-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhRIdaM82IRdzEZ5wK5f6pPpsNTD0r1rJWO63qSPCgk+x23rNpAbiOVBHXMwGz2q ol5m3pG8t5Gb6Zwy0OmS6A== 0000719866-97-000002.txt : 19970701 0000719866-97-000002.hdr.sgml : 19970701 ACCESSION NUMBER: 0000719866-97-000002 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970630 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCTIC CAT INC CENTRAL INDEX KEY: 0000719866 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] IRS NUMBER: 411443470 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18607 FILM NUMBER: 97633065 BUSINESS ADDRESS: STREET 1: 600 BROOKS AVE SOUTH STREET 2: P O BOX 810 CITY: THIEF RIVER FALLS STATE: MN ZIP: 56701 BUSINESS PHONE: 2186818558 FORMER COMPANY: FORMER CONFORMED NAME: ARCTCO INC DATE OF NAME CHANGE: 19940224 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 31, 1997 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-18607 ARCTIC CAT INC. (Exact name of registrant as specified in its charter) Minnesota 41-1443470 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 601 Brooks Avenue South, Thief River Falls, Minnesota 56701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (218)681-8558 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value. Preferred Stock Purchase Rights. Indicate by check 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 20, 1997 (based on the closing sale price of the Common Stock on such date) was approximately $222,994,262. At June 20, 1997, 21,628,649 shares of Common Stock and 7,560,000 shares of Class B Common Stock of the Registrant were outstanding. Documents Incorporated by Reference: Portions of the Company's Proxy Statement for its Annual Meeting of Shareholders currently scheduled to be held on August 14, 1997 is incorporated by reference into Part III of this Form 10-K. PART I Item 1.Business Arctic Cat Inc., based in Thief River Falls, Minnesota, designs, engineers , manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, and personal watercraft (PWC) under the Tigershark 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 Stock 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. Since 1983, snowmobile sales to retail customers in North America have grown to approximately 243,000 units for the 1997 model year. The Company believes this growth was 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 5,300,000 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 occured 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 independent sources. Non-North American sales for the industry are estimated to account for less than 6% 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. Personal Watercraft (PWC). The PWC and the related industry evolved from the one person stand-up craft that was developed in the mid 1960's to the two and three person sit-down models that are most popular today. PWC are craft of up to ten feet in length that are propelled by jet pumps. They are ridden for leisure on lakes, rivers, oceans and major waterways. In 1996, U. S. retail sales were approximately 191,000 units, with the popularity of PWC continuing to rise both in North America and internationally. The most rapidly growing segment of personal watercraft models are the 3-person models, designed to accomodate a driver and up to two passengers. These PWC can pull skiers or water toys. Currently the two-person watercraft is still the most widely owned model type comprising of approximately 56 percent of the market. The three- person watercraft and one person watercraft comprise approximately 42 percent and 2 percent of the market, respectively. Major competitors in the industry include Yamaha, Bombardier (Sea-Doo), Polaris and Kawasaki. 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 one person vehicles with oversized tires 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 318,000 units in 1996. Major competitors in the industry include Honda, Yamaha, Kawasaki, Polaris and Suzuki. Products Snowmobiles. The Company produces a full line of snowmobiles, currently consisting of 34 models, all marketed under the Arctic Cat brand name, and designed to satisfy various market niches. The 1997 Arctic Cat models carry suggested U.S. retail prices ranging from $3,249 to $9,399, excluding a children's model which is sold at a suggested U.S. retail price of $1,269. Arctic Cat snowmobiles are sold in the United States, Canada, Scandinavia and other international markets. The Company's snowmobiles are categorized as High Performance, Trail Performance, Mountain Performance, Family/Touring and Utility. The Company markets: High Performance Arctic Cat snowmobiles under the names Thundercat, ZRT, ZR, ZL and Z; Trail Performance Arctic Cat snowmobiles under the names EXT and Cougar; Mountain Performance Arctic Cat snowmobiles under the names Powder Extreme, Powder Special, Thundercat Mountain Cat and Cougar Mountain Cat ; Family/Touring models under the names EXT, Panther, Pantera and Jag; and Utility models under the name Bearcat. In addition, to encourage family involvement in snowmobiling, the Company offers the only snowmobile in the industry designed especially for small children, marketed under the Kitty Cat 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, a technologically advanced front suspension, and an electronic fuel injection (EFI) system. 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 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. Arctic Cat believes that its leadership in innovation, technology, style and performance has been demonstrated by its models being voted "Snowmobile of the Year" 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, and the Powder Special EFI in the 1998 model year. Arctic Cat believes that it has been able to grow in the worldwide snowmobile retail sales due to a Company 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 1997 model year, approximately 85 percent of the Company's snowmobiles sales were from models or model variations not available three years earlier. Personal Watercraft (PWC). Similar to Arctic Cat snowmobiles, Tigershark PWC are a blend of performance, durability and style, with attention to comfort and economy. In fiscal 1997, the Company offered seven models to cover major market segments in the current PWC market ranging in price from $4,499 to $7,599. For the high performance market, the Company offers the Daytona 1000 and Daytona 770, two-passenger models designed for superior performance and optimum power. Three family touring models are available, including the Monte Carlo 1000, Monte Carlo 770 and Monte Carlo 640, three-passenger machines designed for ample power and handling with the capacity to tow skiers or water toys. For the economy market the Company offers the Montego and Montego Deluxe both two-passenger machines built for exceptional quality and stability. The Company believes Tigersharks have been well received in the market and believes the Tigershark brand continues to maintain its reputation as the dry, stable ride. Watercraft World has, on numerous occasions, recognized the Tigershark by selecting the 1993 Tigershark and the 1994 and 1995 Montego Deluxe as the "Best Buy" in the Recreational Runabout category and by naming the Daytona 770 as the "Editors Choice Award" in 1996. All-Terrain Vehicles (ATV). 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 four models: the Arctic Cat 454 4x4, Arctic Cat 454 2x4, Arctic Cat 300 4x4 and Arctic Cat 300 2x4. Arctic Cat ATVs are designed for the utility, farming/ranching and hunting/fishing markets. These heavy duty machines feature aspects ensuring ease of handling and agility over rough terrain. Features like hydraulic disc brakes, hi-low range and a plentiful 4.25 gallon fuel tank, all make Arctic Cat ATVs consumer friendly. Parts, Garments and Accessories. The Company is the exclusive provider of genuine Arctic Cat snowmobile, Tigershark, and Arctic Cat ATV 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 Power 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 offers 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 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 and Tigershark PWC are manufactured at the Company's facilities in Thief River Falls, Minnesota. The Company produces and/or paints hoods and other parts for its Arctic Cat snowmobiles and PWC in adison, South Dakota. The Company also has a facility in Bucyrus, Ohio which houses its service parts, garments and accessories distributor operations. The Company has chosen to rely on outside vendors for some component parts and is vertically integrated in other phases of its manufacturing process. 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, contracts with the vendors for the development of tooling, and then enters into agreements to purchase component parts manufactured utilizing the tooling. In its vertically integrated operations, the Company manufactures hoods, hulls, decks, foam seats and seat covers and the Company 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 pursuant to separate agreements which have similar termination provisions as the snowmobile agreement. 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 25% 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 snowmobile, PWC, and ATV 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 approximately late February and continuing through December. Since its inception, the Company has experienced a low level of snowmobile order cancellation. 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. Sales of PWC to retail customers generally begin in the spring and continue during the summer. Orders by dealers and distributors for the Company's 1998 model line will be placed in the fall, following a series of dealer and distributor meetings. The PWC are then built to order commencing in the fall and continuing through the early spring. Retail sales of ATVs occur throughout the year with seasonal highs occurring in the spring and fall. As with the snowmobiles and PWC, the Company will produce ATV units on a build-to-order basis. The Company believes ATVs will be built throughout the year to coincide with dealer and consumer demands. The Company is committed to an ongoing engineering program dedicated to innovation and to continued improvements in the quality and performance of its products. The Company currently employs 127 individuals in the design and development of new and existing products, with an additional 32 individuals directly involved in the testing of snowmobiles, PWC, and ATVs in normal and extraordinary conditions at the Company's test track and test facility in Thief River Falls as well as surrounding waterways. In addition, snowmobiles, PWC, 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 1995, 1996 and 1997, the Company spent approximately $7,207,000, $9,317,000, and $9,911,000, or 2.0%, 2.3%, and 2.1%, 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. To promote new dealerships and to service its existing dealer network, the Company also contracts on an independent basis with sales representatives throughout the United States and Canada to represent the Company and 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, PWC, 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 and/or Tigershark 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 United States and Canada to take advantage of their knowledge and experience in their respective markets and to increase market penetration of the Company's 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, PWC, 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 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. The Company publishes and mails, four times a year, the Pride magazine to all registered owners of Arctic Cat snowmobiles, 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 and have not had a material effect on the Company's business. 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 within thirty days of shipment and as part of its marketing program the Company pays the floor plan financing of its dealers for certain fixed 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, such aggregate potential liability being approximately $6,600,000 at March 31, 1997. No material losses have been incurred by the Company under these agreements, which are terminable by either party upon 30 days' notice. Competition The snowmobile, PWC, and ATV markets are highly competitive, with competition 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 and Tigershark PWC 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. Certain materials used in snowmobile, PWC, 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 and various state pollution control agencies which require reports and inspect 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 Arctco, 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. The Company is a member of National Marine Manufacturers Association (NMMA) and the Personal Watercraft Industry Association (PWIA). Tigershark personal watercraft conform to applicable United States Coast Guard (USCG) standards and Society of Automobile Engineer (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. Governmental bodies have proposed legislation 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. Employees During fiscal 1997, the Company had peak employment of approximately 1,722 employees, including 238 salaried and 1,484 hourly and production personnel. Due to the seasonal nature of sales and the Company's production schedules, prior to the introduction of the PWC, approximately 60% of hourly personnel worked only during the spring through the late fall production period. However, during the past four fiscal years, most employees remained employed throughout the year to produce the Tigershark PWC and Arctic Cat ATV. 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, PWC, ATVs and other products. Trademarks are important to the Company's snowmobile, PWC, 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. Properties The Company owns its manufacturing facilities and executive offices in Thief River Falls, Minnesota. The facilities consist of approximately 488,000 square feet of manufacturing, office and warehouse space on 49.5 acres, including approximately 417,000 square feet devoted to manufacturing, and approximately 71,000 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. In addition, the Company also owns three separate parcels of undeveloped land adjacent to its 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 all the tooling used in the manufacture of its products and the machinery located at its plant in Thief River Falls, Minnesota. During fiscal 1997, the Company purchased the 37,000 square foot building located in Madison, South Dakota, that it had leased since 1992. This facility is used to produce and/or paints hoods and other parts for the Company's Arctic Cat snowmobiles and PWC. Also during fiscal 1997, the Company constructed 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 will allow decreased delivery times to the majority of its dealers. 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 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 $5,000,000 in the aggregate, in addition to a $1,000,000 self-insured retention. The Company believes such insurance is adequate. 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 59 Chairman of the Board of Directors Christopher A. Twomey 49 President and Chief Executive Officer Bryce D. Abrahamson 43 Vice President--Materials Mark E. Blackwell 44 Vice President--Marketing Terry J. Blount 54 Vice President--Human Resources Timothy C. Delmore 43 Chief Financial Officer and Secretary Ronald G. Ray 48 Vice President--Manufacturing Roger H. Skime 54 Vice President--Research & Development Ole E. Tweet 50 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 co-owner and a Vice President of Northern Woodwork (specialty furniture manufacturer), Thief River Falls, Minnesota and a director of Northern State Bank. 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 also a Community Board Member of Norwest Bank Minnesota West, N.A. Mr. Abrahamson has been Vice President--Materials of the Company since 1988. He has been with the Company since its inception in 1983, serving as Purchasing Agent prior to being named to his present post. Mr. Abrahamson has been employed in the snowmobile industry for 23 years. Mr. Blackwell has been Vice President--Marketing since May of 1992 and has over 15 years of marketing experience in the recreational vehicle field. Previously he served for five years as Marketing Director for American Suzuki Motor Corporation. His responsibilities have included the motorcycle and marine divisions. Mr. Blount has been Vice President--Human Resources since June of 1996. Mr. Blount has over 28 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 27 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 36 years. Mr. Tweet, Vice President of New Product Development and General Manager of the Marine Division, had been the Company's Vice President- Marketing since its inception in 1983 and has been employed in the snowmobile industry for 32 years. (This space intentionally left blank.) PART II Item 5. Market for Registrant's Common Stock 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, 1997 March 31, 1996 Quarterly Prices High Low High Low First Quarter $12.50 $ 9.50 $15.88 $10.98 Second Quarter $12.25 $ 8.88 $14.50 $11.00 Third Quarter $10.75 $ 9.00 $14.13 $11.00 Fourth Quarter $11.00 $ 9.44 $13.13 $ 9.50 As of June 20, 1997, the Company had approximately 779 stockholders of record, including the nominee of Depository Trust Company which held 17,681,392 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. On February 2, 1995, the Company increased the quarterly dividend to $0.06 per share. All dividends have been adjusted for stock-splits. (This space intentionally left blank.) Item 6. Selected Financial Data Years Ended March 31, (in thousands, except per share amounts) 1997 1996 1995 1994 1993 ____ ____ ____ ____ ____ Income Statement Data: Net sales $468,595 $404,996 $367,144 $268,057 $184,720 Cost of goods sold 351,249 308,946 267,210 190,972 132,950 _______ _______ _______ _______ _______ Gross profit 117,346 96,050 99,934 77,085 51,770 Selling, general and administrative expenses 83,282 72,473 50,939 36,906 26,196 ______ ______ ______ ______ _______ Operating profit 34,064 23,577 48,995 40,179 25,574 Interest income 1,798 2,228 2,383 1,595 1,533 Interest expense (109) - (17) (98) (184) ------ ------ ------ ------ ------ Earnings before income taxes 35,753 25,805 51,361 41,676 26,923 Income taxes 12,692 9,159 17,976 14,170 8,912 ______ ______ ______ ______ ______ Net earnings $ 23,061 $ 16,646 $ 33,385 $ 27,506 $ 18,011 ====== ====== ====== ====== ====== Net earnings per share $ 0.78 $ 0.56 $ 1.13 $ 0.94 $ 0.62 ====== ====== ====== ====== ====== Cash dividends per share $ 0.24 $ 0.24 $ 0.21 $ 0.15 $ 0.12 ====== ====== ====== ====== ====== Average shares outstanding 29,476 29,661 29,495 29,267 29,078 ====== ====== ====== ====== ====== _______________________________________________________________________________ As of March 31, 1997 1996 1995 1994 1993 Balance Sheet Data (in thousands) Cash & short-term investments $ 50,740 $ 44,002 $ 65,241 $ 59,923 $ 54,812 Working capital 131,604 130,142 128,845 104,885 83,878 Total assets 217,967 207,996 183,996 154,980 122,149 Long-term debt -- -- -- -- 581 Shareholders' equity 166,738 156,193 147,067 118,203 94,301 _______________________________________________________________________________ QUARTERLY FINANCIAL DATA (unaudited) (in thousands, except per share amounts) Total First Second Third Fourth Year Quarter Quarter Quarter Quarter Net Sales ______ ______ ______ ______ ______ 1997 $468,595 89,126 177,925 133,877 67,667 1996 404,996 61,759 166,059 123,623 53,555 1995 367,144 56,007 149,204 112,844 49,089 Gross Profit 1997 $117,346 18,539 49,389 35,715 13,703 1996 96,050 11,806 43,295 31,792 9,157 1995 99,934 13,741 41,845 32,940 11,408 Net Earnings (Loss) 1997 $ 23,061 1,002 18,587 6,020 (2,548) 1996 16,646 (4,268) 17,888 6,015 (2,989) 1995 33,385 3,583 18,959 10,761 82 Net Earnings (Loss) Per Share 1997 $ 0.78 0.03 0.63 0.20 (0.09) 1996 0.56 (0.14) 0.60 0.20 (0.10) 1995 1.13 0.12 0.64 0.36 0.00 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 1997 was a successful, record breaking sales year for Arctic Cat Inc. The Company also achieved record retail sales of Arctic Cat snowmobiles for the fourteenth consecutive year. Dealer and customer reception of the Arctic Cat all-terrain vehicle (ATV) continues to be encouraging after completing its first year in this strategic market. The Company's continued growth in this $1.2 billion market will be enhanced by the introduction of new models which will occur during our next fiscal year. Financial Data (in thousands, except per share data) Years ended March 31, 1997 1996 1995 Net Sales $468,595 $404,996 $367,144 Net Earnings $ 23,061 $ 16,646 $ 33,385 Net Earnings Per Share $0.78 $0.56 $1.13 Cash & Short-Term Investments $ 50,740 $ 44,002 $ 65,241 Sales by Product Line (In %) Snowmobiles 58% 66% 65% PWC 15% 14% 18% ATVs 11% 3% - Parts, Garments & Accessories 16% 17% 17% Results of Operations 1997 vs. 1996 Net sales increased 15.7% in 1997 to $468,595,000 from $404,996,000 in 1996 due to a 2.0% increase in snowmobile sales, on flat unit volume, an 8.9% increase in parts, garments and accessories sales, and $50.7 million of ATV sales as the Company completed its first full year in the ATV market. PWC unit volume increased 17.8%. The Company believes the increases in snowmobile parts and accessory sales were driven by increased demand for the Company's products as well as by excellent winter conditions in the midwest and western United States and Canada. PWC sales increases resulted from late shipments of models for the 1996 summer season that were shipped in the first quarter ended June 30, 1996 and the earlier shipment of models for the 1997 summer season occurring in the fourth quarter. Gross profit increased 22.2% to $117,346,000 in 1997 from $96,050,000 in 1996. Gross profit as a percent of net sales was 25.0% in 1997 compared to 23.7% in 1996. The increase in the gross profit percentage was primarily due to the positive fluctuation in the exchange rates between the U.S. dollar and the Japanese yen. The Company shares exchange rate fluctuations with Suzuki Motor Corporation, its engine supplier. These fluctuations affected all three product lines and increased gross profit by approximately $5,500,000 over fiscal 1996 (see Inflation and Exchange Rates). Also improving the gross profit percentage were Canadian dealer direct snowmobile and accessory shipments which yielded higher margins than the prior years shipments to Canadian distributors. These factors were mitigated by a larger percentage of ATVs and PWC in the sales mix which yield lower margins than snowmobiles. Selling, general and administrative expenses increased 14.9% to $83,282,000 in 1997 from $72,473,000 in 1996. The increase is principally attributable to increased selling and administrative expenses associated with increased ATV sales and increased expenses due to selling directly to dealers in Canada. As a percent of net sales, selling, general and administrative expenses were 17.8% in 1997 compared to 17.9% in 1996. Operating profits increased 44.5% to $34,064,000 in 1997 from $23,577,000 in 1996. As a percent of net sales, operating profits increased to 7.3% in 1997 from 5.8% in 1996 (see gross profit and operating expense discussion). Net earnings increased 38.5% to $23,061,000 in 1997 from $16,646,000 in 1996. Net earnings as a percent of net sales were 4.9% and 4.1% in 1997 and 1996 respectively. Net earnings per share were $0.78 in 1997 compared to $0.56 in 1996. 1996 vs. 1995 Net sales increased 10.3% in 1996 to $404,996,000 from $367,144,000 in 1995 due to a 6.5% increase in snowmobile unit volume, a 14.3% increase of parts, garments and accessories sales, and $12,763,000 of ATV sales as the Company entered the ATV market during the fourth quarter. PWC unit volume decreased 14.2% as shipments of certain new models were shifted to the first quarter of fiscal 1997. The Company believes the increases in snowmobile and accessory sales were driven by increased demand for the Company's products as well as by growth in the North American snowmobile market. Gross profit decreased 3.9% to $96,050,000 in 1996 from $99,934,000 in 1995. Gross profit as a percent of net sales was 23.7% in 1996 compared to 27.2% in 1995. The decrease in the gross profit percentage is due principally to the fluctuation in the exchange rates between the U.S. dollar and the Japanese yen, as well as lower margins on PWC compared to last year. The Company shares exchange rate fluctuations with Suzuki Motor Corporation, its engine supplier. These fluctuations, which mainly affected the snowmobile and PWC product lines, decreased gross profit by approximately $4,000,000 over fiscal 1995 (see Inflation and Exchange Rates). Selling, general and administrative expenses increased 42.3% to $72,473,000 in 1996 from $50,939,000 in 1995. The increase is principally attributable to increased selling and administrative expenses related to the 10.3% increase in net sales, factory-to-dealer incentives for the PWC line, and to a much lesser extent, expenses related to the change in Canadian distribution and increased marketing and development costs for the PWC and ATV product lines. As a percent of net sales, selling, general and administrative expenses were 17.9% in 1996 compared to 13.9% in 1995. Operating profits decreased 51.9% to $23,577,000 in 1996 from $48,995,000 in 1995. As a percent of net sales, operating profits decreased to 5.8% in 1996 from 13.3% in 1995 (see gross profit and operating expense discussion). Net earnings decreased 50.1% to $16,646,000 in 1996 from $33,385,000 in 1995. Net earnings as a percent of net sales were 4.1% and 9.1% in 1996 and 1995, respectively. Net earnings per share were $0.56 in 1996 compared to $1.13 in 1995. Liquidity and Capital Resources The seasonality of the Company's snowmobile production cycle and the lead time between the commencement of production in late February 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. Cash and Short-Term Investments Cash and short-term investments were $50,740,000 at March 31, 1997 compared to $44,002,000 at March 31, 1996. 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 production cycle begins. 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 $30,000,000 of documentary and stand-by letters of credit. The total letters of credit issued at March 31, 1997 were $19,888,000, of which $16,639,000 was issued to Suzuki Motor Corporation for engine purchases. During fiscal 1996, the Company's Board of Directors authorized the repurchase of up to 1,500,000 shares of common stock. During 1997 and 1996, the Company invested $5,858,000 and $672,000 to repurchase and cancel 596,500 and 66,000 shares. In 1997, the Company invested $21,270,000 in capital expenditures including approximately $6,000,000 for a parts, garments and accessory distribution facility in Bucyrus, Ohio. The Company expects that for fiscal 1998 capital expenditures, including tooling, will approximate $17,000,000. The Company believes that cash generated from operations will be sufficient to meet its working capital, regular quarterly dividend, share repurchase program and capital expenditure requirements for the foreseeable future. The Company does not provide financing for the purchase of snowmobiles, ATVs or PWC by its retail customers. 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 within thirty days of shipment and as part of its marketing program 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 sets limits upon the Company's potential liability for annual repurchases. The aggregate potential liability was approximately $6,600,000 at March 31, 1997. No material losses have been incurred by the Company under these agreements, which are terminable by either party upon 30 days notice. 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. The relationship of the U.S. dollar to the Canadian dollar and Japanese yen may have a significant impact on the Company's business. Two of the Company's principal competitors are based in Japan and Canada. Also, the Company purchases its snowmobile, ATV and PWC engines and related parts from Suzuki Motor Corporation and sells a full line of products to Canadian dealers. All purchase and sales prices are determined annually. The Company has agreements with Suzuki Motor Corporation, that renew annually, to share the impact of fluctuations in the exchange rate between the U.S. dollar and Japanese yen, above and below a fixed range contained in the agreements for snowmobile and PWC engines. The Company has in the past, in the case of the Japanese yen, and may in the future enter into foreign exchange contracts for both the Japanese yen and the Canadian dollar to minimize the impact of exchange rate fluctuations (see gross profit discussion). 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, contains 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; 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; and overall economic conditions and consumer confidence. Item 8. Financial Statements and Supplementary Data Financial Statements and Notes appear on pages F-1 through F-11. Quarterly financial data appears in Item 6. Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information included under the heading "Election of Directors" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held August 14, 1997, 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. 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 currently scheduled to be held August 14, 1997, is incorporated herein by reference. 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 14, 1997, is incorporated herein by reference. 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 14, 1997, is incorporated herein by reference. PART IV 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 Form 10-K: Form 10-K Page Reference (i) Consolidated Balance Sheets F-1 as of March 31, 1997 and 1996 (ii) Consolidated Statements of Earnings F-2 for the three years ended March 31, 1997, 1996 and 1995 (iii) Consolidated Statements of Shareholders' F-3 Equity for the three years ended March 31, 1997, 1996 and 1995 (iv) Consolidated Statements of Cash Flows F-4 for the three years ended March 31, 1997, 1996 and 1995 (v) Notes to Consolidated Financial F-5 to Statements F-11 (vi) Report of Independent Certified Public F-12 Accountants 2. Schedules filed as part of Form 10-K: (i) Schedule II - Valuation and Qualifying Accounts F-13 3. Exhibits Method of Filing 3(a) Amended and Restated Articles of Incorporation (2) of Company 3(b) Restated By-Laws of the Company (1) 4(a) Form of specimen Common Stock Certificate (1) 10(a) 1989 Stock Option Plan, as amended (2) 10(b) 1995 Stock Option Plan, as amended (2) 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, (2) 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 (2) (b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended March 31, 1997. (c) Exhibits Reference is made to Item 14(a) 3. (d) Schedules None -------------------------------------- (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. (This space intentionally left blank.) 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 27th day of June, 1997. 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 27, 1997 ___________________________ ___________________ William G. Ness Chairman of the Board and Director /s/Christopher A. Twomey June 27, 1997 ___________________________ ___________________ Christopher A. Twomey President, Chief Executive Officer and Director (Principle Executive Officer) /s/Timothy C. Delmore June 27, 1997 ___________________________ ___________________ Timothy C. Delmore Chief Financial Officer (Principle Financial and Accounting Officer) /s/Robert J. Dondelinger June 27, 1997 ___________________________ ___________________ Robert J. Dondelinger, Director /s/William I. Hagen June 27, 1997 __________________________ ___________________ William I. Hagen, Director __________________________ ___________________ Takeshi Natori, Director /s/Lowell T. Swenson June 27, 1997 __________________________ ___________________ Lowell Swenson, Director /s/Gregg A. Ostrander June 27, 1997 __________________________ ___________________ Gregg A. Ostrander, Director __________________________ ___________________ Kenneth J. Roering, Director Arctic Cat Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS March 31, ASSETS 1997 1996 ____ ____ CURRENT ASSETS Cash and equivalents $ 5,540,000 $ 9,032,000 Short-term investments 45,200,000 34,970,000 Accounts receivable, less allowances 27,393,000 36,465,000 Inventories 86,502,000 86,618,000 Prepaid expenses 1,618,000 2,404,000 Income taxes receivable 3,838,000 - Deferred income taxes 8,369,000 8,920,000 ___________ ___________ Total current assets 178,460,000 178,409,000 PROPERTY, PLANT AND EQUIPMENT - (at cost) Machinery, equipment and tooling 60,534,000 55,118,000 Buildings and improvements 11,244,000 6,191,000 Land 527,000 192,000 __________ __________ 72,305,000 61,501,000 Less accumulated depreciation 32,798,000 31,914,000 __________ __________ 39,507,000 29,587,000 __________ __________ $217,967,000 $207,996,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 21,586,000 $ 23,947,000 Accrued expenses 25,270,000 24,320,000 __________ __________ Total current liabilities 46,856,000 48,267,000 DEFERRED INCOME TAXES 4,373,000 3,536,000 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Preferred stock, par value $1.00; 2,300,000 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, 21,533,136 in 1997; 22,055,971 in 1996 215,000 221,000 Class B common stock, par value $.01; 7,560,000 shares authorized, issued, and outstanding 76,000 76,000 Additional paid-in capital 17,069,000 22,502,000 Retained earnings 149,378,000 133,394,000 ___________ ___________ 166,738,000 156,193,000 ___________ ___________ $217,967,000 $207,996,000 ============ ============ F-1 Arctic Cat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS Years ended March 31, 1997 1996 1995 ____ ____ ____ Net sales $468,595,000 $404,996,000 $367,144,000 Cost of goods sold 351,249,000 308,946,000 267,210,000 ___________ ___________ ___________ Gross profit 117,346,000 96,050,000 99,934,000 Selling, general and administrative expenses 83,282,000 72,473,000 50,939,000 ___________ ___________ ___________ Operating profit 34,064,000 23,577,000 48,995,000 Other income (expense) Interest income 1,798,000 2,228,000 2,383,000 Interest expense (109,000) - (17,000) ___________ ___________ ___________ 1,689,000 2,228,000 2,366,000 ___________ ___________ ___________ Earnings before income taxes 35,753,000 25,805,000 51,361,000 Income tax expense 12,692,000 9,159,000 17,976,000 ___________ ___________ ___________ Net earnings $ 23,061,000 $ 16,646,000 $ 33,385,000 ========== ========== ========== Net earnings per share $0.78 $0.56 $1.13 === === ==== Weighted average common and common equivalent shares 29,476,000 29,661,000 29,495,000 outstanding ========== ========== ========== F-2 Arctic Cat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended March 31,
Class B Additional Common Stock Common Stock Paid-in Retained Shares Amount Shares Amount Capital Earnings Total ______ ______ ______ ______ __________ __________ _________ Balances at April 1, 1994 21,770,386 $218,000 7,560,000 $76,000 $21,521,000 $ 96,388,000 $118,203,000 Contribution to retirement savings plan 4,197 - - - 77,000 - 77,000 Exercise of stock options 375,212 4,000 - - 1,947,000 - 1,951,000 Tax benefits from stock option exercises - - - - 914,000 - 914,000 Common stock retired (79,382) (1,000) - - (1,556,000) - (1,557,000) Cash dividends ($.21 per share) - - - - - (5,906,000) (5,906,000) Net earnings - - - - - 33,385,000 33,385,000 __________ _______ _________ ______ __________ __________ ___________ Balances at March 31, 1995 22,070,413 221,000 7,560,000 76,000 22,903,000 123,867,000 147,067,000 Exercise of stock options 58,786 1,000 - - 302,000 - 303,000 Tax benefits from stock option exercises - - - - 62,000 - 62,000 Common stock retired (73,228) (1,000) - - (765,000) - (766,000) Cash dividends ($.24 per share) - - - - - (7,119,000) (7,119,000) Net earnings - - - - - 16,646,000 16,646,000 __________ _______ _________ ______ __________ __________ ___________ Balances at March 31, 1996 22,055,971 221,000 7,560,000 76,000 22,502,000 133,394,000 156,193,000 Exercise of stock options 83,238 - - - 464,000 - 464,000 Tax benefits from stock option exercises - - - - 62,000 - 62,000 Common stock retired (606,073) (6,000) - - (5,959,000) - (5,965,000) Cash dividends ($.24 per share) - - - - - (7,077,000) (7,077,000) Net earnings - - - - - 23,061,000 23,061,000 __________ _______ _________ ______ __________ __________ ___________ Balances at March 31, 1997 21,533,136 $215,000 7,560,000 $76,000 $17,069,000 $149,378,000 $166,738,000 ========== ======= ========= ======= ========== =========== ===========
F-3 Arctic Cat Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended March 31, 1997 1996 1995 Cash flows from operating activities Net earnings $ 23,061,000 $ 16,646,000 $ 33,385,000 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 11,350,000 7,646,000 5,448,000 Deferred income taxes 1,388,000 (2,481,000) (127,000) Contribution to retirement savings plan - - 77,000 Changes in operating assets and liabilities: Trading securities (12,476,000) 25,280,000 (12,603,000) Accounts receivable 9,072,000 (17,099,000) (4,353,000) Inventories 116,000 (16,692,000) (10,030,000) Prepaid expenses 786,000 (400,000) (1,265,000) Accounts payable (2,229,000) 7,957,000 (3,308,000) Accrued expenses 950,000 5,237,000 2,599,000 Income taxes (3,908,000) 2,684,000 (1,481,000) __________ __________ __________ Net cash provided by operating activities 28,110,000 28,778,000 8,342,000 Cash flows from investing activities Additions to property, plant and equipment (21,270,000) (17,155,000) (10,664,000) Sales and maturities of available-for-sale securities 4,500,000 2,292,000 2,669,000 Purchases of available-for-sale securities (2,254,000) (2,933,000) (4,032,000) __________ __________ _________ Net cash used in investing activities (19,024,000) (17,796,000) (12,027,000) Cash flows from financing activities Dividends paid (7,077,000) (7,119,000) (5,906,000) Proceeds from issuance of common stock 357,000 209,000 943,000 Common stock retired (5,858,000) (672,000) - __________ __________ _________ Net cash used in financing activities (12,578,000) (7,582,000) (4,963,000) __________ __________ _________ Net increase (decrease) in cash and equivalents (3,492,000) 3,400,000 (8,648,000) Cash and equivalents at beginning of year 9,032,000 5,632,000 14,280,000 __________ __________ _________ Cash and equivalents at end of year $ 5,540,000 $ 9,032,000 $ 5,632,000 ========== ========== ========== Supplemental disclosure of cash payments for income taxes $ 15,212,000 $ 10,869,000 $ 19,584,000 ========== ========== ========== Supplemental disclosure of non-cash financing activities: During 1997, 1996 and 1995, common stock with a fair market value of $107,000, $94,000 and $1,557,000 was canceled as settlement for the exercise of certain stock options and associated payroll taxes. Tax benefits derived from the exercise of stock options reduced income tax obligations and increased additional paid-in capital in the amount of $62,000, $62,000 and $914,000 during 1997, 1996 and 1995. F-4 Arctic Cat Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997, 1996 and 1995 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Arctic Cat Inc. and Subsidiaries (the "Company") design, engineer, manufacture and market snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, and personal watercraft under the Tigershark brand name, as well as related parts, garments and accessories, principally through its facilities in Thief River Falls, Minnesota. Principal products, as a percentage of 1997 sales, are: snowmobiles - 58%, personal watercraft - 15%, ATVs - 11%, and parts, garments and accessories - 16%. The Company operates in a single industry segment and its products are sold through a network of independent dealers located throughout the United States, Canada, Scandinavia and other international markets. Use of Estimates: Preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from those estimates. 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 and Equivalents: The Company considers all highly liquid temporary investments with an original maturity of three months or less to be cash equivalents. Cash equivalents totaled $10,109,000 and $12,582,000 at March 31, 1997 and 1996, are stated at cost, which approximates market value based upon quoted market prices, and were principally invested in three issuers' and two issuers' put bonds in 1997 and 1996. 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 using the specific identification method. Short-term investments are reported at cost, which approximates market value based upon quoted market prices. Inventories: Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. Property, Plant and Equipment: Depreciation is provided to relate the cost of depreciable assets to operations over their estimated service lives principally on a straight-line basis. Estimated service lives range from 15-25 years for buildings and improvements and 3-7 years for machinery, equipment and tooling. 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 at the time their existence and amounts are known following the sale. Warranty costs on certain parts and components are reimbursed to the Company by supplying vendors. F-5 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: The Company expenses research and development costs as a component of selling , general and administrative expenses as incurred. Research and development expense was $9,911,000, $9,317,000 and $7,207,000 during 1997, 1996 and 1995. Advertising: The Company expenses advertising costs as incurred. Advertising expense was $17,049,000, $12,296,000 and $8,903,000 during 1997, 1996 and 1995. 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 1. Net Earnings Per Share: Net earnings per share is computed by dividing net earnings by the weighted average outstanding common shares and common share equivalents, when dilutive. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, which is effective for financial statements issued after December 15, 1997. Early adoption of the new standard is not permitted. The new standard eliminates primary and fully diluted earnings per share and requires presentation of basic and diluted earnings per share together with disclosure of how the per share amounts were computed. The effect of adopting this new standard would not be material for 1997, 1996 or 1995. Foreign Currency: Effective April 1, 1996, the Company began marketing its products directly to Canadian dealers in Canadian currency. The Company's Canadian operations use the U.S. dollar as the functional currency. Canadian assets and liabilities are translated at the foreign exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average foreign exchange rate in effect. Translation and exchange gains and losses are reflected in the results of operations. The Company enters into foreign exchange forward contracts to hedge purchase commitments denominated in Japanese yen. Gains and losses on the foreign exchange contracts are deferred and included in the determination of the related foreign currency transaction. At March 31, 1997, the Company had open Japanese yen forward purchase contracts with notional amounts totaling $13,993,000. NOTE B - SHORT-TERM INVESTMENTS Short-term investments consist primarily of a diversified portfolio of tax exempt municipal bonds and municipal bond mutual funds and are classified as follows at March 31: 1997 1996 ____ ____ Trading securities $32,490,000 $20,014,000 Available-for-sale debt securities 12,710,000 14,956,000 __________ __________ $45,200,000 $34,970,000 ========== ========== F-6 The contractual maturities of available-for-sale debt securities at March 31, 1997, are as follows: $500,000 within one year, $3,090,000 from one year through five years, and $9,120,000 from five years through ten years. Gross realized and unrealized gains and losses related to available-for-sale securities were not material. NOTE C -INVENTORIES Inventories consist of the following at March 31: 1997 1996 ____ ____ Raw materials and sub-assemblies $32,784,000 $39,027,000 Finished goods 32,573,000 22,727,000 Parts, garments and accessories 21,145,000 24,864,000 __________ __________ $86,502,000 $86,618,000 ========== ========== NOTE D - ACCRUED EXPENSES Accrued expenses consist of the following at March 31: 1997 1996 ____ ____ Compensation $ 7,952,000 $ 5,892,000 Warranty 7,971,000 7,939,000 Self-insured retentions 3,391,000 3,185,000 Other 5,956,000 7,304,000 __________ __________ $25,270,000 $24,320,000 ========== ========== NOTE E - 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 contributions were $773,000, $724,000 and $579,000 in 1997, 1996 and 1995. NOTE F - RELATED PARTY TRANSACTIONS The Company purchases engines and related parts, which are manufactured in Japan, from Suzuki Motor Corporation (Suzuki) (see Note I). Such purchases totaled $103,285,000, $95,619,000 and $77,005,000 in 1997, 1996 and 1995. The purchase price of engines and related parts is determined annually. The Company has an agreement with Suzuki, which renews annually, 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 for snowmobile and watercraft engine purchases. Foreign currency exchange losses under this agreement were not material during the periods presented. F-7 As described above, and in Note I, 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 1997, 1996 and 1995, these transactions aggregated $7,699,000, $6,255,000 and $4,961,000. NOTE G - INCOME TAXES Income tax expense consists of the following for the years ended March 31: 1997 1996 1995 ____ ____ ____ Current -Federal $9,767,000 $10,375,000 $16,227,000 -State 1,537,000 1,265,000 1,876,000 Deferred 1,388,000 (2,481,000) (127,000) __________ __________ __________ $12,692,000 $9,159,000 $17,976,000 ========== ========== ========== 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: 1997 1996 ____ ____ Deferred income taxes assets Accrued warranty $2,989,000 $2,977,000 Inventory capitalization and reserves 1,827,000 2,317,000 Other 3,553,000 3,626,000 _________ _________ $8,369,000 $8,920,000 ========= ========= Deferred income taxes - liabilities Depreciation $2,683,000 $2,057,000 Other 1,690,000 1,479,000 _________ _________ $4,373,000 $3,536,000 ========= ========= The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate for the years ended March 31: 1997 1996 1995 ____ ____ ____ Statutory income tax rate 35.0% 35.0% 35.0% State taxes 2.3 3.2 2.4 Tax exempt interest (1.3) (2.9) (1.6) Foreign sales corporation (1.5) (2.0) (1.0) Other 1.0 2.2 .2 ____ ____ ____ 35.5% 35.5% 35.0% ==== ==== ==== F-8 NOTE H - COMMITMENTS AND CONTINGENCIES Letters of Credit: At March 31, 1997, the Company had an unsecured credit agreement with a bank for the issuance of up to $30,000,000 of documentary and stand-by letters of credit. The total letters of credit issued at March 31, 1997, were $19,888,000, of which $16,639,000 were issued to Suzuki for engine purchases (see Note F). The letters of credit expire through September 1997. Dealer Financing: Finance companies provide certain of the Company's dealers and distributors with financing. The Company has agreements to repurchase certain repossessed products sold to its dealers and reimburse the finance companies for losses up to specified limits. At March 31, 1997, the Company was contingently liable under these agreements for a maximum repurchase amount of approximately $6,600,000. No material losses have been incurred under these agreements during the periods presented. The Company pays a specified portion of the floor plan interest payable to finance companies for certain of its dealers who qualify under various marketing programs. Total payments under these programs were $10,506,000, $7,416,000 and $4,881,000 in 1997, 1996 and 1995 and are included in selling, general and administrative expenses. 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 cash flow or consolidated financial statements. NOTE I - SHAREHOLDERS' EQUITY Stock Plan Options: 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 at the date of grant. At March 31, 1997, the Company had 1,090,300 shares of common stock available for issue under the plans. Transactions under the plans during each of the three years in the period ended March 31, 1997 are summarized as follows: F-9 Number of Weighted shares under average option exercise price _______ ________________ Outstanding at April 1, 1994 1,162,526 $ 6.57 Granted 241,471 16.64 Exercised (375,213) 5.20 __________ _______ Outstanding at March 31, 1995 1,028,784 9.44 Granted 255,000 11.25 Exercised (58,786) 5.15 __________ _______ Outstanding at March 31, 1996 1,224,998 10.02 Granted 602,752 10.25 Exercised (83,238) 5.59 __________ _______ Outstanding at March 31, 1997 1,744,512 $10.31 ========= ======= Options exercisable at March 31: 1995 265,019 $ 7.15 -------------------------------------------------------------------------- 1996 475,831 $ 7.62 -------------------------------------------------------------------------- 1997 751,180 $ 8.94 -------------------------------------------------------------------------- The following tables summarize information concerning currently outstanding and exercisable stock options: Options Outstanding Weighted Average Weighted Range of Number Remaining Average Exercise Prices Outstanding Contractual Life Exercise Price ---------------------------------------------------------------------------- $ 5.95-$ 8.03 431,820 5 months $ 5.99 9.50- 13.33 1,071,221 4.5 years 10.63 16.33- 19.75 241,471 2.2 years 16.64 ---------------------------------------------------------------------------- 1,744,512 ____________________________________________________________________________ Options Exercisable Weighted Range of Number Average Exercise Prices Exercisable Exercise Price ---------------------------------------------------------------------------- $ 5.95-$ 8.03 386,820 $ 5.99 9.50- 13.33 305,463 11.03 16.33- 19.75 58,897 17.52 ---------------------------------------------------------------------------- 751,180 ____________________________________________________________________________ The Company's 1997 and 1996 pro forma net earnings and net earnings per share would have been $22,290,000 and $16,450,000, or $0.76 and $0.55 per share had the fair value method been used for valuing options granted during 1997 and 1996. The impact on net earnings may differ in 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 in 1997 and 1996 was $3.40 and $3.84, computed by applying the following weighted average assumptions to the binomial options pricing model: dividend yield of 2%; risk-free rate of return of 6.6% and 6.2%; volatility of 35%; and an average term of 4.7 and 5 years for 1997 and 1996. 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, recapitalization, or the Company sells substantially all of its assets; or due to the transfer of Class B common stock by Suzuki 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 2,300,000 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. F-10 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's Board of Directors has authorized the repurchase of up to 1,500,000 shares of common stock. During 1997 and 1996, the Company invested $5,858,000 and $672,000 to repurchase and cancel 596,500 and 66,000 shares. NOTE J - EXPORT SALES AND MAJOR CUSTOMER Prior to March 31, 1996, the Company marketed its products to Canadian dealers through two distributors serving eastern and western Canada. Sales to one of these distributors amounted to $29,437,000 and $40,175,000 during 1996 and 1995. Effective April 1, 1996, the Company began marketing all of its products directly to Canadian dealers. Sales to foreign customers, located primarily in Canada, amounted to $94,468,000, $73,964,000 and $74,136,000 in 1997, 1996 and 1995. F-11 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Arctic Cat Inc. We have audited the accompanying consolidated balance sheets of Arctic Cat Inc. (f/k/a Arctco, Inc.) and Subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. 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 generally accepted auditing standards. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. We have also audited Schedule II of Arctic Cat Inc. and Subsidiaries for each of the three years in the period ended March 31, 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. /s/Grant Thornton LLP ______________________ Minneapolis, Minnesota May 9, 1997 F-12 ARCTIC CAT INC. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFING ACCOUNTS THREE YEARS ENDED MARCH 31, 1997
Balance at Charged to Charged to Beginning Costs and Other Accounts Deductions- Balance at end Description of Period Expenses -Describe Describe of Period ___________ __________ ___________ ______________ ___________ ________________ Warranty Reserve Year ended March 31, 1997 $7,939,000 $13,915,000 - $13,883,000 (a) $7,971,000 Year ended March 31, 1996 6,012,000 14,354,000 - 12,427,000 (a) 7,939,000 Year ended March 31, 1995 5,518,000 9,638,000 - 9,144,000 (a) 6,012,000 Self-insured Retentions: Year ended March 31, 1997 3,185,000 4,371,000 - 4,165,000 (b) 3,391,000 Year ended March 31, 1996 2,504,000 3,777,000 - 3,096,000 (b) 3,185,000 Year ended March 31, 1995 2,449,000 2,432,000 - 2,377,000 (b) 2,504,000 Other: Year ended March 31, 1997 3,037,000 - - - 3,190,000 Year ended March 31, 1996 1,608,000 - - - 3,037,000 Year ended March 31, 1995 1,683,000 - - - 1,608,000 (a) Warranty claims paid less vendor reimbursements. (b) Health and workers' comp claims and expenses paid.
F-13 ARCTIC CAT INC. EXHIBIT INDEX Exhibit Number 3(a) Amended and Restated Arcticles of Incorporation of Company 10(a) 1989 Stock Option Plan, as amended 10(b) 1995 Stock Option Plan, as amended 10(g) Discretionary Revolving Credit Facility, dated as of June 6, 1997, between the Company and Norwest Bank Minnesota, National Association. 21 Subsidiaries of Registrant 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule EX-3.A 2 Exhibit 3(a) RESTATED ARTICLES OF INCORPORATION OF ARCTIC CAT INC. Pursuant to the provisions of Chapter 302A of the Minnesota Statutes, known as the Minnesota Business Corporation Act, and laws amendatory thereof and supplementary thereto, the following Restated Articles of Incorporation are adopted and shall supersede and take the place of the existing Restated Articles of Incorporation and any amendments thereto. ARTICLE I. The name of this Corporation shall be Arctic Cat Inc. ARTICLE II. The address of the registered office of the Corporation shall be 600 Brooks Avenue South, P.O. Box 810, Thief River Falls, Minnesota, 56701. ARTICLE III. SECTION 1. The authorized capital stock of this Corporation shall consist of 47,500,000 shares which shall be 45,000,000 shares of common stock of the par value of one cent ($.01) per share (the "Common Stock") and 2,500,000 shares of preferred stock of the par value of One Dollar ($1.00) per share (the "Preferred Stock"). The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions of the shares of each class of stock shall be as follows: SECTION 2. Preferred Stock. The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more series. Subject to the provisions hereof and the limitations prescribed by law, the Board of Directors is expressly authorized by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the Minnesota Secretary of State a statement with respect to the adoption of the resolutions pursuant to the Minnesota Business Corporation Act (or other law hereafter in effect relating to the same or substantially similar subject matter), to establish the number of shares to be included in each such series and to fix the designation and relative powers, preferences and rights and the qualifications, limitations or restrictions thereof relating to the shares of each such series. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) the distinctive serial designation of such series and the number of shares constituting such series, provided that the aggregate number of shares constituting all series of Preferred Stock shall not exceed 2,500,000; (b) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates; (c) whether the shares of such series shall be redeemable and, if so , the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (d) the obligation, if any, of the Corporation to retire shares of such series pursuant to a sinking fund; (e) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so , the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any; (f) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights; (g) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (h) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series. The shares of Preferred Stock of any one series shall be identical with each other in all respects except as to the dates from and after which dividends thereon shall cumulate, if cumulative. SECTION 4. Common Stock. Subject to all of the rights of the Preferred Stock, and except as may be expressly provided with respect to the Preferred Stock herein, by law or by the Board of Directors pursuant to this Article III: (a) dividends may be declared and paid or set apart for payment upon the Common Stock out of any assets or funds of the Corporation legally available for the payment of dividends; (b) the holders of Common Stock shall have the right to vote for the election of directors and on all other matters requiring stockholder action , each share being entitled to one vote; (c) upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective share ownership; and (d) the Board of Directors may, from time to time, establish by resolution different classes or series of shares and may fix the rights and preferences of said shares in any class or series; and the Board of Directors shall have the authority to issue shares of a class or series to holders of shares of another class or series to effectuate share dividends , splits, or conversion of its outstanding shares. ARTICLE IV. Any action required or permitted to be taken at a Board of Directors' meeting may be taken by written action signed by the number of directors that would be required to take the same action at a meeting of the Board of Directors at which all directors were present. The written action is effective when signed by the required number of directors unless a different effective time is provided in the written action. ARTICLE V. SECTION 1. Number and Tenure. The business and affairs of this Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three (3) or more than nine (9) directors. The directors shall be divided into three (3) classes, as nearly equal in number as the then total number of directors constituting the whole Board permits, with the term of office of one class expiring each year. Except as otherwise provided in this Article V, each director shall be elected by the shareholders to hold office for a term expiring at the third succeeding regular meeting of shareholders following the regular meeting at which such director was elected. Each director shall serve until his or her successor has been duly elected and qualified, unless he or she shall retire, resign, die or be removed. SECTION 2. Vacancies. Any vacancies occurring in the Board of Directors for any reason, and any newly created directorships resulting from an increase in the number of directors, may be filled by a majority of the directors in office. Any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified, subject, however, to prior retirement, resignation, death or removal from office. Any newly created directorships resulting from an increase in the authorized number of directors shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible. SECTION 3. Quorum. A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such a majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. The directors present at a duly organized meeting may continue to transact business until adjournment notwithstanding the withdrawal of enough directors to leave less than a quorum. SECTION 4. Removal. Any director may be removed from office, with or without cause, only by the affirmative vote of the holders of at least seventy percent (70%) of the voting power of the then outstanding shares of Capital Stock entitled to vote generally in the election of directors. SECTION 5. Election. Notwithstanding any other provision of this Article V, and except as otherwise provided by law, whenever the holders of any one or more class or series of Common Stock or Preferred Stock shall have the right, voting separately as a class or series, to elect one or more directors of this Corporation, the term of office, the filling of vacancies and other features of such directorships shall be governed by the terms of these Restated Articles of Incorporation applicable thereto, and such directors so elected shall not be classified pursuant to this Article V unless expressly provided by such terms. SECTION 6. Nomination. Advance notice of nominations for the election of directors, other than by the Board of Directors or a committee thereof, shall be given within the time and in the manner provided in the Bylaws. ARTICLE VI. In addition to any affirmative vote of the directors or shareholders of the Corporation required by law or by or pursuant to any other Article of the Restated Articles of Incorporation, any Business Transaction with an Interested Shareholder, which Business Transaction has not been approved by the affirmative vote of a majority of the Continuing Directors, shall require the affirmative vote of the holders of at least 70% of the outstanding shares of Common Stock not held by such Interested Shareholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or any agreement with any national securities exchange, or otherwise. The provisions of this Article shall not be applicable to any Stock Repurchase by the Corporation of shares of Common Stock from an Interested Shareholder. ARTICLE VII. A majority of the Continuing Directors of the Corporation (and only such majority) shall have the power to determine the application of or compliance with Articles VI, VII, VIII and IX of these Restated Articles of Incorporation, including, without limitation (a) whether a person is an Interested Shareholder or an affiliate or association of another; (b) whether Article VI is or has become applicable with respect to a proposed transaction; and (c) whether a person has become a beneficial owner of any shares of Common Stock. Any determination or construction by the Continuing Directors with respect to Articles VI, VII, VIII and IX shall be within their absolute discretion and shall be conclusive and binding except in circumstances involving bad faith. ARTICLE VIII. For the purposes of Articles VI, VII, VIII and IX: SECTION 1. Business Transaction. The term "Business Transaction" shall mean: (a) any merger or consolidation of the Corporation or a Subsidiary with (i) an Interested Shareholder or (ii) any other Corporation (whether or not itself in Interested Shareholder) which is or after such merger or consolidation would be an affiliate or associate of an Interested Shareholder ; (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) with any Interested Shareholder or any affiliate or associate of any Interested Shareholder involving any Substantial Portion of assets or securities of the Corporation, any Subsidiary or any Interested Shareholder or any affiliate or associate of any Interested Shareholder; (c) the issuance of any securities of an Interested Shareholder or any affiliate or associate of any Interested Shareholder in exchange for stock of the Corporation or any Subsidiary; (d) any recapitalization of the Corporation that would have the effect, directly or indirectly, of increasing the voting power of an Interested Shareholder or any affiliate or associate of any Interested Shareholder, (e) any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any affiliate or associate of any Interested Shareholder; and (f) any agreement, contract or other arrangement providing for any one or more of the actions specified in the foregoing clauses (a) through (e). SECTION 2. Continuing Director. The term "Continuing Director" shall mean a director who was a member of the Board of Directors of the Corporation on July 7, 1986, and those members of the Board of Directors prior to the time the Interested Shareholder in question became an Interested Shareholder and who was not proposed for election as a director by or on behalf of such Interested Shareholder, and any successor of a Continuing Director who is not an affiliate or associate or representative of such Interested Shareholder and is recommended to succeed a Continuing Director by a majority of the Continuing Directors then on the Board of Directors of the Corporation. SECTION 3. Fair Market Value. The term "Fair Market Value" shall mean , with respect to the Common Stock, the Fair Market Value, on the date in question of a share of such stock as determined in good faith by a majority of the Continuing Directors, and shall mean, with respect to property other than Common Stock, the Fair Market Value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. SECTION 4. Interested Shareholder. The term "Interested Shareholder" shall mean and include an individual, Corporation, partnership, or other person or entity (other than this Corporation or any Subsidiary or any employee benefit plan of either this Corporation or any Subsidiary or any trustee or fiduciary with respect to any such plan when acting in such capacity) which, together with its "affiliates" and "associates" (as defined pursuant to Rule 12b-2 under the Securities Exchange Act of 1934), was the "beneficial owner" (as defined pursuant to Rule 13d-3 under such Act) of more than ten percent (10%) of the outstanding shares of Common Stock, and any affiliate or associate of any such individual, Corporation, partnership or other person or entity, or which was the beneficial owner at any time within the two-year period immediately preceding the time in question of more than ten percent (10%) of the outstanding Common Stock, and any affiliate or associate of any such individual , Corporation, partnership or other person or entity. SECTION 5. Subsidiary. The term "Subsidiary" shall mean a Corporation with respect to which the Corporation is the beneficial owner of the majority of each class of voting securities. SECTION 6. Stock Repurchase. The term "Stock Repurchase" shall mean any repurchase, directly or indirectly by the Corporation or any Subsidiary of any shares of Common Stock at a price greater than the then Fair Market Value for such shares. SECTION 7. Substantial Portion. The term "Substantial Portion" shall mean assets having a Fair Market Value of fifty percent (50%) or more of the total assets of the Corporation or any Subsidiary or such Interested Shareholder as the case may be, as of the date of the most recent balance sheet available on the record date of the stockholder meeting or consent (in the case of an Interested Shareholder) relating to approval of a Business Transaction involving assets constituting a Substantial Portion. ARTICLE IX. SECTION 1. Articles of Incorporation. Notwithstanding any other provisions of these Restated Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that a lesser percentage may be specified by law, these Restated Articles of Incorporation or the Bylaws of the Corporation), the amendment or repeal of Articles V, VI, VII, VIII, or IX of these Restated Articles of Incorporation, or the adoption of any provisions inconsistent therewith, shall require the approval of the holders of shares representing at least 70% of the outstanding shares of Common Stock. SECTION 2. Bylaws. Except as otherwise provided in Section 3 of this Article IX, Bylaws may be adopted, altered, amended or repealed or new Bylaws enacted by the affirmative vote of a majority of the entire Board of Directors (if notice thereof is contained in the notice of the meeting at which such vote is taken or if all directors are present) or at any regular meeting of the shareholders (or at any special meeting thereof duly called for that purpose) by the affirmative vote of a majority of the shares represented and entitled to vote at such meeting (if notice thereof is contained in the notice of such meeting). SECTION 3. Change of Bylaws. Notwithstanding anything contained in Section 2 of this Article IX to the contrary, either (i) the affirmative vote of the holders of at least 70% of the votes entitled to be cast by the holders of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class, or (ii) the affirmative vote of a majority of the entire Board of Directors with the concurring vote of a majority of the Continuing Directors, voting separately and as a subclass of directors, shall be required to alter, amend or repeal, or adopt any provision inconsistent with, Article II, Section 10, and Article III, Sections 2, 3, 4, 5, 6 and 7 of the Bylaws of the Corporation. ARTICLE X. No shareholder of this Corporation shall have any preemptive rights to subscribe for, purchase, or acquire any shares of the Corporation of any class, whether unissued now or hereafter authorized, or any obligations or other securities convertible into or exchangeable for such shares. ARTICLE XI. No holder of any shares of the Corporation shall have the right to cumulative votes for the election of directors and there shall be no cumulative voting for any purpose whatsoever. ARTICLE XII. No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived any improper personal benefit; or (v) for any action or omission occurring prior to the date when this provision becomes effective. The provisions of this Article XII shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of this Article XII. If the Minnesota Statutes hereafter are amended to authorize the further eliminations or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Statutes, as so amended. EX-10.A 3 Exhibit 10(a) ARCTIC CAT INC. 1989 STOCK OPTION PLAN 1. Purpose. The purpose of the Arctic Cat, Inc. 1989 Stock Option Plan is to promote the success of Arctic Cat, Inc. (the "Corporation") and of any subsidiary of the Corporation (a "Subsidiary") by facilitating the employment and retention of key personnel and by furnishing continuing, long-term incentive to officers, other key employees and Directors upon whose efforts the success of the Corporation depends to a large degree. In addition, the Plan is intended to provide key employees on whom rests the major responsibility for the present and future success of the Corporation with an opportunity to acquire a proprietary interest in the Corporation and thereby to develop a stronger incentive to expend maximum effort for the continued success and growth of the Corporation. 2. Definitions. The following words and phrases as used herein shall have the meanings set forth below: 2.1 "Board" shall mean the Board of Directors of the Corporation. 2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended. 2.3 "Committee" shall mean a committee of the Board as may be designated by the Board, from time to time, for the purpose of administering this plan as contemplated by Article 4 hereof. 2.4 "Common Stock" shall mean the common stock, $0.01 par value, of the Corporation. 2.5 "Corporation" shall mean Arctic Cat, Inc., a Minnesota corporation. 2.6 "Director" shall mean any member of the Board. 2.7 "Fair Market Value" of any security on any given date shall be determined by the Committee as follows: (a) if the security is listed for trading on one or more national securities exchanges (including the NASDAQ National Market), the reported last price on the principal such exchange on the date in question, or if such security shall not have been traded on such exchange on such date, the reported last price on such exchange on the first day prior thereto on which such security was so traded; or (b) if the security is not listed for trading on a national securities exchange (including the NASDAQ National Market) but is traded in the over-the-counter market, the mean of the highest and lowest bid prices for such security on the date in question, or if there are no such bid prices for such security on such date, the mean of the highest and lowest bid prices on the first day prior thereto on which such prices existed; or (c) if neither (a) nor (b) is applicable, by any means deemed fair and reasonable by the Committee, which determination shall be final and binding on all parties. 2.8 "ISO" shall mean any stock option granted pursuant to this Plan as an "incentive stock option" within the meaning of Section 422 of the Code. 2.9 "Non-Employee Director" shall mean a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any successor rule. 2.10 "NQO" shall mean any stock option granted pursuant to this Plan which is not an ISO. 2.11 "Option" shall mean any stock option granted pursuant to this Plan, whether an ISO or an NQO. 2.12 "Optionee" shall mean any person who is the holder of an Option granted pursuant to this Plan. 2.13 "Outside Director" means a Director who (a) is not a current employee of the Corporation or any member of an affiliated group which includes the Corporation; (b) is not a former employee of the Corporation who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Corporation; (d) does not receive remuneration from the Corporation, either directly or indirectly, in any capacity other than as a Director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. 2.14 "Plan" shall mean this 1989 Stock Option Plan of the Corporation. 2.15 "Subsidiary" shall mean any corporation which at the time qualifies as a subsidiary of the Corporation under Section 425 (f) of the Code. 3. Shares Available Under Plan. The number of shares which may be issued pursuant to Options granted under this Plan shall not exceed 700,000 shares of the Common Stock of the Corporation; provided, however, that shares which become available as a result of cancelled, unexercised, lapsed or terminated Options granted under this Plan shall be available for issuance pursuant to Options subsequently granted under this Plan. The shares issued upon exercise of Options granted under this Plan may be authorized and unissued shares or shares previously acquired or to be acquired by the Corporation. 4. Administration. 4.1 The Plan will be administered by the Board, or at the Board's discretion, by a Committee of at least two Directors, all of whom shall be Outside Directors and Non-Employee Directors. Other than references in this Section 4.1, references to the "Committee" in this Plan shall be deemed to refer to the Board where the Board has not designated a Committee to administer the Plan. 4.2 The Committee will have plenary authority, subject to provisions of the Plan, to determine when and to whom Options will be granted, the term of each Option, the number of shares covered by it, the participation by the Optionee in other plans, and any other terms or conditions of each Option. The Committee shall determine with respect to each grant of an Option whether a participant shall receive an ISO or an NQO. The number of shares, the term and the other terms and conditions of a particular kind of Option need not be the same, even as to Options granted at the same time. The Committee's recommendations regarding Option grants and terms and conditions thereof will be conclusive. 4.3 The Committee will have the sole responsibility for construing and interpreting the Plan, for establishing and amending any rules and regulations as it deems necessary or desirable for the proper administration of the Plan, and for resolving all questions arising under the Plan. Any decision or action taken by the Committee arising out of or about the construction, administration , interpretation and effect of the Plan and of its rules and regulations will, to the extent permitted by law, be within its absolute discretion, except as otherwise specifically provided herein, and will be conclusive and binding on all Optionees, all successors, and any other person, whether that person is claiming under or through any Optionee or otherwise. 4.4 No member of the Committee will be liable, in the absence of bad faith, for any act or omission with respect to his services on the Committee. Service on the Committee will constitute service as a member of the Board, so that the members of the Committee will be entitled to indemnification and reimbursement as Board members pursuant to its Bylaws. 4.5 The Committee will regularly inform the Board as to its actions with respect to all Options granted under the Plan and the terms and conditions and any such Options in a manner, at any times, and in any form as the Board may reasonably request. 5. Participants. 5.1 Participation in this Plan shall be limited to key personnel of the Corporation or of a Subsidiary, who are salaried employees of the Corporation or of a Subsidiary, and to Directors of the Corporation. 5.2 Subject to other provisions of this Plan, Options may be granted to the same participants on more than one occasion. 5.3 The Committee's determination under the Plan including, without limitation, determination of the persons to receive Options, the form, amount and type of such Options, and the terms and provisions of Options need not be uniform and may be made selectively among otherwise eligible participants, whether or not the participants are similarly situated. 5.4 No person shall receive Options under this Plan which exceed 250,000 shares during any fiscal year of the Corporation. 6. Terms and Conditions. 6.1 Each Option granted under the Plan shall be evidenced by a written agreement, which shall be subject to the provisions of this Plan and to such other terms and conditions as the Corporation may deem appropriate. 6.2 Each Option agreement shall specify the period for which the Option thereunder is granted (which in no event shall exceed ten years from the date of the grant for any NQO or any ISO subject to the pricing requirements of Section 6.3(a) hereof and five years from the date of grant for any ISO subject to the pricing requirements of Section 6.3(b) hereof) and shall provide that the Option shall expire at the end of such period. 6.3 The exercise price per share shall be determined by the Committee at the time any Option is granted and shall be determined as follows: (a) For employees who do not own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred percent (100%) of Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. (b) For employees who own stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation or of any Subsidiary, the ISO exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. (c) Unless approved by a majority of the Board, the NQO exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock of the Corporation on the date the Option is granted, as determined by the Committee. 6.4 The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an ISO under this Plan or any other plan of the Corporation or its Subsidiaries is exercisable for the first time by an Optionee during any calendar year shall not exceed $100,000. 6.5 An Option shall be exercisable at such time or times, and with respect to such minimum number of shares, as may be determined by the Committee at the time of the grant; provided, however, that the Committee may, in its discretion, accelerate the exercise date for any unexercisable Options when the Committee deems such action to be appropriate under the circumstances. The Option agreement may require, if so determined by the Committee, that no part of the Option may be exercised until the Optionee shall have remained in the employ of the Corporation or of a Subsidiary for such period after the date of the Option as the Committee may specify. Notwithstanding the foregoing and subject to the discretionary acceleration rights of the Committee, an Option granted to a Director, officer or 10% shareholder of the Corporation shall not be exercisable for a period of six (6) months after the date of grant unless the Option has been approved by the Board, the Committee or the shareholders of the Corporation. 6.6 The Corporation may prescribe the form of legend which shall be affixed to the stock certificate representing shares to be issued and the shares shall be subject to the provisions of any repurchase agreement or other agreement restricting the sale or transfer thereof. Such agreements or restrictions shall be noted on the certificate representing the shares to be issued. 7. Exercise of Option. 7.1 Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice thereof, delivered to the Chief Financial Officer of the Corporation (or such other person as he may designate). The notice shall state the number of shares with respect to which the Options are being exercised and shall be accompanied by payment in full for the number of shares so designated. Shares shall be registered in the name of the Optionee unless the Optionee otherwise directs in his or her notice of election. 7.2 Payment shall be made to the Corporation either (i) in cash, including check, bank draft or money order as authorized by the Corporation, or (ii) at the discretion of the Corporation, by delivering Corporation Common Stock already owned by the participant or a combination of Common Stock and cash. With respect to (ii), the Fair Market Value of stock so delivered shall be determined as of the date immediately preceding the date of exercise. 7.3 Upon notification of the amount due and prior to or concurrently with, the delivery to the Optionee of a certificate representing any shares purchased pursuant to the exercise of an Option, the Optionee shall promptly pay to the Corporation any amount necessary to satisfy applicable federal, state or local withholding tax requirements. 7.4 If the terms of an Option so permit but subject to the approval of the Committee, an Optionee may elect by written notice to the Chief Financial Officer of the Corporation (or such other person as he may designate), to satisfy the withholding tax requirements associated with the exercise of an Option by (i) authorizing the Corporation to retain from the number of shares of Common Stock that would otherwise be deliverable to the Optionee, or (ii) delivering to the Corporation from shares of Common Stock already owned by the Optionee, that number of shares having an aggregate Fair Market Value equal to the tax payable by the Optionee under Section 7.3. Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. 8. Extraordinary Corporate Transactions. New Options may be substituted for the Options granted under the Plan, or the Corporation's duties as to Options outstanding under the Plan may be assumed, by a corporation other than the Corporation, or by a parent or subsidiary of the Corporation or such corporation, in connection with any merger, consolidation, acquisition, separation, reorganization, liquidation or like occurrence in which the Corporation is involved. Notwithstanding the foregoing or the provisions of Section 9 hereof, in the event such corporation, or parent or subsidiary of the Corporation or such corporation, does not substitute new Options for, and substantially equivalent to, the Options granted hereunder, or assume the Options granted hereunder, the Options granted hereunder shall terminate and thereupon become null and void (i) upon dissolution or liquidation of the Corporation, or similar occurrence, (ii) upon any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Corporation will not be a surviving entity or (iii) upon a transfer of substantially all of the assets of the Corporation or more than 80% of the outstanding Common Stock; provided, however, that each Optionee shall have the right within a 30-day period prior to or concurrently with such dissolution, liquidation, merger, consolidation, acquisition, separation, reorganization or similar occurrence, to exercise any unexpired Option granted hereunder without regard to any installment exercise restrictions. 9. Changes in Corporation's Capital Structure. The existence of outstanding Options shall not affect in any way the right or power of the Corporation or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Corporation's capital structure or its business, or any merger or consolidation of the Corporation, or any issuance of Common Stock or subscription rights thereto, or any merger or consolidation of the Corporation, or any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise; provided, however, that if the outstanding shares of Common Stock of the Corporation shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination of shares or recapitalization, the number and kind of shares subject to the Plan or subject to any Options theretofore granted, and the option exercise prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of shares without changing the aggregate option exercise price. 10. Assignments. Any Option granted under this Plan shall be exercisable only by the Optionee to whom granted during his or her lifetime and shall not be assignable or transferable otherwise than by will or by the laws of descent an distribution, or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act or the rules thereunder. 11. Severance; Death; Disability. An Option shall terminate, and no rights thereunder may be exercise, if the person to whom it is granted ceases to be employed by the Corporation or by a Subsidiary except that: 11.1 If the employment of the Optionee is terminated by any reason other than his or her death or disability, all rights under the Option shall terminate and expire upon such termination. 11.2 If the Optionee dies while in the employ of the Corporation or a Subsidiary, or within not more than one month after termination of his or her employment, the Optionee's rights under the Option may be exercised in whole or in part, without regard to any installment exercise restrictions, at any time within six months following such death by his or her personal representative or by the person or persons to whom such rights under the Option shall pass by will or by the laws of descent and distribution. 11.3 If the employment of the Optionee is terminated because of permanent disability, the Optionee, or his or her legal representative, may at any time within not more than six months after termination of his or her employment, exercise his or her Option rights in whole or in part, without regard to any installment exercise restrictions. 11.4 Notwithstanding anything contained in Sections 11.1, 11.2 and 11.3 to the contrary, no Option rights shall be exercisable by anyone after the expiration of the term of the Option. 11.5 Transfers of employment between the Corporation and a Subsidiary, or between Subsidiaries, will not constitute termination of employment for purposes of any Option granted under this Plan. The Committee may specify in the terms and conditions of an Option whether any authorized leave of absence or absence for military or government service or for any other reasons will constitute a termination of employment for purposes of the Option and the Plan. 12. Rights of Participants. Neither the participant nor the personal representatives, heirs, or legatees of such participant shall be or have any of the rights or privileges of a shareholder of the Corporation in respect of any of the shares issuable upon the exercise of an Option granted under this Plan unless and until certificates representing such shares shall have been issued and delivered to the participant or to such personal representatives, heirs or legatees. 13. Securities Registration. If any law or regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require the Corporation or the participant to take any action in connection with the exercise of an Option, then notwithstanding any contrary provision of an Option agreement or this Plan, the date for exercise of such Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Corporation shall deem it necessary, the Corporation may condition the grant or exercise of an Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Option or the shares obtained by exercise of the Option for investment purposes and not with the view or intent to resell or otherwise distribute such Option or shares. In such event, the stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Corporation shall deem it necessary to register under the Securities Act of 1933, as amended , or any other applicable statute, any Options or any shares with respect to which an Option shall have been granted or exercised, then the participant shall cooperate with the Corporation and take such action as is necessary to permit registration or qualification of such Options or shares. 14. Duration and Amendment. 14.1 There is no express limitation upon the duration of the Plan, except for the requirement of the Code that all ISOs must be granted within ten years from the date the Plan is approved by the shareholders. 14.2 The Board may terminate or may amend the Plan at any time, provided, however, that the Board may not, without approval of the shareholders of the Corporation, (i) increase the maximum number of shares as to which Options may be granted under the Plan, (ii) permit the granting of ISOs at less than 100% of Fair Market Value at time of grant, or (iii) change the class of employees eligible to receive Options under the Plan. 15. Granting of Options to Non-Employee Directors. [Replaced by Section 5(k) of the Corporation's 1995 Stock Plan.] 16. Approval of Shareholders. This Plan expressly is subject to approval of holders of a majority of the outstanding shares of Common Stock of the Corporation, and if it is not so approved on or before one year after the date of adoption of this Plan by the Board, the Plan shall not come into effect, and any Options granted pursuant to this Plan shall be deemed cancelled. 17. Conditions of Employment. The granting of an Option to a participant under this Plan who is an employee shall impose no obligation on the Corporation to continue the employment of any participant and shall not lessen or affect the right of the Corporation to terminate the employment of the participant. Adopted by the Board of Directors on June 22, 1989; amended by the Board of Directors on December 12, 1996. EX-10.B 4 Exhibit 10(b) ARCTIC CAT INC. 1995 STOCK PLAN SECTION CONTENTS PAGE 1. General Purpose of Plan; Definitions 1 2. Administration 3 3. Stock Subject to Plan 4 4. Eligibility 4 5. Stock Options 5 6. Restricted Stock 9 7. Transfer, Leave of Absence, etc. 12 8. Amendments and Termination 12 9. Unfunded Status of Plan 12 10. General Provisions 13 11. Effective Date of Plan 14 ARCTIC CAT INC. 1995 STOCK PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the Arctic Cat Inc. 1995 Stock Plan (the "Plan"). The purpose of the Plan is to enable Arctic Cat Inc. (the "Company") and its Subsidiaries to retain and attract executives, other key employees, consultants and directors who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company. b. "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's misconduct or dishonesty, any of which is harmful to the business or reputation of the Company. c. "Code" means the Internal Revenue Code of 1986, as amended. d. "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. e. "Company" means Arctic Cat Inc., a corporation organized under the laws of the State of Minnesota (or any successor corporation). f. "Disability" means permanent and total disability as determined by the Committee. g. "Early Retirement" means retirement, with consent of the Committee at the time of retirement, from active employment with the Company and any Subsidiary or Parent Corporation of the Company. h. "Fair Market Value" means the value of the Stock on a given date as determined by the Committee in accordance with Section 422 of the Code and any applicable Treasury Department regulations with respect to "incentive stock options." i. "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. j. "Non-Employee Director" means a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Securities Exchange Act of 1934, as amended, or any successor rule. k. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." l. "Normal Retirement" means retirement from active employ- ment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 65. m. "Outside Director" means a director who (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for goods or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. n. "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. o. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 6 below. p. "Retirement" means Normal Retirement or Early Retirement. q. "Stock" means the Common Stock, $.01 par value per share, of the Company. Class B Common Stock of the Company shall be considered Stock hereunder only following conversion to Common Stock of the Company r. "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. s. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. Administration. The Plan shall be administered by the Board or by a Committee appointed by the Board consisting of at least two directors, all of whom shall be Outside Directors and Non-Employee Directors, and who shall serve at the pleasure of the Board. The Committee may be a subcommittee of the Compensation Committee of the Board. The Committee shall have the power and authority to grant to eligible employees, consultants and directors pursuant to the terms of the Plan: (i) Stock Options and (ii) Restricted Stock. In particular, the Committee shall have the authority: (i) to select the officers, other key employees, directors and consultants of the Company and its Subsidiaries to whom Stock Options and/or Restricted Stock awards may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, or Restricted Stock awards, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto); and (v) to determine whether, to what extent and under what circumstances Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 1,800,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, or if any shares subject to any Restricted Stock award granted hereunder are forfeited or such award otherwise terminates without a payment being made to the participant, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, in the number and option price of shares subject to outstanding Stock Options granted under the Plan, and in the number of shares subject to Restricted Stock awards granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. Eligibility. Officers, other key employees, consultants and members of the Board of the Company and Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options or Restricted Stock awards under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award. Notwithstanding the foregoing, no person shall receive grants of Stock Options and Restricted Stock awards under this Plan which exceed 250,000 shares during any fiscal year of the Company. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after April 21, 2005. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of options. To the extent that any option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant. In no event shall the option price per share of Stock purchasable under an Incentive Stock Option be less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price shall be no less than 110% of the Fair Market Value of the Stock on the date the option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the option is granted. If an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant. If the Committee provides, in its discretion, that any option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time, provided, however, that unless the Stock Option has been approved by the Board, the Committee or the shareholders of the Company, a Stock Option to a director, officer or a 10% shareholder of the Company or its Subsidiaries shall not be exercisable for a period of six (6) months after the date of grant. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise or vesting provisions, for a period specified by the Board, but not to exceed sixty (60) days nor be less than seven (7) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or Restricted Stock subject to an award hereunder (based on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee); provided, however, that in the event payment is made in the form of shares of Restricted Stock, the optionee will receive a portion of the option shares in the form of, and in an amount equal to, the Restricted Stock award tendered as payment by the optionee. If the terms of an option so permit, or the Committee, in its sole discretion, so permits, an optionee may elect to pay all or part of the option exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate option exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee generally shall have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 10. (e) Non-transferability of Options. No Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title 1 of the Employee Retirement Income Security Act, or the rules thereunder, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of twelve months (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after twelve months (or such shorter period as the Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. (h) Termination by Reason of Retirement. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after three months (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Other Termination. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for any reason other than Cause, death, Disability or Retirement, the Stock Option may be exercised to the extent it was exercisable at such termination for the lesser of one month or the balance of the option's term. If the Optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for Cause, the Stock Option may be exercisable to the extent it was then exercisable no later than the date of such termination. (j) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (k) Directors Who Are Not Employees. Each person who is not an employee of the Company or its Subsidiaries and who on and after the date this Plan is approved by the shareholders of the Company is, or within the prior two (2) years has been, elected or reelected as a director of the Company at any annual or special meeting of the shareholders of the Company or appointed as a director of the Company by action of the Board during the period between shareholder meetings, shall (i) as of the date of such election, reelection or action and (ii) as of the date of each subsequent annual or special meeting of the shareholders of the Company at which action is taken to elect any director and such director who is not an employee (A) has served as a director for at least six (6) months and (B) is serving an unexpired term as a director, automatically be granted a Stock Option to purchase 6,000 shares of the Company's Stock at an exercise price per share equal to 100% of the Fair Market Value of a share of the Company's Stock on the date of the grant of the Stock Option. All such options shall be designated as Non-Qualified Stock Options and shall be subject to the same terms and provisions as are then in effect with respect to the grant of Non-Qualified Stock Options to officers and key employees of the Company, except that the term of each such Stock Option shall expire five years following the termination of the director's services as a director to the Company. In the event discretionary Stock Options are granted to members of the Committee, such Stock Options shall be granted by the Board. This Section 5(k) shall supercede and replace the provisions of the Company's 1989 Stock Option Plan granting options to Non-Employee Directors. SECTION 6. Restricted Stock. (a) Administration. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and Subsidiaries to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant of Restricted Stock upon the attainment of specified performance goals. The provisions of Restricted Stock awards need not be the same with respect to each recipient. In the event that Restricted Stock Awards are granted to members of the Committee, such awards shall be granted by the Board. (b) Awards and Certificates. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. (i) Each participant shall be issued a stock certificate in respect of shares of Restricted Stock awarded under the Plan. Such certificate shall be registered in the name of the participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Arctic Cat Inc. 1995 Stock Plan and an Agreement entered into between the registered owner and Arctic Cat Inc. Copies of such Plan and Agreement are on file in the executive offices of Arctic Cat Inc. (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) Restrictions and Conditions. The shares of Restricted Stock awarded pursuant to the Plan shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the award agreement, during a period set by the Committee commencing with the date of such award (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. Within these limits, the Committee may provide for the lapse of such restrictions in installments where deemed appropriate. (ii) Except as provided in paragraph (c)(i) of this Section 6, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any cash dividends. The Committee, in its sole discretion, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional shares of Restricted Stock (to the extent shares are available under Section 3 and subject to paragraph (f) of Section 10). Certificates for shares of Unrestricted Stock shall be delivered to the grantee promptly after, and only after, the period of forfeiture shall have expired without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the award agreement and paragraph (c)(iv) of this Section 6, upon termination of employment for any reason during the Restriction Period, all shares still subject to restriction shall thereupon be forfeited by the participant. (iv) In the event of special hardship circumstances of a participant whose employment is terminated (other than for Cause), including death, Disability or Retirement, or in the event of an unforeseeable emergency of a participant still in service, the Committee may, in its sole discretion, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to such participant's shares of Restricted Stock. (v) All restrictions with respect to any participant's shares of Restricted Stock shall lapse or be deemed to have lapsed or been terminated on the tenth (10th) business day prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company, other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. SECTION 7. Transfer, Leave of Absence, etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 8. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee or participant under a Stock Option or Restricted Stock award theretofore granted, without the optionee's or participant's consent, or (ii) which without the approval of the stockholders of the Company would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code or any other regulatory requirements. Further, paragraph k of Section 5 shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder. The Committee may amend the terms of any award or option theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted options, including previously granted options having higher option prices. SECTION 9. Unfunded Status of Plan. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder; provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 10. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan pursuant to any Restricted Stock awards shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Subject to paragraph (d) below, recipients of Restricted Stock awards under the Plan (not including Stock Options) are not required to make any payment or provide consideration other than the rendering of services. (c) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (d) Each participant shall, no later than the date as of which any part of the value of an award first becomes includable as compensation in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. With respect to any award under the Plan, if the terms of such award so permit, a participant may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the award by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the participant, or (ii) delivering to the Company from shares of Stock already owned by the participant, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the participant under this Section 10(d). Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (e) At the time of grant, the Committee may provide in connection with any grant or award made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee may, at the time of the grant of an award under the Plan, provide the Company with the right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any participant who, at any time within two years after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company. (f) The reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if the Committee (or the Company's chief executive or chief financial officer) certifies in writing that under Section 3 sufficient shares are available for such reinvestment (taking into account then outstanding Stock Options and other Plan awards). SECTION 11. Effective Date of Plan. The Plan was approved by the Board and became effective on April 21, 1995 and it was approved by the shareholders on August 3, 1995. The Plan was further amended by the Board on December 12, 1996. EX-10.G 5 Exhibit 10(g) CREDIT AGREEMENT between ARCTIC CAT INC. and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Closing Date: June 6, 1997 $75,000,000 Revolving Credit Facility TABLE OF CONTENTS ARTICLE I Definitions . . . . . . . . . . . . . . . . . . . .-1- Section 1.1 Definitions. . . . . . . . . . . . . . . . .-1- ARTICLE II Amount and Terms of the Loans; Letters of Credit .-7- Section 2.1 Facilities . . . . . . . . . . . . . . . . .-7- Section 2.2 Procedures Applicable to Advances. . . . . .-8- Section 2.3 Procedures Applicable to Letters of Credit .-9- Section 2.4 Interest . . . . . . . . . . . . . . . . . -10- Section 2.5 Termination of the Facilities. . . . . . . -11- Section 2.6 Voluntary Prepayments. . . . . . . . . . . -11- Section 2.7 Computation of Interest and Fees . . . . . -11- Section 2.8 Payment. . . . . . . . . . . . . . . . . . -11- Section 2.9 Payment on Nonbusiness Days. . . . . . . . -11- Section 2.10 Fees on Fixed Rate Advances and Indemnity -11- ARTICLE III Documents . . . . . . . . . . . . . . . . . . . -12- Section 3.1 Documents. . . . . . . . . . . . . . . . . -12- ARTICLE IV Representations and Warranties . . . . . . . . . -13- Section 4.1 Corporate Existence and Power. . . . . . . -13- Section 4.2 Authorization of Borrowing; No Conflict as -13- to Law or Agreements Section 4.3 Legal Agreements . . . . . . . . . . . . . -13- Section 4.4 Subsidiaries . . . . . . . . . . . . . . . -13- Section 4.5 Financial Condition. . . . . . . . . . . . -14- Section 4.6 Adverse Change . . . . . . . . . . . . . . -14- Section 4.7 Litigation . . . . . . . . . . . . . . . . -14- Section 4.8 Hazardous Substances . . . . . . . . . . . -14- Section 4.9 Regulation U . . . . . . . . . . . . . . . -14- Section 4.10 Taxes . . . . . . . . . . . . . . . . . . -14- Section 4.11 Titles and Liens. . . . . . . . . . . . . -15- Section 4.12 ERISA . . . . . . . . . . . . . . . . . . -15- ARTICLE V Affirmative Covenants . . . . . . . . . . . . . . -15- Section 5.1 Financial Statements . . . . . . . . . . . -15- Section 5.2 Books and Records; Inspection and Examination-17- Section 5.3 Compliance with Laws . . . . . . . . . . . -17- Section 5.4 Payment of Taxes and Other Claims. . . . . -17- Section 5.5 Maintenance of Properties. . . . . . . . . -17- Section 5.6 Insurance. . . . . . . . . . . . . . . . . -18- Section 5.7 Preservation of Corporate Existence. . . . -18- Section 5.8 Interest Coverage Ratio. . . . . . . . . . -18- Section 5.9 Leverage Ratio . . . . . . . . . . . . . . -18- Section 5.10 Tangible Net Worth. . . . . . . . . . . . -18- ARTICLE VI Negative Covenants . . . . . . . . . . . . . . . -18- Section 6.1 Liens. . . . . . . . . . . . . . . . . . . -18- Section 6.2 Indebtedness . . . . . . . . . . . . . . . -19- Section 6.3 Guaranties . . . . . . . . . . . . . . . . -20- Section 6.4 Investments. . . . . . . . . . . . . . . . -20- Section 6.5 Sale of Assets . . . . . . . . . . . . . . -21- Section 6.6 Restrictions on Issuance and Sale of Subsidiary Stock-21- Section 6.7 Consolidation and Merger . . . . . . . . . -21- Section 6.8 Sale and Leaseback . . . . . . . . . . . . -21- Section 6.9 Hazardous Substances . . . . . . . . . . . -22- Section 6.10 Restrictions on Nature of Business. . . . -22- ARTICLE VII Critical Events; Rights and Remedies. . . . . . -22- Section 7.1 Critical Events. . . . . . . . . . . . . . -22- Section 7.2 Rights and Remedies. . . . . . . . . . . . -23- Section 7.3 Pledge of L/C Cash Collateral Account. . . -24- ARTICLE VIII Miscellaneous. . . . . . . . . . . . . . . . . -24- Section 8.1 No Waiver; Cumulative Remedies . . . . . . -24- Section 8.2 Amendments, Etc. . . . . . . . . . . . . . -24- Section 8.3 Notice . . . . . . . . . . . . . . . . . . -24- Section 8.4 Participations . . . . . . . . . . . . . . -25- Section 8.5 Disclosure of Information. . . . . . . . . -25- Section 8.6 Costs and Expenses . . . . . . . . . . . . -25- Section 8.7 Indemnification by Borrower. . . . . . . . -25- Section 8.8 Execution in Counterparts. . . . . . . . . -26- Section 8.9 Binding Effect, Assignment . . . . . . . . -26- Section 8.10 Governing Law . . . . . . . . . . . . . . -26- Section 8.11 Waiver of Jury Trial. . . . . . . . . . . -26- Section 8.12 Severability of Provisions. . . . . . . . -26- Section 8.13 Prior Agreements. . . . . . . . . . . . . -26- Section 8.14 Headings. . . . . . . . . . . . . . . . . -27- CREDIT AGREEMENT Dated as of June 6, 1997 Arctic Cat Inc., a Minnesota corporation (the "Borrower"), and Norwest Bank Minnesota, National Association, a national banking association (the "Bank"), agree as follows: ARTICLE I Definitions Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles. "Advance" means an advance by the Bank to the Borrower pursuant to Article II. "Agreement" means this Credit Agreement. "Bank Business Day" means a day other than a Saturday, Sunday, United States national holiday or other day on which banks in Minnesota or New York are permitted or required by law to close. "Base Rate" means the rate of interest publicly announced from time to time by the Bank as its "prime" or "base" rate or, if the Bank ceases to announce a rate so designated, any similar successor rate designated by the Bank. "Compliance Certificate" means a certificate in substantially the form of Exhibit B, or such other form as the Borrower and the Bank may from time to time agree upon in writing, executed by the chief financial officer of the Borrower, stating (i) that any financial statements delivered therewith have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section 4.5, subject to year-end adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Critical Event not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto and (iii) if such statements are made as of the end of a fiscal quarter of the Borrower, all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the Financial Covenants. "Covenant Termination Date" means the later of (i) the Facility Termination Date, or (ii) the date on which no indebtedness remains outstanding under the Note and no Facility A Documentary L/C Outstandings, Facility A Standby L/C Outstandings or Facility B Standby L/C Outstandings remain outstanding. "Critical Event" has the meaning specified in Section 7.1. "Dealer Finance Agreements" means (i) the Retail Financing Program Agreement dated May 12, 1997 among the Borrower, the Guarantor and General Electric Capital Corporation, and (ii) the Consumer Credit Card Program Agreement dated May 12, 1997 among the Borrower, the Guarantor and Monogram Credit Card Bank of Georgia, but not amendment to or restatement of such agreements entered into without the prior written consent of the Bank if such amendment or restatement would change the nature of the obligations of the Borrower or any Subsidiary thereunder in a manner adverse to the Borrower or such Subsidiary. "EBIT" means, as of any date, pre-tax net income during the one-year period ending on that date, excluding extraordinary items, together with all Interest Expense recognized by the Borrower with respect to that period and deducted in determining the Borrower s net income, all determined with respect to the Borrower and its Subsidiaries on a consolidated basis in accordance with generally accepted accounting principles consistently applied. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is, along with the Borrower, a member of a controlled group of corporations or a controlled group of trades or businesses, as described in sections 414(b) and 414(c), respectively, of the Internal Revenue Code of 1986, as amended. "Environmental Law" means the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. 1802 et seq., the Toxic Substances Control Act, 15 U.S.C. 2601 et seq., the Federal Water Pollution Control Act, 33 U.S.C. 1252 et seq., the Clean Water Act, 33 U.S.C. 1321 et seq., the Clean Air Act, 42 U.S.C. 7401 et seq., and any other federal, state, county, municipal, local or other statute, law, ordinance or regulation which may relate to or deal with human health or the environment, all as may be from time to time amended. "Facility A" means the revolving credit facility established under Section 2.1(a). "Facility A Amount" means $30,000,000, unless said amount is reduced pursuant to Section 2.5, in which event it means the amount to which said amount is reduced. "Facility A Documentary L/C Outstandings" means the sum of (i) the aggregate face amount of all issued and outstanding documentary Facility A Letters of Credit, and (ii) amounts drawn under documentary Facility A Letters of Credit for which the Bank has neither been reimbursed nor made any Advance. "Facility A Letter of Credit" means a Letter of Credit issued pursuant to Section 2.1(b). "Facility A Note" means the Borrower s promissory note in the form of Exhibit A. "Facility A Outstandings" means the sum of (i) the principal balance of the Facility A Note, (ii) the aggregate face amount of all issued and outstanding Facility A Letters of Credit, and (iii) amounts drawn under Facility A Letters of Credit for which the Bank has neither been reimbursed nor made any Advance. "Facility A Standby L/C Outstandings" means the sum of (i) the aggregate face amount of all issued and outstanding standby Facility A Letters of Credit, and (ii) amounts drawn under standby Facility A Letters of Credit for which the Bank has neither been reimbursed nor made any Advance. "Facility B" means the revolving documentary letter of credit facility established under Section 2.1(b). "Facility B Amount" means $45,000,000, unless said amount is reduced pursuant to Section 2.5, in which event it means the amount to which said amount is reduced. "Facility B Letter of Credit" means a Letter of Credit issued pursuant to Section 2.1(b). "Facility B Outstandings" means the sum of (i) the aggregate face amount of all issued and outstanding Facility B Letters of Credit, and (ii) amounts drawn under Facility B Letters of Credit for which the Bank has neither been reimbursed nor made any Advance. "Facility Termination Date" means July 31, 1998, or the earlier date of the termination of the Facilities pursuant to Section 2.5 or 7.2. "Federal Funds Rate" means at any time an interest rate per annum equal to the weighted average of the rates for overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Bank Business Day, the average of the quotations for such day for such transactions received by the Bank from three federal funds brokers of recognized standing selected by it, it being understood that the Federal Funds Rate for any day which is not a Bank Business Day shall be the Federal Funds Rate for the next preceding Bank Business Day. "Financial Covenant" means any of the Borrower s obligations set forth in Sections 5.8, 5.9 and 5.10 of this Agreement "Floating Rate" means , at any time, an annual rate equal to the greater of: (i) the Base Rate; or (ii) the Federal Funds Rate, plus 50 basis points (0.50%). The Floating Rate shall change when and as the Base Rate or Federal Funds Rate changes. "Fixed Rate" means the annual rate equal to the sum of (i) the rate determined by the Bank, in its sole and absolute discretion, to be its cost of funds with respect to a hypothetical borrowing in an amount approximately equal to the amount for which a Fixed Rate quotation has been requested under Section 2.4(b) to be issued on the day specified by the Borrower in its request for such quotation and maturing at the end of the Interest Period specified in such quotation, and (iii) one and one- quarter percent (1.25%). "Fixed Rate Amount" means any portion of the principal balance of the Note bearing interest at a Fixed Rate. "Funded Debt" means (without duplication) (i) all indebtedness of the Borrower or any Subsidiary for borrowed money; (ii) the deferred and unpaid balance of the purchase price owing by the Borrower or any Subsidiary on account of any goods or services purchased (other than trade payables and other accrued liabilities incurred in the ordinary course of business that are not more than 60 days past due) if such purchase price is (A) due more than 60 days from the date of incurrence of the obligation in respect thereof or (B) evidenced by a note or a similar written instrument; (iii) all capitalized lease obligations; (iv) all indebtedness secured by a Lien on any property owned by the Borrower or any Subsidiary, whether or not such indebtedness has been assumed by the Borrower or any Subsidiary or is nonrecourse to the Borrower or any Subsidiary; (v) notes payable and drafts accepted representing extensions of credit, whether or not representing obligations for borrowed money (other than such notes or drafts for the deferred purchase price of assets or services to the extent such purchase price is excluded from clause (ii) above); (vi) indebtedness evidenced by bonds, notes or similar written instrument; (vii) the face amount of all letters of credit and bankers acceptances issued for the account of the Borrower or any Subsidiary, and without duplication, all drafts drawn thereunder (other than such letters of credit, bankers acceptances and drafts for the deferred purchase price of assets or services to the extent such purchase price is excluded from clause (ii) above); (viii) all net obligations of the Borrower or any Subsidiary under interest rate agreements or currency agreements; (ix) guaranty obligations of the Borrower or any Subsidiary with respect to indebtedness for borrowed money of another person or entity (including affiliates), all determined on a consolidated basis in accordance with generally accepted accounting principles consistently applied. "Guarantor" means Arctic Cat Sales Inc., a Minnesota corporation. "Guaranty" means a guaranty agreement of the Guarantor, acceptable to the Bank in form and substance, guarantying all present and future debt of the Borrower to the Bank. "Hazardous Substance" means any asbestos, urea-formaldehyde, polychlorinated biphenyls ("PCBs"), nuclear fuel or material, chemical waste, radioactive material, explosives, known carcinogens, petroleum products and by-products and other dangerous, toxic or hazardous pollutants, contaminants, chemicals, materials or substances listed or identified in, or regulated by, any Environmental Law. "Interest Coverage Ratio" means, as of the end of any fiscal quarter of the Borrower, the ratio of (i) EBIT of the Borrower and its Subsidiaries during the four-quarter period ending on that quarter-end, to (ii) Interest Expense of the Borrower and its Subsidiaries during the four-quarter period ending on that quarter-end, all determined on a consolidated basis in accordance with generally accepted accounting principles consistently applied. "Interest Expense" means, for any period of calculation and without duplication, all interest, whether paid in cash, accrued as a liability or capitalized, on indebtedness during such period, all calculated for such period for the Borrower and its Subsidiaries on a consolidated basis in accordance with generally accepted accounting principles consistently applied. "Interest Period" means a period of not less than 1 day and not more than 30 days. "L/C Cash Collateral Account" means an account maintained with the Bank in which funds are deposited pursuant to Section 2.3(e) or Section 7.2. "Letter of Credit" means a standby or documentary letter of credit issued for the account of the Borrower pursuant to this Agreement. For purposes of this Agreement, the term "Letter of Credit" shall also include all letters of credit issued by the Bank for the account of the Borrower on or before the date hereof and outstanding on the date hereof. "Leverage Ratio" means, at any time, the ratio of Funded Debt to Total Capital, all determined with respect to the Borrower and its Subsidiaries on a consolidated basis in accordance with generally accepted accounting principles consistently applied. "Lien" means any mortgage, deed of trust, lien, pledge, security interest or other charge or encumbrance, of any kind whatsoever, including but not limited to the interest of the lessor or titleholder under any capitalized lease, title retention contract or similar agreement. "Loan Documents" means this Agreement and the Note. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA. "Note" has the meaning set forth in Section 2.1. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for employees of the Borrower or any Subsidiary or ERISA Affiliate and covered by Title IV of ERISA. "Reportable Event" means (i) a "reportable event" described in Section 4043 of ERISA and the regulations issued thereunder, (ii) a withdrawal from any Plan, as described in Section 4063 of ERISA, (iii) an action to terminate a Plan for which a notice is required to be filed under Section 4041 of ERISA, (iv) any other event or condition that might constitute grounds for termination of, or the appointment of a trustee to administer, any Plan, or (v) a complete or partial withdrawal from a Multiemployer Plan as described in Sections 4203 and 4205 of ERISA. "Subsidiary" means (i) any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries, (ii) any partnership of which 50% or more of the partnership interests therein are directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries, and (iii) any limited liability company or other form of business organization the effective control of which is held by the Borrower, the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Tangible Net Worth" means stockholders equity, less intangible assets included in calculating such stockholders equity, all determined with respect to the Borrower and its Subsidiaries on a consolidated basis in accordance with generally accepted accounting principles consistently applied. For purposes of the foregoing calculation, intangible assets shall include but not be limited to the value of patents, trademarks, trade names, copyrights, licenses, goodwill, prepaid expenses and deferred charges. "Total Capital" means the sum of retained earnings, stockholders equity (including preferred stock), and Funded Debt, all determined with respect to the Borrower and its Subsidiaries on a consolidated basis in accordance with generally accepted accounting principles consistently applied. "Welfare Plan" means a "welfare plan" as defined in Section 3(1) of ERISA. ARTICLE II Amount and Terms of the Loans; Letters of Credit Section 2.1 Facilities. (a) Facility A. The Bank shall consider making Advances to the Borrower and issuing documentary and standby Letters of Credit for the account of the Borrower from the date hereof through the Facility Termination Date. The credit facility established under this paragraph (a) is revolving; subject always to the Bank s discretion and the limits set forth below, the Borrower may continue to request Advances and Letters of Credit through the Facility Termination Date so long as no Advance or Letter of Credit causes the dollar limits set forth below to be exceeded. The Borrowers obligation to repay Advances made under this paragraph will be evidenced by and payable on demand with interest in accordance with the Borrower s promissory note in the form of Exhibit A hereto (the "Note"). (b) Facility B. The Bank shall consider issuing documentary Letters of Credit for the account of the Borrower from the date hereof through the Facility Termination Date. The credit facility established under this paragraph (b) is revolving; subject always to the Banks discretion and the limits set forth below, the Borrower may continue to request Letters of Credit through the Facility Termination Date so long as no Letter of Credit causes the dollar limits set forth below to be exceeded. (c) Limitations. In no event shall: (i) The Facility A Outstandings at any one time exceed the Facility A Amount. (ii) The Facility A Standby L/C Outstandings at any one time exceed $5,000,000. (iii) The Facility B Outstandings at any one time exceed the Facility B Amount. (d) Discretion. The decision to make each individual Advance and issue each Letter of Credit hereunder will always be at the sole discretion of the Bank. Nothing herein should be interpreted as a promise to make any one or more Advances or to issue any one or more Letters of Credit. (e) Purpose. The Borrower may use up to $10,000,000 in Advances for the repurchase or redemption of the Borrower s stock. The proceeds of all other Advances, and each Letter of Credit, shall be used by the Borrower for the Borrower s general corporate purposes. (f) Representations. Any request for an Advance or a Letter of Credit, whether written or telephonic, shall be deemed to be a representation that, as of the date of such Advance or Letter of Credit: (i) the representations and warranties contained in Article IV are correct on and as of the date of such Advance or Letter of Credit as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (ii) no event has occurred and is continuing, or would result from such Advance or Letter of Credit, which constitutes a Critical Event. Section 2.2 Procedures Applicable to Advances. The Borrower shall request each Advance by written notice from the Borrower to the Bank or telephonic request from any person purporting to be authorized to request Advances on behalf of the Borrower, which notice or request shall specify the date of the requested Advance and the amount thereof. Each Advance shall be in the amount of $100,000 or a multiple thereof. If the Bank (in its sole discretion) elects to make such Advance, the Bank shall disburse the amount of the requested Advance by crediting the same to the Borrower s demand deposit account maintained with the Bank or in such other manner as the Bank and the Borrower may from time to time agree. The Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Bank. The Borrower shall be obligated to repay all Advances notwithstanding the failure of the Bank to receive such confirmation and notwithstanding the fact that the person requesting same was not in fact authorized to do so. Section 2.3 Procedures Applicable to Letters of Credit. (a) Procedures; Governing Documents. The Borrower shall request each Letter of Credit on at least five Bank Business Days prior written notice from the Borrower to the Bank. All decisions as to whether to issue any Letter of Credit, the form of any Letter of Credit and the term of any Letter of Credit shall be made by the Bank in its sole discretion. Prior to the issuance of any Letter of Credit, the Borrower will execute such letter of credit applications and other documents as the Bank deems necessary. The rights and obligations of the Borrower and the Bank with respect to each Letter of Credit shall be governed by (among other things) (i) this Credit Agreement, (ii) any such separate letter of credit application, and (iii) the Master Security Agreement for Irrevocable Documentary Letters of Credit dated September 1, 1993, executed by the Borrower, or the Master Security Agreement for Irrevocable Standby Letter of Credit dated September 1, 1993, executed by the Borrower, as the case may be. To the extent that the terms of this Agreement are different from or in addition to the terms of any other document identified in the preceding sentence, the terms of this Agreement shall govern. (b) Applicable Facility. All standby Letters of Credit issued hereunder shall be deemed to be Facility A Letters of Credit. All documentary Letters of Credit issued hereunder shall be deemed Facility A Letters of Credit or Facility B Letters of Credit by the Bank in its sole discretion. (c) Fees. (i) Standby Letters of Credit. An issuance fee shall be due and payable in connection with the issuance of any standby Letter of Credit. Such fee shall be calculated at the rate of one and one-quarter percent (1.25%) per annum on the face amount of such standby Letter of Credit. Such fee shall be paid in full in advance upon issuance of any standby Letter of Credit maturing 90 days or less after its issuance. In all other cases, the amount of such fee accruing through the end of the fiscal quarter in which the standby Letter of Credit is issued shall be paid in advance upon issuance of such Letter of Credit, and the remainder of the fee shall be paid quarterly in advance thereafter. In no event shall the issuance fee be less than $250 with respect to any standby Letter of Credit. (ii) Documentary Letters of Credit. An examination fee shall be due and payable upon any draw under any documentary Letter of Credit . The examination fee shall be equal to one-eighth of one percent of the amount so drawn, except that in no event shall such examination fee be less than $50 or greater than $2,500. (iii) Discretion to Change Fees. The Bank reserves the right, in its sole discretion, to increase or decrease the amount of its issuance fees and examination fees at any time and from time to time upon reasonable notice to the Borrower. (d) Obligation of Reimbursement. The Borrower shall pay the amount of each draft drawn under any Letter of Credit to the Bank on demand, together with interest at the Floating Rate from the date that such draft is paid by the Bank until payment of such amount in full. The Bank may (at its option) charge any deposit account maintained by the Borrower with the Bank for the amount of any draft drawn under a Letter of Credit or make an Advance under Facility A in the amount of the draft and apply such Advance to satisfy the Borrower s obligation to reimburse the Bank on account of such draft, all without notice to or consent of the Borrower. (e) Term; L/C Cash Collateral Account. Unless otherwise approved by the Bank, no Letter of Credit shall have an initial or any renewal term of more than one year or a term (including renewals thereof) extending beyond the Facility Termination Date. Unless otherwise agreed by the Bank in writing, the Borrower shall deposit in the L/C Cash Collateral Account, on the Facility Termination Date, an amount equal to the aggregate face amount of all Letters of Credit then outstanding, less the balance (if any) then outstanding in the L/C Cash Collateral Account. Section 2.4 Interest. (a) Floating Rate. Unless the Borrower elects a Fixed Rate pursuant to this Section, the principal balance of the Note shall bear interest at the Floating Rate. (b) Fixed Rates. On any Bank Business Day between 8:30 a.m. and 2:00 p.m., the Borrower may request telephonically that the Bank quote the Fixed Rate that would be applicable to the Fixed Rate Amount and for the Interest Period specified in such request. Each Fixed Rate Amount must be equal to $100,000 or an integral multiple thereof. The Bank may, in its sole discretion, choose to quote such a Fixed Rate to the Borrower. Immediately upon receipt of such quotation from the Bank, the Borrower may telephonically accept the Fixed Rate, whereupon the Fixed Rate Amount shall from the date the quotation is made bear interest at the Fixed Rate so selected (and the remaining part of the principal balance of the Note, if any, shall continue to bear interest at the rate or rates previously applicable to such amounts). Acceptance of any Fixed Rate quotation shall be irrevocable. Failure immediately to accept such a quotation shall be deemed to be a rejection of such quotation. At the termination of each Interest Period, the interest rate with respect to the applicable Fixed Rate Amount shall revert to the Floating Rate unless a new Fixed Rate quotation is requested and accepted by the Borrower. Absent manifest error, the records of the Bank shall be conclusive as to any Fixed Rate Amount and the Fixed Rate and Interest Period applicable thereto. Section 2.5 Termination of the Facilities. The Borrower may at any time and from time to time upon three Bank Business Days prior notice to the Bank permanently terminate the Facilities in whole, without penalty or premium , provided that the Facilities may not be terminated while any Advance or Letter of Credit remains outstanding. Section 2.6 Voluntary Prepayments. The Borrower may prepay the Note in whole or in part, without penalty or premium, at any time and from time to time; provided that (i) no prepayment may be applied to any portion of the principal balance of the Note which, at the time of such prepayment, bears interest at a Fixed Rate, and (ii) each partial prepayment of the Note shall be in the principal amount of $100,000 or a multiple thereof. Section 2.7 Computation of Interest and Fees. Interest under the Note and the fees hereunder shall be computed on the basis of actual number of days elapsed in a year of 360 days. Section 2.8 Payment. All payments of principal and interest under the Note and of the fees hereunder shall be made to the Bank in immediately available funds. Payments received after noon on any day shall be deemed received on the next succeeding Bank Business Day. The Borrower agrees that the amount shown on the books and records of the Bank as being the principal balance of the Note shall be prima facie evidence of such principal amount. The Borrower hereby authorizes the Bank to charge against the Borrower share account with the Bank an amount equal to the accrued interest and fees from time to time due and payable to the Bank under the Note or hereunder, or (at the option of the Bank) to make an Advance in such amount, all without receipt of any request for such charge or Advance. Section 2.9 Payment on Nonbusiness Days. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a day other than a Bank Business Day, such payment may be made on the next succeeding Bank Business Day, and such extension of time shall in each case be included in the computation of payment of interest on such Note or the fees hereunder, as the case may be. Section 2.10 Fees on Fixed Rate Advances and Indemnity. In addition to any interest payable on Advances made hereunder and any fees or other amounts payable hereunder, the Borrower shall compensate the Bank, upon written request by the Bank (which request shall set forth the basis for requesting such amounts), for all losses and expenses in respect of any interest or other consideration paid by the Bank to lenders of funds borrowed by it or deposited with it to maintain any Fixed Rate Amount at a Fixed Rate which the Bank may sustain to the extent not otherwise compensated for hereunder and not mitigated by the reemployment of such funds if any prepayment of any such Fixed Rate Amount occurs on a date that is not the expiration date of the applicable Interest Period. A certificate as to any such loss or expense (including calculations, in reasonable detail, showing how the Bank computed such loss or expense) shall be promptly submitted by the Bank to the Borrower and shall, in the absence of manifest error, be conclusive and binding as to the amount thereof. ARTICLE III Documents Section 3.1 Documents. On or before the date of the first Advance or Letter of Credit, the Borrower shall deliver to the Bank each of the following, each in form and substance satisfactory to the Bank: (a) The Note, properly executed on behalf of the Borrower. (b) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower or any Subsidiary, and (ii) no financing statements have been filed and remain in effect against the Borrower or any Subsidiary except financing statements perfecting only Liens permitted under Section 6.1. (c) The Guaranty, duly executed by the Guarantor. (d) A certificate of the secretary of the Borrower and each Subsidiary (i) certifying that the execution, delivery and performance of the Loan Documents and other documents contemplated hereunder to which such corporation is a party have been duly approved by all necessary action of the Board of Directors of the Borrower or such Subsidiary, as the case may be, and attaching true and correct copies of the applicable resolutions granting such approval, (ii) certifying that attached to such certificate are true and correct copies of the articles of incorporation and bylaws of the Borrower or such Subsidiary, as the case may be, together with such copies, and (iii) certifying the names of the officers of the Borrower and its Subsidiaries that are authorized to sign the Loan Documents and other documents contemplated hereunder, including requests for Advances, together with the true signatures of such officers. The Bank may conclusively rely on such certificate until it receives a further certificate of the Secretary or Assistant Secretary of the Borrower canceling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (e) Certificates of good standing of the Borrower and its Subsidiaries, dated not more than ten days before such date. (f) A signed copy of an opinion of counsel for the Borrower, addressed to the Bank as to matters referred to in Sections 4.1, 4.2, 4.3 and 4.7, and as to such other matters as the Bank may reasonably request, with that opinion being acceptable to the Bank s counsel. In the case of Section 4.7, the opinion may be to the best knowledge of such counsel and may be made without regard to products liability and intellectual property litigation, and, in the case of Section 4.3, insofar as it relates to enforcement of remedies, it may be subject to applicable bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally from time to time, and to usual equity principles. ARTICLE IV Representations and Warranties The Borrower represents and warrants to the Bank as follows: Section 4.1 Corporate Existence and Power. The Borrower and its Subsidiaries are each corporations duly incorporated, validly existing and in good standing under the laws of their respective jurisdictions of incorporation , and are each duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by them makes such licensing or qualification necessary. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. Section 4.2 Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the stockholders of the Borrower, or any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Articles of Incorporation or Bylaws of the Borrower, (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected, or (iv) result in, or require, the creation or imposition of any Lien or other charge or encumbrance of any nature upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 4.3 Legal Agreements. This Agreement and the other Loan Documents constitute, the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. Section 4.4 Subsidiaries. Schedule 4.4 hereto is a complete and correct list of all present Subsidiaries and of the percentage of the ownership of the Borrower or any other Subsidiary in each as of the date of this Agreement. Except as otherwise indicated in that Schedule, all shares of each Subsidiary owned by the Borrower or by any such other Subsidiary are validly issued and fully paid and nonassessable. Section 4.5 Financial Condition. The Borrower has heretofore furnished to the Bank its audited financial statement as of March 31, 1996, and its unaudited interim financial statement as of March 31, 1997. Those financial statements fairly present the financial condition of the Borrower and its Subsidiaries on the dates thereof and the results of their operations and cash flows for the periods then ended, and were prepared in accordance with generally accepted accounting principles. Section 4.6 Adverse Change. There has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrower or any Subsidiary since the date of the latest financial statement referred to in Section 4.5. Section 4.7 Litigation. There are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or the properties of the Borrower or any Subsidiary before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or that Subsidiary, would have a material adverse effect on the financial condition, properties, or operations of the Borrower or any Subsidiary. Section 4.8 Hazardous Substances. To the best of the Borrower s knowledge after reasonable inquiry, neither the Borrower nor any Subsidiary nor any other Person has ever caused or permitted any Hazardous Substance to be disposed of in any manner which might result in any material liability to the Borrower or any Subsidiary on, under or at any real property which is operated by the Borrower or any Subsidiary or in which the Borrower or any Subsidiary has any interest; and no such real property has ever been used (either by the Borrower, by any Subsidiary or by any other Person) as a dump site or permanent or temporary storage site for any Hazardous Substance (other than the temporary storage of products used or consumed in the ordinary course of the Borrower s business in accordance with all applicable Environmental Laws). Section 4.9 Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 4.10 Taxes. The Borrower and its Subsidiaries have each paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by them. The Borrower and its Subsidiaries have each filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower are required to be filed, and the Borrower and its Subsidiaries have each paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by them to the extent such taxes have become due, other than taxes whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which the Borrower or the applicable Subsidiary has provided adequate reserves in accordance with generally accepted accounting principles. Section 4.11 Titles and Liens. The Borrower or one of its Subsidiaries has good title to each of the properties and assets reflected in the latest balance sheet referred to in Section 4.5 (other than any sold, as permitted by Section 6.5), free and clear of all Liens and encumbrances, except for Liens permitted by Section 6.1 and covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the business or operations of the Borrower or such Subsidiary as presently conducted. No financing statement naming the Borrower or any Subsidiary as debtor is on file in any office except to perfect only Liens permitted by Section 6.1. Section 4.12 ERISA. No Plan established or maintained by the Borrower, any Subsidiary or any ERISA Affiliate that is subject to Part 3 of Subtitle B of Title I of ERISA had an accumulated funding deficiency (as such term is defined in Section 302 of ERISA) in excess of $1,000,000 as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof, and no liability to the Pension Benefit Guaranty Corporation or the Internal Revenue Service in excess of such amount has been, or is expected by the Borrower, any Subsidiary or any ERISA Affiliate to be, incurred with respect to any Plan of the Borrower, any Subsidiary or any ERISA Affiliate. The Borrower has no contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Subtitle B of Title I of ERISA. ARTICLE V Affirmative Covenants At all times through and including the Covenant Termination Date, the Borrower will comply with the following requirements, unless the Bank shall otherwise consent in writing: Section 5.1 Financial Statements. The Borrower will deliver to the Bank: (a) As soon as available, and in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the annual audit report of the Borrower prepared on a consolidated basis with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Bank, which annual report shall include the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, shareholders equity and cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, all in reasonable detail and all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices applied in the annual financial statements referred to in Section 4.5, together with a copy of such accountants management letter issued to the Borrower for such year. (b) As soon as available and in any event within 45 days after the end of each fiscal quarter of the Borrower, consolidated balance sheets of the Borrower and its Subsidiaries as at the end of such quarter and related consolidated statements of earnings and cash flows of the Borrower and its Subsidiaries for such quarter and for the year to date, in reasonable detail and stating in comparative form the figures for the corresponding date and period in the previous year, all prepared in accordance with generally accepted accounting principles applied on a basis consistent with the accounting practices reflected in the annual financial statements referred to in Section 4.5, and certified by the chief financial officer of the Borrower, subject to year-end audit adjustments. (c) Concurrent with the delivery of any financial statements under paragraph (a) or (b), a Compliance Certificate, duly executed by the chief financial officer of the Borrower. (d) Promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower or any Subsidiary shall have sent to its stockholders. (e) Promptly after the sending or filing thereof, copies of all regular and periodic financial reports which the Borrower or any Subsidiary shall file with the Securities and Exchange Commission or any national securities exchange. (f) Immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower or any Subsidiary of the type described in Section 4.7. (g) As promptly as practicable (but in any event not later than five business days) after the chief executive officer or the chief financial officer of the Borrower obtains knowledge of the occurrence of any Critical Event, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower or the appropriate Subsidiary of the steps being taken by the Borrower or the appropriate Subsidiary to cure the effect of such event. (h) Promptly upon becoming aware of any Reportable Event or any prohibited transaction (as defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA) in connection with any Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Borrower has taken, is taking or proposes to take with respect thereto, and, when known, any action taken or threatened by the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the Department of Labor with respect thereto. (i) Promptly upon their receipt or filing, copies of (i) all notices received by the Borrower, any Subsidiary or any ERISA Affiliate of the Pension Benefit Guaranty Corporation s intent to terminate any Plan or to have a trustee appointed to administer any Plan, and (ii) all notices received by the Borrower, any Subsidiary or any ERISA Affiliate from a Multiemployer Plan concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA. (j) Upon request of the Bank, copies of the most recent annual report (Form 5500 Series), including any supporting schedules, filed by the Borrower, any Subsidiary or any ERISA Affiliate with the Internal Revenue Service with respect to any Plan. (k) Such other information respecting the financial condition and results of operations of the Borrower or any Subsidiary as the Bank may from time to time reasonably request. Section 5.2 Books and Records; Inspection and Examination. The Borrower will keep, and will cause each Subsidiary to keep, accurate books of record and account for itself in which true and complete entries will be made in accordance with generally accepted accounting principles consistently applied and, upon request of the Bank, will give any representative of the Bank access to, and permit such representative to examine, copy or make extracts from, any and all books, records and documents in its possession, to inspect any of its properties and to discuss its affairs, finances and accounts with any of its principal officers, all at such times during normal business hours and as often as the Bank may reasonably request. Section 5.3 Compliance with Laws. The Borrower will, and will cause each Subsidiary to, comply with the requirements of applicable laws and regulations, the noncompliance with which would materially and adversely affect its business or the consolidated financial condition of the Borrower and its Subsidiaries. Section 5.4 Payment of Taxes and Other Claims. The Borrower will pay or discharge, and will cause each Subsidiary to pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien or charge upon any properties of the Borrower or any Subsidiary; provided, that neither the Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary has provided adequate reserves in accordance with generally accepted accounting principles. Section 5.5 Maintenance of Properties. The Borrower will keep and maintain, and will cause each Subsidiary to keep and maintain, all of its properties necessary or useful in its business in good condition, repair and working order; provided, however, that nothing in this Section shall prevent the Borrower or any Subsidiary from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the judgment of the Borrower or the appropriate Subsidiary, desirable in the conduct of its business and not disadvantageous in any material respect to the Bank as holder of the Note. Section 5.6 Insurance. The Borrower will, and will cause each Subsidiary to, obtain and maintain insurance with insurers believed by the Borrower to be responsible and reputable, in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates. Section 5.7 Preservation of Corporate Existence. The Borrower will, and will cause each Subsidiary to, preserve and maintain its corporate existence and all of its rights, privileges and franchises; provided, however, that neither the Borrower nor any Subsidiary shall be required to preserve any of its rights, privileges and franchises if its Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or the appropriate Subsidiary and that the loss thereof is not disadvantageous in any material respect to the Bank as a holder of the Note. Section 5.8 Interest Coverage Ratio. The Borrower will at all times maintain its Interest Coverage Ratio, determined at the end of each fiscal quarter of the Borrower, at not less than 6.00 to 1. Section 5.9 Leverage Ratio. The Borrower will at all times maintain its Leverage Ratio, determined as at the end of each fiscal quarter of the Borrower, at not more than 0.30 to 1. Section 5.10 Tangible Net Worth. The Borrower will maintain Consolidated Tangible Net Worth at all times in an amount not less than $120,000,000. ARTICLE VI Negative Covenants At all times through and including the Covenant Termination Date, the Borrower agrees that, without the prior written consent of the Bank: Section 6.1 Liens. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien or other charge or encumbrance of any nature on any of its assets, now owned or hereafter acquired, or assign or otherwise convey any right to receive income or give its consent to the subordination of any right or claim of the Borrower or any Subsidiary to any right or claim of any other Person; excluding, however, from the operation of the foregoing: (a) Liens for taxes or assessments or other governmental charges to the extent not required to be paid by Section 5.4. (b) Materialmen s, merchants , carriers worker s, repairer s, or other like liens arising in the ordinary course of business to the extent not required to be paid by Section 5.4. (c) Pledges or deposits to secure obligations under worker s compensation laws, unemployment insurance and social security laws, or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases or to secure statutory obligations or surety or appeal bonds, or to secure indemnity, performance or other similar bonds in the ordinary course of business. (d) Zoning restrictions, easements, licenses, restrictions on the use of real property or minor irregularities in title thereto, which do not materially impair the use of such property in the operation of the business of the Borrower or any Subsidiary or the value of such property for the purpose of suchbusiness. (e) Purchase money Liens, so long as the aggregate amount of all debts secured by such mortgages, liens or security interests (including capitalized leases) does not exceed $500,000 at any one time outstanding. (f) Liens created by any Subsidiary as security for debt owing to the Borrower or to another Subsidiary. (g) Liens on any property of the Borrower or any Subsidiary (other than those described in subsection (e) and (f)) securing any indebtedness for borrowed money in existence on the date hereof and listed in Schedule 6.1 hereto. (h) Liens granted under the Dealer Finance Agreements to General Electric Capital Corporation and Monogram Credit Card Bank of Georgia, but only so long as (i) such Liens secure only obligations described in and permitted under Sections 6.2(e) and 6.3(c), and (ii) such Liens cover only the right, title and interest (if any) of the Borrower and the Guarantor in the obligations of purchasers of the Borrower s products which obligations are acquired or held by General Electric Capital Corporation or Monogram Credit Card Bank of Georgia pursuant to the Dealer Finance Agreements. Section 6.2 Indebtedness. The Borrower will not, and will not permit any Subsidiary to, incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) Indebtedness to the Bank. (b) Indebtedness of the Borrower or any Subsidiary in existence on the date hereof and listed in Schedule 6.2 hereto, but not including any extensions or renewals thereof. (c) Indebtedness of a Subsidiary to the Borrower or another Subsidiary on account of borrowings, or indebtedness of the Borrower to a Subsidiary on account of borrowings from that Subsidiary. (d) Purchase money indebtedness of the Borrower or any Subsidiary secured by Liens permitted by subsection 6.1(e). (e) Obligations of the Borrower and the Guarantor under the Dealer Finance Agreements. Section 6.3 Guaranties. The Borrower will not, and will not permit any Subsidiary to, assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) The endorsement of negotiable instruments by the Borrower or any Subsidiary for deposit or collection or similar transactions in the ordinary course of business. (b) Guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in existence on the date hereof and listed in Schedule 6.3 hereto. (c) Obligations of the Borrower and the Guarantor under the Dealer Finance Agreements. Section 6.4 Investments. The Borrower will not, and will not permit any Subsidiary to, purchase or hold beneficially any stock or other securities or evidence of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, except: (a) Investments in (i) direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America, (ii) commercial paper issued by U.S. corporations rated "A-1" by Standard & Poors Corporation or "P1" by Moody s Investors Service, (iii) certificates of deposit or bankers acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000, or (iv) tax exempt securities rated A or better by Standard & Poors Corporation or M1G1 by Moody s Investors Service. (b) Any existing investment by the Borrower or any other Subsidiary in the stock of any Subsidiary. (c) Travel advances to officers and employees of the Borrower or any Subsidiary in the ordinary course of business. (d) Advances in the form of progress payments, prepaid rent or security deposits. Section 6.5 Sale of Assets. The Borrower will not, and will not permit any Subsidiary to, sell, lease, assign, transfer or otherwise dispose of all or a substantial part of its assets (whether in one transaction or in a series of transactions) to any other Person other than in the ordinary course of business, except for the sale of inventory in the ordinary course of the Borrower s business. For purposes of this Section, "substantial part" means 10% or more of the assets of the Borrower, as determined in accordance with generally accepted accounting principles. Section 6.6 Restrictions on Issuance and Sale of Subsidiary Stock. The Borrower will not: (a) permit any Subsidiary to issue or sell any shares of stock of any class of such Subsidiary to any other Person (other than the Borrower or a wholly-owned Subsidiary of the Borrower), except for the purpose of qualifying directors or of satisfying pre-emptive rights or of paying a common stock dividend on, or splitting, common stock of such Subsidiary; or (b) sell, transfer or otherwise dispose of any shares of stock of any class (except to a wholly-owned Subsidiary of the Borrower) of any Subsidiary or permit any Subsidiary to sell, transfer or otherwise dispose of (except to the Borrower or a wholly-owned Subsidiary of the Borrower or for the purpose of qualifying directors) any shares of stock of any class of any other Subsidiary. Section 6.7 Consolidation and Merger. The Borrower will not, and will not permit any Subsidiary to, consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all of the assets of any other Person; provided, however, that the restrictions contained in this Section shall not apply to or prevent the consolidation or merger of a Subsidiary with, or a conveyance or transfer of its assets to, the Borrower (if the Borrower shall be the continuing or surviving corporation) or another then-existing wholly-owned Subsidiary of the Borrower. Section 6.8 Sale and Leaseback. The Borrower will not, and will not permit any Subsidiary to, enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower or such Subsidiary shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which the Borrower or such Subsidiary, as the case may be, intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 6.9 Hazardous Substances. The Borrower will not, and will not permit any Subsidiary to, cause or permit any Hazardous Substance to be disposed of, in any manner which might result in any material liability to the Borrower or any Subsidiary, on, under or at any real property which is operated by the Borrower or any Subsidiary or in which the Borrower or any Subsidiary has any interest. Section 6.10 Restrictions on Nature of Business. The Borrower will not, and will not permit any Subsidiary to, engage in any line of business materially different from that presently engaged in by the Borrower or such Subsidiary. ARTICLE VII Critical Events; Rights and Remedies Section 7.1 Critical Events. "Critical Event", wherever used herein, means any one of the following events: (a) Failure to make any scheduled payment of interest on the Note when the same becomes due and payable. (b) Default in the performance, or breach, of any covenant or agreement on the part of the Borrower contained in this Agreement. (c) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture or other instrument. (d) A petition naming the Borrower or the Guarantor as debtor shall be filed by or against the Borrower or the Guarantor under the United States Bankruptcy Code. (e) A writ of attachment, garnishment, levy or similar process shall be issued against or served upon the Bank with respect to any property of the Borrower in the possession of the Bank or any indebtedness of the Bank to the Borrower having a value in excess of $250,000. (f) The Guarantor shall repudiate, purport to revoke, or fail to perform any of that Guarantor s obligations under his Guaranty. (g) Any Plan shall have been terminated, or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan, or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan, or withdrawal liability shall have been asserted against the Borrower, any Subsidiary or any ERISA Affiliate by a Multiemployer Plan; or the Borrower, any Subsidiary or any ERISA Affiliate shall have incurred liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or Plan participants in excess of $1,000,000 with respect to any Plan; or any Reportable Event that the Bank may determine in good faith might constitute grounds for the termination of any Plan, for the appointment by the appropriate United States District Court of a trustee to administer any Plan or for the imposition of withdrawal liability with respect to a Multiemployer Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Bank. Section 7.2 Rights and Remedies. At any time and for any reason, whether arising before, on or after the date hereof, whether or not the Borrower is in compliance with the covenants contained herein, and whether or not a Critical Event has occurred hereunder, or for no reason at all, the Bank may (i) demand payment of the Note, and/or (ii) require the Borrower to deposit in the L/C Cash Collateral Account immediately available funds equal to the sum of the Facility A Standby L/C Outstandings, the Facility A Documentary L/C Outstandings and the Facility B Outstandings. Upon the failure of the Borrower to pay the Note or make such deposit in full on the date set forth in the applicable notice of demand, or at any time thereafter until such payment and deposits are made, the Bank may exercise any or all of the following rights and remedies: (a) The Bank may, by notice to the Borrower, declare the Facilities to be terminated, whereupon the same shall forthwith terminate. (b) The Bank may, without notice to the Borrower and without further action, apply any and all money owing by the Bank to the Borrower to the payment of the Note, including interest accrued thereon, and of all other sums then owing by the Borrower hereunder, including the deposits required to be made under Section 7.3. (c) The Bank may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of a Critical Event described in Section 7.1(d) hereof, the entire unpaid principal amount of the Note, all interest accrued and unpaid thereon, and all other amounts payable under this Agreement shall be immediately due and payable without presentment, demand, protest or notice of any kind. Section 7.3 Pledge of L/C Cash Collateral Account. The Borrower hereby pledges, and grants the Bank a security interest in, all sums held in the L/C Cash Collateral Account from time to time and all proceeds thereof as security for the payment of all amounts due and to become due from the Borrower to the Bank pursuant to this Agreement, including but not limited to both principal of and interest on the Note and all renewals, extensions and modifications thereof and any notes issued in substitution therefor, and specifically including the Borrower s obligation to reimburse the Bank for any amount drawn under any Letter of Credit, whether such reimbursement obligation arises directly under this Agreement or under a separate reimbursement agreement. Upon request of the Borrower, the Bank shall permit the Borrower to withdraw from the L/C Cash Collateral Account the lesser of (i) the amount by which the balance of the L/C Cash Collateral Account exceeds the aggregate amount secured by the sums held in the L/C Cash Collateral Account, or (ii) the balance of the L/C Cash Collateral Account. The Bank shall have full ownership and control of the L/C Cash Collateral Account, and, except as set forth above, the Borrower shall have no right to withdraw the funds maintained in the L/C Cash Collateral Account. ARTICLE VIII Miscellaneous Section 8.1 No Waiver; Cumulative Remedies. No failure or delay on the part of the Bank in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall the Bank s acceptance of payments following any demand for payment of the Note or for a deposit in the L/C Cash Collateral Account operate as a waiver of such demand, or any right, power or remedy under the Loan Documents; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 8.2 Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom shall be effective unless the same shall be in writing and signed by the Bank and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 8.3 Notice. Except as otherwise expressly provided herein, all notices and other communications hereunder shall be in writing and shall be (i) personally delivered, (ii) transmitted by registered mail, postage prepaid, (iii) sent by Federal Express or similar expedited delivery service, or (iv) transmitted by telecopy, in each case addressed to the party to whom notice is being given at its address as set forth by its signature below, or, if telecopied, transmitted to that party at its telecopier number set forth by its signature below; or, as to each party, at such other address or telecopier number as may hereafter be designated in a notice by that party to the other party complying with the terms of this Section. All such notices or other communications shall be deemed to have been given on (i) the date received if delivered personally or by mail, (ii) the date of receipt, if delivered by Federal Express or similar expedited delivery service, or (iii) the date of transmission if delivered by telecopy, except that notices or requests to the Bank pursuant to any of the provisions of Article II shall not be effective until received. Section 8.4 Participations. The Bank may grant participations in the Facilities to any institutional investor without the consent of the Borrower. The Borrower shall assist the Bank in granting any such participations. Section 8.5 Disclosure of Information. The Borrower authorizes the Bank to disclose to any participant or assignee (each, a "Transferee") and any prospective Transferee any and all financial and other information in the Bank s possession concerning the Borrower which has been delivered to the Bank by the Borrower pursuant to this Agreement or which has been delivered to the Bank by the Borrower in connection with the Bank s credit evaluation of the Borrower before entering into this Agreement; provided, however, that prior to disclosing such information to a Transferee or prospective Transferee, the Bank shall obtain from such Transferee or prospective Transferee a confidentiality agreement agreeing that such information shall be used only in connection with such Person s evaluation and, if applicable, administration of its interest in this Agreement and the loans hereunder, and shall not be disclosed to any other person, subject to exceptions permitting disclosure to regulators and auditors, disclosure as required by law or judicial process, and disclosure under such other limited circumstances as the Bank and such Transferee or prospective Transferee may reasonably agree. Section 8.6 Costs and Expenses. The Borrower agrees to pay on demand all reasonable costs and expenses incurred by the Bank in connection with the negotiation, preparation, execution, administration, amendment or enforcement of the Loan Documents and the other instruments and documents to be delivered hereunder and thereunder, including the reasonable fees and reasonable out-of-pocket expenses of counsel for the Bank with respect thereto, whether paid to outside counsel or allocated to the Bank by in-house counsel. The Borrower also agrees to pay and reimburse the Bank for all of its out-of - -pocket and allocated costs incurred in connection with each audit or examination conducted by the Bank, its employees or agents, which audits and examinations shall be for the sole benefit of the Bank. Section 8.7 Indemnification by Borrower. The Borrower hereby agrees to indemnify the Bank and each officer, director, employee and agent thereof (herein individually each called an "Indemnitee" and collectively called the "Indemnitees") from and against any and all losses, claims, damages, reasonable expenses (including, without limitation, reasonable attorneys fees) and liabilities (all of the foregoing being herein called the "Indemnified Liabilities") incurred by an Indemnitee in connection with or arising out of the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the use of the proceeds of any Advance or Letter of Credit hereunder (including but not limited to any such loss, claim, damage, expense or liability arising out of any claim in which it is alleged that any Environmental Law has been breached with respect to any activity or property of the Borrower), except for any portion of such losses, claims, damages, expenses or liabilities incurred solely as a result of the gross negligence or willful misconduct of the applicable Indemnitee. If and to the extent that the foregoing indemnity may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. All obligations provided for in this Section shall survive any termination of this Agreement. Section 8.8 Execution in Counterparts. This Agreement and the other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts of this Agreement or such other Loan Document, as the case may be, taken together, shall constitute but one and the same instrument. Section 8.9 Binding Effect, Assignment. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the prior written consent of each of the Bank. Section 8.10 Governing Law. The Loan Documents shall be governed by , and construed in accordance with, the laws of the State of Minnesota. Section 8.11 Waiver of Jury Trial. THE BORROWER AND THE BANK HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT AND THE NOTE OR THE RELATIONSHIPS ESTABLISHED HEREUNDER. Section 8.12 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 8.13 Prior Agreements. This Agreement and the other Loan Documents and related documents described herein restate and supersede in their entirety any and all prior agreements and understandings, oral or written, between the Bank and the Borrower. Section 8.14 Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. Address: Post Office Box 810 Thief River Falls, Minnesota 56701 Attention: Timothy C. Delmore Telecopier: 218-681-5972 ARCTIC CAT INC. By____________________________ Its______________________ Address: Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0085 Attention: Mary D. Falck Telecopier: 612-667-4145 NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By_____________________ Mary D. Falck Its Vice President EXHIBITS AND SCHEDULES Exhibit A Note Exhibit B Form of Compliance Certificate ------------------------------ Schedule 4.4 Subsidiaries Schedule 6.1 Permitted Liens Schedule 6.2 Permitted Indebtedness Schedule 6.3 Permitted Guaranties REVOLVING NOTE $30,000,0000 Minneapolis, Minnesota June 6, 1997 For value received, Arctic Cat Inc., a Minnesota corporation (the "Borrower"), promises to pay to the order of Norwest Bank Minnesota, National Association, a national banking association (the "Bank"), at its main office in Minneapolis, Minnesota, ON DEMAND, the principal sum of Thirty Million Dollars ($30,000,000), or, if less, the aggregate unpaid principal amount of all advances made by the Bank to the Borrower pursuant to Section 2.1(a) of the Credit Agreement dated June 6, 1997 between the Borrower and the Bank (together with all amendments, modifications and restatements thereof, the "Credit Agreement"), and to pay interest on the principal balance of this Note outstanding from time to time at the rate or rates determined pursuant to the Credit Agreement. Terms defined in the Credit Agreement and not otherwise defined herein shall have the meanings given them in the Credit Agreement. Interest accruing on the principal balance of this Note each month at the Floating Rate shall be due and payable on the last day of each month, commencing on the last day of the month hereof, and on demand. Interest accruing on any Fixed Rate Amount shall be due and payable on the last day of the Interest Period applicable thereto. This Note is issued pursuant to, and is subject to, the Credit Agreement. The Borrower shall pay all costs of collection, including reasonable attorneys fees and legal expenses, if this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. The Borrower acknowledges that in accepting this Note the Bank has not undertaken any obligation to make any advance to the Borrower and that the Bank may refuse to make any advance requested by the Borrower and may demand payment of advances that it has made under this Note at any time, with or without notice (except as expressly provided in the Credit Agreement) and for any reason, whether arising before, on or after the date hereof, whether or not the Borrower is in compliance with the terms of this Note and the Credit Agreement, or for no reason at all. ARCTIC CAT INC. By________________________ Its__________________ COMPLIANCE CERTIFICATE __________________________, ______ Norwest Bank Minnesota, National Association Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479-0085 Compliance Certificate Ladies and Gentlemen: Reference is made to the Credit Agreement (the "Credit Agreement") dated June 6, 1997 entered into between Norwest Bank Minnesota, National Association and Arctic Cat Inc. (the "Borrower"). All terms defined in the Credit Agreement and not otherwise defined herein shall have the meanings given them in the Credit Agreement. This is a Compliance Certificate submitted in connection with the Borrower s financial statements (the "Statements") as of _____________________, _______ (the "Effective Date"). I hereby certify to you as follows: 1. I am the _________________________ of the Borrower, and I am familiar with the financial statements and financial affairs of the Borrower. 2. The Statements, and the computations below, have been prepared in accordance with generally accepted accounting principles applied on a basis that is consistent with the accounting practices reflected in the annual financial statements of the Borrower previously delivered to you. 3. If the Effective Date is the last day of a fiscal quarter of the Borrower, the following computations set forth the Borrower s compliance or non-compliance with the requirements set forth in Sections 5.8, 5.9 and 5.10 of the Credit Agreement as of the Effective Date: Actual Required INTEREST COVERAGE RATIO EBIT $___________ $___________ Interest Expense EBIT:Interest Expense __________________ >= 6.00:1 LEVERAGE RATIO Indebtedness $__________ + Letters of $__________ Credit = Funded Debt $__________ Funded Debt $__________ + Equity $__________ = Total Capital $__________ Funded Debt : Total Capital __________________ <= 0.30:1 Tangible Net Worth Equity - - Intangible $__________ Assets $__________ Tangible Net Worth $_________________ >= $120,000,000 Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of, the financial covenants referred to above. 4. I have no knowledge of the occurrence of any breach of the Credit Agreement or other Critical Event, except as set forth in the attachments, if any, hereto. Very truly yours, ARCTIC CAT INC. By________________________ Its_______________________ EX-21 6 Exhibit 21 ARCTIC CAT INC. Subsidiaries of the Company Arctic Cat Sales Inc. organized under the laws of the State of Minnesota 100% of common stock owned by parent Arctco FSC, Inc. (a foreign sales corporation) Organized under the laws of the United States Virgin Islands 100% of common stock owned by parent EX-23 7 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated May 9, 1997, accompanying the consolidated financial statements and schedule included in the Annual Report on Form 10-K of Arctic Cat Inc. for the year ended March 31, 1997. We hereby consent to the incorporation by reference of said report in the Registration Statements of Arctic Cat Inc. on Forms S-8 (File No. 33-37065, effective October 1, 1990, File No. 33-69916, effective October 4, 1993, and File No. 33-97244, effective September 22, 1995). /s/Grant Thornton LLP ______________________ Minneapolis, Minnesota June 17, 1997 EX-27 8
5 12-MOS MAR-31-1997 MAR-31-1997 5,540,000 45,200,000 27,893,000 (500,000) 86,502,000 178,460,000 72,305,000 32,798,000 217,967,000 48,856,000 0 0 0 291,000 166,447,000 217,967,000 468,595,000 468,595,000 351,249,000 351,249,000 0 351,000 109,000 35,753,000 12,692,000 23,061,000 0 0 0 23,061,000 .78 0
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