 31, 2000 is due to the effect of decreased earnings subject to tax and implementation of new income tax reduction strategies.
The cumulative temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes are as follows at March 31: 2000 1999 Short-term deferred income taxes --------- --------- Accrued expenses $11,591,000 $ 8,762,000 PWC exit costs 4,085,000 - Inventory capitalization and writedowns 2,530,000 2,720,000 Other 769,000 738,000 --------- --------- Net short-term deferred tax asset $18,975,000 $12,220,000 --------- --------- --------- --------- Long-term deferred income taxes Property and equipment $ 2,182,000 $ 2,219,000 Other 3,718,000 2,227,000 --------- --------- Net long-term deferred tax liability $ 5,900,000 $ 4,446,000 --------- --------- --------- ---------
NOTE J - COMMITMENTS AND CONTINGENCIES
Dealer Financing: Finance companies provide certain of the Company's dealers and distributors with floor plan financing. The Company has agreements with these finance companies to repurchase certain repossessed products sold to its dealers. At March 31, 2000, the Company was contingently liable under these agreements for a maximum repurchase amount of approximately $11,100,000. The Company has also guaranteed approximately 50% of the amounts financed by its dealers and distributors with one of the finance companies. At March 31, 2000, the Company's maximum exposure under this guarantee was $73,589,000. Losses incurred under these agreements during the periods presented have not been significant.
Litigation: The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the ultimate outcome of these matters will not be material to the Company's consolidated financial position, results of operations or cash flows. During fiscal 2000, the Company recognized an approximately $1,600,000 change in the estimate of litigation costs.
NOTE K - SHAREHOLDERS' EQUITY
Stock Option Plans: The Company has stock option plans that provide for incentive and non-qualified stock options to be granted to directors, officers and other key employees or consultants. The stock options granted generally have a five to ten year life, vest over a period of one to three years, and have an exercise price equal to the fair market value of the stock on the date of grant. At March 31, 2000, the Company had 557,721 shares of common stock available for grant under the plans.
Transactions under the plans during each of the three years in the period ended March 31, 2000 are summarized as follows:
Number of Weighted shares under average option exercise price -------- ------- Outstanding at April 1, 1997 1,744,512 $10.31 Granted 45,000 10.83 Exercised (230,949) 6.00 Canceled (15,000) 10.45 -------- ------- Outstanding at March 31, 1998 1,543,563 10.96 Granted 391,000 9.70 Exercised (49,950) 6.00 Canceled (120,573) 11.05 -------- ------- Outstanding at March 31, 1999 1,764,040 10.80 Granted 320,000 9.38 Canceled (87,848) 14.35 -------- ------- Outstanding at March 31, 2000 1,996,192 $10.42 -------- ------- -------- ------- Options exercisable at March 31 are as follows: 1998 965,380 $11.08
1999 1,210,318 $11.24
2000 1,425,526 $10.78
The following tables summarize information concerning currently outstanding and exercisable stock options at March 31, 2000:
Options Outstanding
Weighted Average Range of Number Remaining Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price - - ------------ --------- ----------- ----------- $ 6.00 - $8.03 150,921 2.2 years $ 6.00 9.38 - 13.33 1,668,648 6.9 years 10.16 16.33 - 19.75 176,623 3.9 years 16.67 - - -------------------------------------------------------------------- 1,996,192 $10.42 - - --------------------------------------------------------------------
Options Exercisable
Range of Number Weighted Average Exercise Prices Exercisable Exercise Price - - --------------- -------- ----------- $ 6.00 - $8.03 150,921 $ 6.00 9.38 - 13.33 1,097,982 10.50 16.33 - 19.75 176,623 16.67 - - -------------------------------------------------------------------- 1,425,526 $10.78 - - --------------------------------------------------------------------
The Company's pro forma net earnings and basic and diluted net earnings per share would have been as follows had the fair value method been used for valuing stock options granted to employees:
2000 1999 1998 ---- ---- ---- Pro forma net earnings $ 6,667,000 $22,190,000 $24,351,000 Pro forma basic and diluted net earnings per share $ 0.26 $ 0.80 $ 0.84
The impact on net earnings may not be representative of future disclosures because they do not take into effect pro forma compensation expense related to grants made before 1996.
The weighted average fair value of options granted and the weighted average assumptions used in the binomial options pricing model are as follows:
2000 1999 1998 ---- ---- ----
Fair value of options granted $3.75 $3.93 $4.44
Assumptions: Dividend yield 2% 2% 2% Average term 8 years 7.7 years 8 years Volatility 35% 35% 35% Risk-free rate of return 6.2% 6.2% 6.2%
Class B Common Stock: Suzuki owns all outstanding shares of the Company's Class B common stock. At the option of Suzuki, the Class B common stock is convertible into an equal number of shares of the Company's common stock. The Class B shareholder is entitled to elect one member of the Company's Board of Directors but cannot vote for the election of other directors of the Company. The Class B shareholder can vote on all other matters submitted to the common shareholders. The Class B common stock participates equally with the common stock in all dividends and other distributions duly declared by the Company's Board of Directors. The Class B common shares are converted into an equal number of shares of common stock if: Suzuki owns less than 15% of the aggregate number of outstanding common and Class B common shares; the Company becomes a non- surviving party due to a merger or recapitalization; the Company sells substantially all of its assets; or Suzuki transfers its Class B common stock to any person.
In addition, the Company has a Stock Purchase Agreement with Suzuki that prohibits the purchase of additional shares of the Company's common stock unless, following such purchase, Suzuki's ownership is less than or equal to 32% of the aggregate outstanding shares of common and Class B common stock. The Company has the first right of refusal to purchase any shares Suzuki intends to sell. Suzuki has agreed not to compete in the manufacture of snowmobiles or related parts so long as it supplies engines to the Company or owns at least 10% of the aggregate common and Class B common shares outstanding.
Preferred Stock: The Company's Board of Directors is authorized to issue 2,050,000 shares of $1.00 par value preferred stock in one or more series. The board can determine voting, conversion, dividend and redemption rights and other preferences of each series. No shares have been issued.
Shareholders' Rights Plan: In connection with the adoption of a Shareholders' Rights Plan, the Company created a Series A Junior Participating preferred stock. Under terms of the Company's Shareholder Rights Plan, upon the occurrence of certain events, registered holders of common stock and Class B common stock are entitled to purchase one-hundredth of a share of Series A Junior Participating preferred stock at a stated price, or to purchase either the Company's common shares or common shares of an acquiring entity at half their market value. The Rights related to this plan expire September 5, 2001.
Share Repurchase Authorization: The Company invested $14,411,000, $18,493,000 and $8,392,000 during 2000, 1999 and 1998 to repurchase and cancel 1,500,800, 2,049,114, and 834,900 shares, pursuant to Board of Directors' authorizations for the repurchase of up to 4,500,000 and an additional $30,000,000 of shares. Cumulative shares repurchased through March 31, 2000 under these authorizations totaled 4,996,722 for a total of $47,154,000.
NOTE L - EXPORT SALES Sales to foreign customers, located primarily in Canada, amounted to $93,497,000, $101,471,000 and $113,442,000 in 2000, 1999 and 1998.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Arctic Cat Inc.
We have audited the accompanying consolidated balance sheets of Arctic Cat Inc. and subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Arctic Cat Inc. and subsidiaries as of March 31, 2000 and 1999, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/Grant Thornton LLP - - ------------------------------- Minneapolis, Minnesota May 12, 2000
ARCTIC CAT INC. EXHIBIT INDEX
Exhibit Number
21 Subsidiaries of Registrant
23 Consent of Independent Certified Public Accountants
27 Financial Data Schedule - March 31, 2000