Arctic Cat 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number: 0-18607
ARCTIC CAT INC.
(Exact name of registrant as specified in its charter)
601 Brooks Avenue South
Thief River Falls, Minnesota 56701
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (218) 681-8558
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01 par value.
Preferred Stock Purchase Rights.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act:
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrants most recently completed second fiscal quarter was approximately: $296,138,659.
At June 2, 2008, the Registrant had 11,967,485 shares of Common Stock and 6,102,000 shares of Class B Common Stock outstanding.
Documents Incorporated by Reference:
Portions of the Registrants Proxy Statement for its Annual Meeting Of Shareholders currently scheduled to be held on August 7, 2008 are incorporated by reference into Part iii of this Form 10-k, to the extent described in such Part.
ARCTIC CAT INC.
TABLE OF CONTENTS
Arctic Cat Inc., a Minnesota corporation, (the Company or Arctic Cat), is based in Thief River Falls, Minnesota. The Company operates in a single industry segment and designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Catâ brand name, as well as related parts, garments and accessories. The Company markets its products through a network of independent dealers located throughout the United States, Canada, and Europe and through distributors representing dealers in Europe, the Middle East, Asia and other international markets. The Arctic Cat brand name has existed for more than 45 years and is among the most widely recognized and respected names in the snowmobile industry. The Company trades on the NASDAQ Global Select Market under the symbol ACAT.
Snowmobiles The snowmobile, developed in the 1950s, was originally intended to be used as a utility vehicle, but today the overwhelming majority of the industrys sales are for recreational use. Between the late 1950s and early 1970s, the industry expanded dramatically reaching a peak of over 100 manufacturers and a high of nearly 495,000 units sold to retail customers in North America in 1971. Today the number of major industry participants has decreased to four, Arctic Cat, Bombardier Recreational Products (BRP), Polaris and Yamaha. The Company believes there are currently more significant barriers to entry into the snowmobile market than existed in the 1970s. These barriers include increased brand loyalty, long-standing dealer and distributor networks and relationships, limited engine sources, cost of four stroke engine development, manufacturing and engineering expertise and higher initial start-up costs. Industry-wide snowmobile sales to retail customers in North America were approximately 130,000 units for the 2008 model year.
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. The most popular ATV use is general recreation, followed by hunting/fishing, farm/ranch use, hauling/towing, transportation, and commercial uses. From 1970 to 1986, the number of ATVs retailed in the United States continued to grow until reaching an initial peak of 535,000 units in 1986. From 1987 to 1991, the number of ATVs sold declined to a low of approximately 147,000 units. Industry wide sales were 637,000 units in the United States and 88,500 units in Canada in calendar 2007. Major competitors in the industry include Honda, Yamaha, Kawasaki, BRP, Polaris and Suzuki.
Snowmobiles The Company produces a full line of snowmobiles, consisting of 41 models, marketed under the Arctic Cat brand name, and designed to satisfy various market niches. The 2008 Arctic Cat models carry suggested U.S. retail prices ranging from $5,499 to $12,699, excluding a youth model which is sold at a suggested U.S. retail price of $2,249. Arctic Cat snowmobiles are sold in the United States, Canada, Scandinavia and other international markets.
The Companys 2008 year snowmobile models are categorized as Performance, Mountain, Crossover, Touring and Utility. The Company markets: Performance Arctic Cat models under the names F series and Jaguar ; Mountain models under the name M series; Crossover models under the name Crossfire; Touring models under the names Panther, and T series; and Utility models under the name Bearcat. In addition, to encourage family involvement in snowmobiling, the Company offers a youth snowmobile marketed under the AC120 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, fuel management, style, comfort, ride and handling. Arctic Cat snowmobiles offer a wide range of standard and optional features which enhance their operation, riding comfort and performance. Such features include hydraulic disc brakes, remote starters, heated seats and a technologically advanced front and rear suspension. Arctic Cat is the industry leader in fuel management technology offering an electronic fuel injection (EFI) system on most of its snowmobiles. The Company was the first in the snowmobile industry to utilize four stroke engines to reduce emissions. The Company subsequently introduced a snowmobile with a turbo charged four-stroke inter-cooled engine, and for the 2007 model year, the first four-stroke engine designed specifically for a snowmobile.
Arctic Cat focuses on new product development in order to grow its market share and introduces at least one new model every year. These new models are consistently the Companys best sellers in their respective category. In the 2008 model year, approximately 80 percent of the Companys snowmobile sales were from models or model variations not available three years earlier. Some recent examples of the success of Arctic Cats new products include the following: American Snowmobiler voted the 2008 TZ1 LXR the best touring sled for 2008, Sno X Magazine voted the 2008 TZ1 LXR the best touring sled ever, Affinity Powersports Media voted the 2008 Z1 Turbo Best of Class, Snow Tech Magazine voted the 2007 Arctic Cat F8 the best riding and handling sled, and Supertrax Magazine voted the 2007 Arctic Cat Jaguar the best Twin Spar chassis sled. Racers riding Arctic Cat snowmobiles won numerous events in the 2008 model year including the Winter X Games Snocross Gold Medal, The Alaskan Iron Dog Race, the WPSA Powersports Snowmobile Tour Pro Stock Points Championship, the USCC Triple Crown points championship, and both
the Improved class and Mod class King titles at the Jackson Hole Hillclimb.
For the last three fiscal years ended 2008, 2007 and 2006 snowmobiles accounted for 26%, 32% and 32%, respectively, of the Companys revenues.
All-Terrain Vehicles (ATVs) In December 1995, the Company introduced its first ATV. Since that time the Arctic Cat line has grown to 24 models. Features like fully independent front and rear suspensions, hydraulic disc brakes, hi-low range transmission, long travel suspension with high ground clearance, MRP Speedracks, automatic transmissions, selectable 2WD/4WD shaft drive, locking differentials, newly introduced electronic fuel injection and a large fuel tank, all make Arctic Cat ATVs consumer friendly. The Company has special two rider models that provide a proper alternative for customers that want to ride double. The 2008 Arctic Cat ATV models carry suggested U.S. retail prices ranging from $3,599 to $10,499, excluding youth models which are sold at suggested U.S. retail price ranging from $1,799 to $2,299.
The Company introduced its new Prowler UTV into the utility ATV vehicle segment in 2006. The Prowler utilizes the Companys 650cc and 700cc engines, a rear cargo box, dual bucket seats as well as Arctic Cats renowned long travel, suspension and ride characteristics. In fiscal year 2008 the UTV line consisted of three models with retail prices of $9,499 to $10,999.
In 2007 Arctic Cat introduced the industrys first diesel ATV, capable of using biodiesel fuels and in 2008 the Company introduced the Thundercat 1000, the ATV with the largest displacement in the industry.
Arctic Cat has continued to expand into international markets by focusing on new product development, adding new distributors, entering new territories, and developing new markets. In July 2005, the Company acquired a 100% interest in a European company that markets ATVs which utilize the Companys base ATV models. The Company completed this acquisition to further expand its ATV model offerings and strengthen its European presence.
Arctic Cat believes its ATVs are recognized for their power, durability, utility, suspension, style and are well received within the market. In 2005, ATV Illustrated voted the Prowler the best new UTV for sport and utility purposes. In 2006, All Terrain Vehicle Magazine awarded the Arctic Cat 250 the best entry level ATV and the Arctic Cat TRV as the best value. Farm Industry News awarded the Arctic Cat 400 4X4 best ground clearance in class. In 2007, ATV Magazine crowned the Arctic Cat Prowler XT the best trail recreational side-by-side. In 2008, ATV Magazine nominated the Thundercat as ATV of the Year and All Terrain Vehicle Magazine voted the Prowler XTX 700 as Best UTV in the Industry. Also in 2008, Affinity Powersports Media voted the Thundercat Best in Class.
For the last three fiscal years ended 2008, 2007, and 2006 ATVs accounted for 56%, 55%, and 54%, respectively, of the Companys revenues.
Parts, Garments and Accessories The Company is the exclusive provider of genuine Arctic Cat snowmobile and ATV parts, garments and accessories. Included are replacement parts and accessory items to upgrade Arctic Cat snowmobiles such as electric start and reverse kits, luggage racks and bags, backrests, machine covers, windshields, and colored accessories. Other items include maintenance supplies such as oil and fuel additives, track studs and carbide runners. Arctic Cat ATV parts and accessories include winch kits, snow plow kits, MRP Speedrack accessories, portable lights, utility bags and maintenance supplies.
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 pull-overs, riding gloves, hats, helmets, boots, gear bags, sweatshirts, T-shirts, and caps. The colors and designs of many of these items are coordinated with specific Arctic Cat snowmobile models.
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, helmets, gear bags, sweatshirts, T-shirts, and caps.
For the last three fiscal years ended 2008, 2007 and 2006 parts, garments and accessories accounted for 18%, 13% and 14%, respectively, of the Companys revenues.
Manufacturing and Engineering
Arctic Cat snowmobiles and most ATVs are manufactured at the Companys facilities in Thief River Falls, Minnesota. The Companys European subsidiary has performed a portion of the manufacturing of the road ready ATVs for the European market. A Taiwanese company manufactures 50cc to 366cc ATVs for Arctic Cat. The Company also has a facility in Bucyrus, Ohio which houses its parts, garments and accessories distribution 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 Companys 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 foam seats, seat covers and machines, welds and paints other components.
The Company completes the total assembly of most of its products at its facilities in Thief River Falls. Manufacturing operations include robotics as well as digital and computer-automated equipment to speed production, reduce costs and improve the quality, fit and finish of every product. The Company believes that most raw materials used in its manufacturing process and most component parts, with the exception of engines are available from multiple alternative vendors on relatively short notice at competitive prices.
Suzuki Motor Corporation (Suzuki) has manufactured snowmobile engines and through fiscal 2008 certain ATV engines for the Company pursuant to supply agreements which are automatically renewed annually unless terminated. During late fiscal 2005, the Company began manufacturing certain of its own designed ATV engines as part of a strategic first step in a new engine program. The Company believes that having the capability to design and manufacture its own ATV engines will enable Arctic Cat to offer customers more choices, provide excellent value, lower Japanese yen currency exposure and enhance its long-term competitive position. In 2007, the Company transitioned its engine manufacturing from the Thief River Falls facility to its new facility in St. Cloud, Minnesota. Beginning in fiscal 2009, substantially all the Companys ATVs will use engines that are produced from the Companys engine facility or purchased separately or as part of the 50cc to 366cc units the Company receives from a Taiwanese supplier.
The Company and Suzuki have enjoyed an excellent relationship since the Companys inception. Suzuki purchased approximately 31% of the Companys then outstanding capital stock in July 1988, prior to the Companys initial public offering in July of 1990, and is currently the Companys largest shareholder with approximately 34% of the Companys outstanding capital stock. If Suzuki were ever to cease supplying snowmobile engines to the Company, such an interruption could materially and adversely affect production and results of operations. While notice of termination of the supply agreement may be given annually, effective termination of supply would take at least one model year and the Company believes it could take up to two model years for the Company or a new engine supplier to be in a position to manufacture the Companys specially designed snowmobile engines. As a consequence, the Company regularly evaluates alternative snowmobile engine supply sources.
Since the Company began snowmobile production, it has followed a build-to-order policy to control inventory levels. Under this policy, the Company only manufactures a number of snowmobiles equivalent to the orders received from its dealers and distributors, plus a number of uncommitted machines used for dealer and market development, in-house testing and miscellaneous promotional purposes.
Most sales of snowmobiles to retail customers begin in the early fall and continue during the winter. Orders by dealers and distributors for each years production are placed in the spring following dealer and distributor meetings. Snowmobiles are built commencing in the spring and continuing through late autumn or early winter.
Retail sales of ATVs occur throughout the year with seasonal highs occurring in the spring and fall. The Company builds and purchases ATVs throughout the year to coincide with expected dealer and consumer demand.
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 new product introduction. The Company currently employs 150 individuals in the design and development of new and existing products, with an additional 32 individuals directly involved in the testing of snowmobiles and ATVs in normal and extraordinary conditions. 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 fiscal years ended 2008, 2007, and 2006, the Company spent approximately $16,143,000, $17,756,000, and $17,067,000, respectively, on engineering, research and development. In addition, utilizing their particular expertise, the Companys vendors regularly test and apply new technologies to the design and production of component parts.
Sales and Marketing
The Companys products are currently sold through an extensive network of independent dealers located throughout the United States, Canada, and Europe and through distributors representing dealers in Europe, the Middle East, Asia and other international markets. To promote new dealerships and to service its existing dealer network, the Company also employs sales representatives throughout the United States and Canada.
The Companys dealers enter into an annual renewable contract and are required to maintain status as an authorized dealer in order to continue selling the Companys products. To obtain and maintain such status, dealers are expected 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 expected to carry adequate levels of inventory of genuine Arctic Cat parts and accessories. As is typical in the industry, most of the Companys dealers also sell some combination of motorcycles, marine products, lawn and garden products and other related products.
The Company utilizes distributors outside the United States and Canada to take advantage of their knowledge and experience in their respective markets and to increase market penetration of its products. Canadian sales are made in Canadian dollars, nearly all of which is financed through certain Canadian financial institutions. Most sales to
distributors outside North America are made in U.S. dollars and are supported to some extent by letters of credit.
The Companys sales and marketing efforts are comprised of dealer and consumer promotions, direct advertising and cooperative advertising programs with its dealers. Each year, the Company and its distributors conduct dealer shows in order to introduce the upcoming years models and to promote dealer orders. Marketing activities are 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 racers who participate in snowmobile 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. In order to build brand loyalty the Company publishes and mails, during the year, magazines called Pride (snowmobile) and Ride (ATV) to 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 and ATVs under a limited warranty against defects in materials and workmanship for a period generally 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 Companys dealers and distributors.
The snowmobile and ATV markets are highly competitive, based on a number of factors, including performance, ride, suspension, innovation, technology, styling, fit and finish, brand loyalty, reliability, durability, price and distribution. The Company believes Arctic Cat snowmobiles and ATVs are highly regarded by consumers in all of these competitive categories. Certain of the Companys competitors are more diversified and have financial and marketing resources which are substantially greater than those of the Company.
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.
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 Environmental Protection Agency (EPA) and various state pollution control agencies, which require reports and inspection of facilities to monitor compliance. The Companys manufacturing facilities are subject to the regulations promulgated by, and may be inspected by, the Occupational Safety and Health Administration.
Various states and other governmental agencies have also promulgated safety regulations regarding the use of snowmobiles and ATVs. The Company has supported laws and regulations pertaining to safety and exhaust emissions. 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.
The EPA adopted regulations affecting snowmobiles and ATVs for model years 2006 and beyond. The Company believes that it is and will be in compliance with these regulations. The Company supports balanced and appropriate programs that educate the customer on the safe use of its products and protect the environment.
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, BRP, 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 category produced by participating snowmobile manufacturers, have been adopted by the Canadian Ministry 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 Companys inception, all of its models have complied with the SSCC standards.
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 ATVs manufactured and/or distributed throughout the United States. The Company is also a member of the Canadian Off-Highway Vehicle Distributors Council (COHV), as well as the All-Terrain Vehicle Association Europe (ATVEA).
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. In the past, weather conditions have materially affected snowmobile sales and there is no assurance that weather conditions will not materially affect the Companys future sales of snowmobiles, ATVs and parts, garments and accessories.
At March 31, 2008, the Company had 1,630 employees including 380 salaried and 1,250 hourly and production personnel. The Companys 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.
The Company makes an effort to patent significant innovations that it considers patentable and owns numerous patents for its snowmobiles, ATVs and other products. Trademarks are also important to the Companys snowmobile, ATVs and related parts, garments and accessories business activities. The Company has a program of trademark enforcement to eliminate the unauthorized use of its patents and trademarks, thereby strengthening their value. The Company believes that its Arctic Cat registered trademark is its most significant trademark. Additionally, the Company has numerous registered trademarks, trade names and logos, both in the United States and internationally.
The Company is subject to the reporting requirements of the Securities Exchange Act of 1934 and its rules and regulations (the 1934 Act). The 1934 Act requires the Company to file reports, proxy statements and other information with the Securities and Exchange Commission (the SEC). Copies of these reports, proxy statements and other information can be read and copied at: SEC Public Reference Room, 100 F Street, N.E., Washington D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy statements, and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SECs home page at http://www.sec.gov.
The Company has a website at www.arcticcat.com, the contents of which are not part of or incorporated by reference into this annual report. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports, available on its website, free of charge, as soon as reasonably practicable after such report has been filed with or furnished to, the SEC. The Companys Code of Conduct, as well as any waivers from and amendments to the Code, are also posted on the Companys website.
EXECUTIVE OFFICERS OF REGISTRANT
Mr. Twomey has been Chairman of the Company since 2003, President and Chief Executive Officer of the Company since 1986 and a director since 1987. Mr. Twomey is also currently serving as a director of The Toro Company.
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. Blount has been Vice President Human Resources since 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 for a Minnesota-based company.
Mr. Ray has been Vice President Operations since 2004; prior to that he served as the Companys Vice President Manufacturing since 1992 and has over 30 years of manufacturing experience. Before joining the Company 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 over 40 years.
Mr. Tweet has been General Manager ATVs since 2006 and prior to that was Vice President New Product Development since 1992 and Vice President Marketing since its inception in 1983 to 1992. Mr. Tweet has been employed either in the snowmobile or ATV industry for over 30 years.
Ms. Walker has been General Manager, Parts, Garments and Accessories and Sales since November 2007. Prior to joining the Company, Ms. Walker had been with a Minnesota-based company, 3M for 26 years, most recently serving as General Manager of Building Safety Solutions.
The following are significant factors known to the Company that could adversely affect the Companys business, financial condition, or operating results, as well as adversely affect the value of an investment in the Companys common stock. These risks could cause Arctic Cats actual results to differ materially from its historical experience and from results predicted by forward-looking statements. All forward-looking statements made by Arctic Cat are qualified by the risks described below. There may be additional risks that are not presently material or known. You should carefully consider each of the following risks and all other information set forth in this annual report.
The Companys products are subject to extensive federal and state safety, environmental and other government regulation that may require the Company to incur expenses or modify product offerings in order to maintain compliance with the actions of regulators.
The Companys products are subject to extensive laws and regulations relating to safety, environmental and other regulations promulgated by the U.S. and Canadian federal governments and individual states and provinces as well as international regulatory authorities. Although the Company believes that its snowmobiles, and ATVs have always complied with applicable vehicle safety and emissions standards and related regulations, there can be no assurance that future regulations will not require additional safety standards or emission reductions that would require additional expenses and/or modification of product offerings in order to maintain such compliance. Although the Company is unable to predict the ultimate impact of adopted or proposed regulations on its business and operating results, the Company believes that its business would be no more adversely affected than those of its competitors by the adoption of any pending laws or regulations.
A significant adverse determination in any material product liability claim against the Company could adversely affect its operating results or financial condition.
Accidents involving personal injury and property damage occur in the use of snowmobiles and ATVs. Claims have been made against the Company from time to time. It is the Companys policy to vigorously defend against these actions. The Company presently maintains product liability insurance 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 $10,000,000 self-insured retention. While Arctic Cat does not believe the outcome of any pending product liability litigation will have a material adverse effect on its operations, no assurance can be given that material product liability claims against Arctic Cat will not be made in the future. Adverse determination of material product liability claims made against Arctic Cat could adversely affect its operating results or financial condition.
Significant repair and/or replacement with respect to product warranty claims or product recalls could have a material adverse impact on the results of operations.
The Company provides a limited warranty for a period of six months for its ATVs and one year for its snowmobiles. The Company may provide longer warranties in certain geographical markets as determined by local regulations and market conditions. Although the Company employs quality control procedures, sometimes a product is distributed which needs repair or replacement. The Companys standard warranties require the Company or its dealers to repair or replace defective products during such warranty periods at no cost to the consumer. Historically, product recalls have been administered through the Companys dealers and distributors and have not had a material effect on the Companys business. See Note A of Notes to Consolidated Financial Statements in this annual report.
Changing weather conditions may reduce demand for certain Arctic Cat products and negatively impact net sales.
Lack of snowfall in any year in any particular region of the United States or Canada may adversely affect snowmobile retail sales and related parts, garments and accessories sales in that region. There is no assurance that weather conditions will not materially affect the Companys future sales of snowmobiles, ATVs, and parts, garments and accessories.
The Company faces intense competition in all product lines, from competitors that have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact the Companys business and operating results.
The snowmobile and ATV markets in the United States and Canada are highly competitive. Competition in such markets is based upon a number of factors, including performance, ride, suspension, innovation, technology, styling, fit and finish, brand loyalty, reliability, durability, price and distribution. At the dealer level, competition is based on a number of factors including sales and marketing support programs (such as sales incentives and cooperative advertising). The Companys competitors are more diversified and have financial and marketing resources which are substantially greater than those of the Company. In addition, the Companys products compete with many other recreational products for the discretionary spending of consumers and to a lesser extent, with other vehicles designed for utility applications. If the Company is not able to effectively compete
in this environment, its business and operating results will be negatively impacted.
Termination or interruption of supply arrangements could have a material adverse effect on the Companys business or results of operations.
Suzuki Motor Corporation (Suzuki) has manufactured snowmobile engines and through fiscal 2008 certain ATV engines for the Company pursuant to supply agreements which are automatically renewed annually unless terminated. During late fiscal 2005, the Company began manufacturing certain of its own designed ATV engines as part of a strategic first step in a new engine program. The Company believes that having the capability to design and manufacture its own ATV engines will enable Arctic Cat to offer customers more choices, provide excellent value, lower Japanese yen currency exposure and enhance its long-term competitive position. In 2007, the Company transitioned its engine manufacturing from the Thief River Falls facility to its new facility in St. Cloud, Minnesota. Beginning in fiscal 2009, substantially all the Companys ATVs will use engines that are produced from the Companys engine facility or purchased separately or as part of the 50cc to 366cc units the Company receives from a Taiwanese supplier. The Company and Suzuki have enjoyed an excellent relationship since the Companys inception. Suzuki purchased approximately 31% of the Companys then outstanding capital stock in July 1988, prior to the Companys initial public offering in July of 1990, and is currently the Companys largest shareholder with approximately 34% of the Companys outstanding capital stock. If Suzuki were ever to cease supplying snowmobile engines to the Company, such an interruption could materially and adversely affect production and results of operations. While notice of termination of the supply agreement may be given annually, effective termination of supply would take at least one model year and the Company believes it could take up to two model years for the Company or a new engine supplier to be in a position to manufacture the Companys specially designed snowmobile engines. As a consequence, the Company regularly evaluates alternative snowmobile engine supply sources. While the Company anticipates no significant difficulties in obtaining substitute supply arrangements for other raw materials or components for which it relies upon limited sources of supply, there can be no assurance that alternate supply arrangements will be made on satisfactory terms.
General Economic Conditions and Certain Other External Factors
Companies within the snowmobile and ATV industry are subject to volatility in operating results due to external factors such as general economic conditions and political changes. Specific factors affecting the industry include:
· Overall consumer confidence and the level of discretionary consumer spending;
· Interest rates and related higher dealer floorplan costs;
· Adverse impact on margins of increases in raw material and transportation costs which companies are unable to pass on to dealers without negatively affecting sales; and
· Fluctuation in foreign currency exchange rates.
The following sets forth the Companys material property holdings as of March 31, 2008.
Accidents involving personal injury and property damage occur in the use of snowmobiles and ATVs. Claims have been made against the Company from time to time. It is the Companys policy to vigorously defend against these actions. The Company is not involved in any legal proceedings which it believes will have the potential for a materially adverse impact on the Companys 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 $10,000,000 self-insured retention. The Company believes such insurance is adequate.
No matters were submitted to the shareholders during the fourth quarter of fiscal 2008.
The Companys common stock is traded on The NASDAQ Global Select Market under the NASDAQ symbol ACAT. Quotations below represent the high and low sale prices as reported by NASDAQ. The Companys stock began trading on NASDAQ on June 26, 1990.
As of June 2, 2008, the Company had approximately 386 stockholders of record, including the nominee of Depository Trust Company which held 11,244,503 shares of common stock.
Cash Dividends Paid
Cash Dividends are declared quarterly and have been paid since 1995.
Company Purchases of Company Equity Securities
The following table presents the total number of shares repurchased during the fourth quarter of fiscal 2008 by fiscal month, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase plan, and the approximate dollar value of shares that may yet be purchased pursuant to the Companys stock repurchase program as of the end of fiscal 2008:
(1) The Company has in the past maintained publicly announced stock repurchase programs which have been approved by the Board of Directors. On October 26, 2006, the Company announced that the Board of Directors approved a $20 million repurchase program and on January 4, 2008, the Company announced that the Board approved an additional $10 million stock repurchase program. Pricing under this program has been delegated to management. There is no expiration date for this program.
(2) Number of Shares purchasable at closing price of the Companys common stock on the last trading day of the month.
The Company purchases Company common stock primarily to offset the dilution created by employee stock option programs and because the Board of Directors believes investment in the Companys common stock is an excellent use of its excess cash.
The Company has executed the Company stock purchases in accordance with Rule 10b-18 of the Securities Exchange Act of 1934. There have been no other purchases of the Companys common stock.
Executive Level Overview
Fiscal 2008 net sales decreased 21% to $621.6 million from $782.4 million in fiscal 2007. The fiscal 2008 net loss was $3.3 million or $0.18 per diluted share compared to net earnings of $22.1 million or $1.15 per diluted share in fiscal 2007. The decrease in net earnings was mainly due to decreased sales of ATVs and snowmobiles caused by challenging retail market conditions for ATV sales and the planned reduction of fiscal 2008 snowmobile production to align inventory with retail demand. During the year the Company repurchased nearly 624,000 shares of the common stock and ended the fiscal year with $35 million in cash and short-term investments.
The Companys product lines consist of ATVs, snowmobiles and parts, garments and accessories.
ATV sales decreased 19% in fiscal 2008 to $350.3 million from $431.5 million in fiscal 2007. ATV net sales first surpassed snowmobile net sales in fiscal 2004 and are the Companys largest product line, comprising over 56% of net sales in fiscal 2008. Snowmobile sales decreased 34% in fiscal 2008 to $161.9 million from $247.0 million in fiscal 2007 primarily due to the planned reduction in snowmobile production to align dealer inventory with retail demand. Snowmobiles comprised 26% of the Companys net sales in fiscal 2008. Parts, garments and accessory sales increased 5% in fiscal 2008 to $109.4 million from $103.9 million in fiscal 2007 driven primarily by snowmobile parts and accessories. Parts, garments and accessory sales were 18% of the Companys net sales in fiscal 2008. The following discussions should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this annual report.
Results of Operations
Fiscal 2008 vs. Fiscal 2007 During fiscal 2008 net sales decreased 21% to $621,568,000 from $782,431,000 in fiscal 2007. ATV unit volume decreased 25%, snowmobile unit volume decreased 37% and sales of parts, garments and accessories increased 5% or $5,489,000. ATV unit volume decreased primarily due to declining industry wide ATV retail sales. Snowmobile unit volume decreases were largely due to the Companys planned 30% reduction in fiscal 2008 snowmobile production to align dealer inventory with retail demand.
Gross profit decreased 22% to $110,429,000 in 2008 from $141,794,000 in 2007. The gross profit percentage for fiscal 2008 decreased to 17.8% versus 18.1% in 2007. The decrease in the 2008 gross profit percentage was mainly due to additional Canadian sales incentives to help compensate for the stronger Canadian dollar as well as lower sales volumes.
Selling, general and administrative expenses increased 8% to $119,142,000 in 2008 from $109,861,000 in 2007. Selling, general and administrative costs increased primarily due to increased Canadian currency hedge costs. As a percent of net sales, operating expenses were 19.2% in 2008 compared with 14.0% in 2007.
Operating profit (loss) decreased 127.3% to $(8,713,000) in 2008 from $31,933,000 in 2007. As a percent of net sales, operating profit (loss) were (1.4%) in 2008 compared to 4.1% in 2007. The decrease in operating profit is attributable to decreased gross profit and increased operating expenses.
Interest income decreased 44.5% to $632,000 in fiscal 2008 from $1,139,000 in fiscal 2007. Interest expense increased 3.9% to $1,066,000 in fiscal 2008 from $1,026,000 in fiscal 2007. Interest income was primarily affected by the higher cash levels at the beginning of our fiscal year compared to last year, and lower cash balances during the third and fourth quarters of fiscal 2008 due primarily to higher working capital needs.
The net loss was $3,259,000 or $0.18 per diluted share versus net earnings of $22,070,000 or $1.15 per diluted share for fiscal 2007. Net earnings (loss) as a percent of net sales were( 0.5%) and 2.8% in 2008 and 2007, respectively. The decrease in net earnings (loss) is attributable to decreased sales and increased operating expenses.
Fiscal 2007 vs. Fiscal 2006 During fiscal 2007 net sales increased 6.8% to $782,431,000 from $732,794,000 in fiscal 2006. ATV unit volume decreased 1.8%, snowmobile unit volume decreased 4.9% and dollar sales of parts, garments and accessories increased $4,101,000. The Company believes the continued increase in ATV net sales is due to higher end product offerings led by the Prowler UTV. Snowmobile unit volume decreased because of lower dealer orders related to less than normal snowfalls during the prior winter season in certain key regions in North America.
Gross profit increased 3.9% to $141,794,000 in 2007 from $136,510,000 in 2006. The gross profit percentage decreased to 18.1% versus 18.6% in 2006. The decrease in the 2007 gross profit percentage was mainly due to increased snowmobile sales incentives.
Selling, general and administrative expenses increased 5.9% to $109,861,000 in 2007 from $103,775,000 in 2006. Selling, general and administrative costs increased primarily due to increased operating cost of the European subsidiary and increased product liability and litigation accruals. As a percent of net sales, operating expenses were 14.0% in 2007 compared with 14.2% in 2006.
Operating profits decreased 2.4% to $31,933,000 in 2007 from $32,735,000 in 2006. As a percent of net sales, operating profits were 4.1% in 2007 compared to 4.5% in 2006. The decrease in operating profits is attributable to increased operating expenses.
Interest income decreased to $1,139,000 in fiscal 2007 from $1,556,000 in fiscal 2006. Interest expense increased to $1,026,000 in fiscal 2007 from $105,000 in fiscal 2006. Interest income was primarily affected by the lower cash levels at the beginning of our fiscal year compared to last year. Interest expense was also affected by the lower cash balances that resulted in increased borrowings from the Companys line of credit during the first and second quarters of fiscal 2007 compared to the same period last year.
Net earnings decreased to $22,070,000 or $1.15 per diluted share from $23,746,000 or $1.20 per diluted share for fiscal 2006. Net earnings as a percent of net sales were 2.8% and 3.2% in 2007 and 2006, respectively. The decrease in net earnings is attributable to increased operating expenses.
Critical Accounting Policies
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. The Company reviewed the development and selection of the critical accounting policies and believes the following are the most critical accounting policies that could have an effect on the Companys reported results. These critical accounting policies and estimates have been reviewed with the audit committee of the Board of Directors.
Revenue Recognition The Company recognizes revenue and provides for estimated marketing and sales incentive costs when products are shipped to dealers and distributors pursuant to their order, the price is fixed and collection is reasonably assured. The Company has agreements with finance companies to repurchase products repossessed up to certain limits. The Companys financial exposure to repurchase products is limited to the difference between the amount paid to the finance company and the resale value of the repossessed products. Historically, the Company has not incurred material losses as a result of repurchases nor has it provided a financial reserve for repurchases. Adverse changes in retail sales could cause this situation to change.
Marketing and Sales Incentive Costs The Company provides for various marketing and sales incentive costs which are offered to its dealers and consumers at the later of when the revenue is recognized or when the marketing and sales incentive program is approved and communicated. Examples of these costs include: dealer and consumer rebates, dealer floorplan financing assistance and other incentive and promotion programs. Adverse market conditions resulting in lower than expected retail sales or the matching of competitor programs could cause accrued marketing and incentive costs to materially increase if the Company authorizes and communicates new programs to its dealers. The Company estimates marketing and sales incentive costs based on expected usage and historical experience. The related marketing and sales incentive costs accrual is included in accrued marketing in the Companys balance sheet. To the extent current experience differs with previous estimates the accrued liability for marketing and sales incentives is adjusted accordingly.
Product Warranties The Company generally provides a limited warranty to the owner of snowmobiles for twelve months from the date of consumer registration and for six months on ATVs. The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to their estimate as actual claims become known or the amounts are determinable. Adverse changes in actual warranty costs compared to the Companys initial estimates could cause accrued warranty to materially change.
Product Liability and Litigation The Company is subject to product liability claims and other litigation in the normal course of business. Arctic Cat insures for product liability claims although it retains a modest self insured retention accrual within the balance sheet caption Insurance. The estimated costs resulting from any losses over insured amounts are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable.
The Company utilizes historical trends and other analysis to assist in determining the appropriate loss. Adverse changes in the final determination of product liability or other claims made against the Company could have a material impact on the Companys financial condition.
The Company recognizes stock based compensation based on certain assumption inputs within the Black-Scholes Model. These assumption inputs are used to determine an estimated fair value of stock based payment awards on the date of grant and require subjective judgment. The Company accounts for stock based payment awards in accordance with Statement of Financial Accounting Standard No. 123(R), Share Based Payments (SFAS 123(R)). Because employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. Management assesses the assumptions and methodologies used to calculate estimated fair value of stock-based compensation on a regular basis. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors change and the Company employs different assumptions in the application of SFAS 123(R) the amount of compensation expense associated with SFAS 123(R) may differ significantly from what was recorded in the current period.
Liquidity and Capital Resources
The seasonality of the Companys 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 Companys 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 together with its available line of credit will provide sufficient funds to finance the Company on a short and long-term basis.
Cash and Short-Term Investments
Cash and short-term investments decreased to $35,063,000 at March 31, 2008 from $75,277,000 at March 31, 2007 because of the fiscal 2008 net loss and increased inventories. The Companys cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the
Companys snowmobile and spring ATV production cycles begin. The Companys investment objectives are first, safety of principal and second, rate of return.
Financing Arrangements and Cash Flows
The Company has a $75,000,000 unsecured bank credit agreement for the documentary and stand-by letters of credit and for working capital purposes. Total working capital borrowings under the credit agreement are limited to $60,000,000 during the last five months of the fiscal year. The total letters of credit issued at March 31, 2008 were $7,367,000, of which $5,746,000 was issued to Suzuki for engine and service parts purchases.
The Company has agreements with certain finance companies to provide snowmobile and ATV floor plan financing for the Companys North American dealers. These agreements improve the Companys liquidity by financing dealer purchases of products without requiring substantial use of the Companys 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 dealers order. The financing agreements require repurchase of repossessed new and unused units and set limits upon the Companys potential liability for annual repurchases. The aggregate potential liability was approximately $45,222,000 at March 31, 2008. The Company has incurred no material losses under these agreements. 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 and repurchase agreement.
In 2008, the Company invested $15,466,000 in capital expenditures. The Company expects that capital expenditures, will increase to approximately $27,000,000 in fiscal 2009. Since 1996, the Company has repurchased over 11 million shares of common stock. There is approximately $10,000,000 remaining on the January 2008 repurchase authorization. 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 on a short and long-term basis.
The following table summarizes the Companys significant future contractual obligations at March 31, 2008 (in millions):
(1) The Company has outstanding purchase obligations with suppliers and vendors at March 31, 2008 for raw materials and other supplies as part of the normal course of business.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements. This annual report on Form 10-K, as well as the Companys Annual Report and future filings with the Securities and Exchange Commission, the Companys press releases and oral statements made with the approval of an authorized executive officer, contain forward-looking statements that reflect the Companys 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 the risk factors described in Item 1A of this annual report. The Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Inflation, Foreign Exchange Rates and Interest Rates
Inflation historically, has not significantly impacted on the Companys business. The Company generally has been able to offset the impact of increasing costs through a combination of productivity gains and product sales price increases.
During fiscal 2008, approximately 15% of the Companys cost of sales was purchased from Japanese yen denominated suppliers. The majority of these purchases were made from Suzuki, who supplies engines for the Companys snowmobiles and ATVs. 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. During fiscal 2008, the exchange rate fluctuation between the U.S. dollar and the Japanese yen had a modest negative impact on the Companys operating results. From time to time the Company utilizes foreign exchange cash flow hedging contracts to minimize the impact of exchange rate fluctuations relating to ATV engine purchases. During 2008, the average contracted forward exchange rate on these cash flow hedges was approximately 118 (Japanese yen to the U.S. dollar). At March 31, 2008, there were no Japanese yen forward exchange contracts outstanding.
Sales to Canadian dealers are made in Canadian dollars with the U.S. dollar serving as the functional currency. During fiscal 2008, sales to Canadian dealers comprised 27.5% of total net sales. During fiscal 2008, the exchange rate fluctuation between the U.S. dollar and the Canadian dollar had no material impact on operating profits. During 2008, the Company utilized cash flow hedges to mitigate the variability in Canadian exchange rate changes relating to Canadian dollar fund transfers to the United States. During 2008, the average contracted forward exchange rate on these cash flows hedges was approximately $1.10 (Canadian dollar to U.S. dollar). At March 31, 2008 there were Canadian dollar forward exchange contracts outstanding with a notional amount of $30,599,000.
Sales to European on-road ATV dealers and distributors are made in Euros with the Euro serving as the functional currency. During fiscal 2008, sales to European on-road ATV dealers comprised 5.0% of total net sales. During fiscal 2008, the exchange rate fluctuation between the U.S. dollar and the Euro had no significant impact on operating profits. During 2008, the Company did not utilize any hedges to mitigate the variability in the Euro exchange rate and at March 31, 2008, there were no foreign exchange contracts outstanding for the Euro.
The fair values of the Canadian dollar hedge contracts at March 31, 2008 represented an unrealized gain of $211,000. A ten percent fluctuation in the currency rates as of March 31, 2008 would have resulted in a change in fair value of the Canadian dollar hedge contracts of approximately $3,060,000.
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.
The Company is a party to an unsecured bank line of credit arrangement under which it may borrow an aggregate of up to $75 million. The total letters of credit issued at March 31, 2008 were $7,367,000 of which $5,746,000 was issued to Suzuki Motor Corporation for engine and service parts purchases. Interest is charged at variable rates based on either LIBOR or prime. Because the interest rate risk related to the line of credit is not deemed to be significant, the Company does not actively manage this exposure.
Financial Statements, Notes, and Report of Independent Registered Public Accounting Firm appear on pages 21 through 32. Quarterly financial data appears in Item 6.
The Companys management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15 under the 1934 Act as of March 31, 2008. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
There have been no significant changes in internal controls over financial reporting during the fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
MANAGEMENTS REPORT OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Arctic Cat is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. The Companys internal control system was designed to provide reasonable assurance to the Companys management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of March 31, 2008. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework. Based on the assessment management believes that, as of March 31, 2008, the Companys internal control over financial reporting is effective based on those criteria.
The Companys independent registered public accounting firm has issued an audit report on our assessment of the Companys internal control over financial reporting. This report appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of Arctic Cat Inc.
We have audited managements assessment, included in the accompanying
Managements Report included in Item 9 of this
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Arctic Cat Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arctic Cat Inc. and subsidiaries as of March 31, 2008 and March 31, 2007, and the related consolidated statements of operations, shareholders equity, and cash flows for
each of the three years in the period ended March 31, 2008 and our report dated June 10, 2008 expressed an unqualified opinion on those consolidated financial statements.
/s/ GRANT THORNTON LLP
June 10, 2008
ITEM 9B. OTHER INFORMATION
(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:
2. Schedules filed as part of this Form 10-K.
The information required to be disclosed within Schedule II Valuation and Qualifying Accounts is provided within the Consolidated Financial Statements of the Company, filed as part of this Form 10-K.
Reference is made to Item 15(a) 3.
Reference is made to Item 15(a) 2.
(1) Incorporated herein by reference to the Companys Form S-1 Registration Statement (File Number 33-34984).
(2) Filed with this Form 10-K.
(3) Incorporated herein by reference to the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
(4) Incorporated by reference to Exhibit 1 to the Companys Registration on Form 8-A filed with the SEC on September 20, 2001.
(5) Incorporated by reference to Exhibit 99.1 to the Companys Registration on Form S-8 filed with the SEC on September 6, 2002.
(6) Incorporated herein by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.
(7) Incorporated herein by reference to the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2005.
(8) Incorporated herein by reference to the Companys Current Report of Form 8-K filed August 14, 2007.
(9) Incorporated herein by reference to the Companys Current Report of Form 8-K filed April 7, 2008.
(10) Incorporated by reference to the Companys Current Report on Form 8-K filed December 19, 2007.
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 13th day of June, 2008.
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.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.
The accompanying notes are an integral part of these statements.