<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-----------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________to_________________
Commission File Number 1-11411
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Polaris Industries Inc.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1790959
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1225 Highway 169 North, Minneapolis, MN 55441
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(Address of principal executive offices) (Zip Code)
(612) 542-0500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
to be filed 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
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
As of November 6 , 1998, 25,648,768 shares of Common Stock of the issuer
were outstanding.
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POLARIS INDUSTRIES INC.
FORM 10-Q
For Quarter Period Ended September 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets......................................3
Consolidated Statements of Operations ...........................4
Consolidated Statements of Cash Flows............................5
Consolidated Statement of Shareholders' Equity...................6
Notes to Consolidated Financial Statements.......................7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations...........................................12
Cash Dividends .................................................14
Liquidity and Capital Resources.................................14
Year 2000.......................................................15
Inflation and Exchange Rates....................................16
Part II. OTHER INFORMATION...................................................18
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURE PAGE................................................................19
</TABLE>
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POLARIS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,487 $ 1,233
Trade receivables 64,612 42,593
Inventories 127,726 139,544
Prepaid expenses and other 3,908 5,088
Deferred tax assets 30,000 29,000
-------- --------
Total current assets 240,733 217,458
-------- --------
Deferred Tax Assets 24,000 26,000
Property and Equipment, net 116,685 98,020
Investments in Affiliates 26,328 19,767
Intangible Assets, net 22,844 23,501
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Total Assets $430,590 $384,746
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $82,878 $61,027
Accrued expenses 119,651 113,867
Litigation loss payable 61,409 0
Income taxes payable 4,975 16,217
-------- --------
Total current liabilities 268,913 191,111
Borrowings under credit agreement 15,000 24,400
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Total Liabilities 283,913 215,511
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Commitments and Contingencies (Notes 4, 6 and 7)
Shareholders' Equity:
Common stock 257 260
Additional paid-in capital 61,698 72,955
Deferred compensation (6,170) (3,133)
Compensation payable in common stock 4,749 7,346
Retained earnings 86,143 91,807
-------- --------
Total shareholders' equity 146,677 169,235
-------- --------
Total Liabilities and Shareholders' Equity $430,590 $384,746
-------- --------
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
Third Quarter For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $359,861 $293,428 $844,573 $767,950
Cost of Sales 273,431 214,860 647,130 579,632
-------- -------- -------- --------
Gross profit 86,430 78,568 197,443 188,318
Operating Expenses 49,976 47,421 128,247 121,084
-------- -------- -------- --------
Operating income 36,454 31,147 69,196 67,234
Non-operating Expense (Income)
Interest expense 787 630 2,086 2,484
Equity in income of affiliates (2,043) (2,108) (5,199) (4,978)
Other expense (income), net (1,212) (1,188) (2,308) (3,636)
Provision for litigation loss 61,409 0 61,409 0
-------- -------- -------- --------
Income before income taxes (22,487) 33,813 13,208 73,364
Provision for income taxes (7,983) 12,173 4,867 26,411
-------- -------- -------- --------
Net income (loss) ($14,504) $21,640 $8,341 $46,953
-------- -------- -------- --------
Basic and Diluted Net Income (Loss) Per Share ($0.56) $0.82 $0.32 $1.75
-------- -------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements
- 4 -
<PAGE>
POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 8,341 $ 46,953
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 27,336 25,182
Noncash compensation 6,352 4,948
Equity in income of affiliates (5,199) (4,978)
Deferred income taxes 1,000 0
Changes in current operating items -
Trade receivables (22,019) (7,619)
Inventories 11,818 (40,620)
Accounts payable 21,851 32,981
Litigation loss payable 61,409 0
Accrued expenses 5,784 5,893
Income taxes payable (11,242) 11,437
Others, net 1,607 1,484
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Net cash provided by
operating activities 107,038 75,661
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Cash Flows From Investing Activities:
Purchase of property and equipment (45,344) (22,714)
Investments in affiliates, net (1,362) (10,208)
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Net cash used for investing activities (46,706) (32,922)
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Cash Flows From Financing Activities:
Borrowings under credit agreement 261,500 220,900
Repayments under credit agreement (270,900) (215,900)
Repurchase and retirement of common shares (23,673) (35,357)
Cash dividends to shareholders (14,005) (12,790)
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Net cash provided by financing activities (47,078) (43,147)
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Increase (decrease) in cash and cash equivalents 13,254 (408)
Cash and Cash Equivalents, Beginning 1,233 5,812
---------- ---------
Cash and Cash Equivalents, Ending $ 14,487 $ 5,404
---------- ---------
---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
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<PAGE>
POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Additional Compensation
Common Paid-In Deferred Payable in Retained
Stock Capital Compensation Common Stock Earnings Total
------ ------- ------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $260 $72,955 ($3,133) $7,346 $91,807 $169,235
Employee stock compensation 3 10,568 (3,037) (734) 0 6,800
First Rights conversion to stock 1 1,841 0 (1,863) 0 (21)
Cash dividends declared 0 0 0 0 (14,005) (14,005)
Repurchase and retirement of common
shares (7) (23,666) 0 0 0 (23,673)
Net income 0 0 0 0 8,341 8,341
------ ------- ------- ------ ------- --------
Balance, September 30, 1998 $257 $61,698 ($6,170) $4,749 $86,143 $146,677
------ ------- ------- ------ ------- --------
------ ------- ------- ------ ------- --------
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
POLARIS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial statements and, therefore, do not
include all information and disclosures of results of operations,
financial position and changes in cash flow in conformity with
generally accepted accounting principles for complete financial
statements. Accordingly, such statements should be read in
conjunction with the Company's annual report on Form 10-K for the
year ended December 31, 1997, previously filed with the Securities
and Exchange Commission. In the opinion of management, such
statements reflect all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the
financial position, results of operations, and cash flows for the
periods presented. Due to the seasonality of the snowmobile, all
terrain vehicle (ATV) and personal watercraft (PWC) business, and to
certain changes in production and shipping cycles, results of such
periods are not necessarily indicative of the results to be expected
for the complete year.
NOTE 2. INVENTORIES
The major components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<C> <S> <S>
Raw Materials $36,083 $17,614
Service Parts 43,403 45,619
Finished Goods 48,240 76,311
-------- --------
$127,726 $139,544
-------- --------
-------- --------
</TABLE>
NOTE 3. FINANCING AGREEMENT
Polaris has an unsecured bank line of credit arrangement with maximum
available borrowings of $175.0 million. Interest is charged at rates
based on LIBOR or "prime" (6.00% at September 30, 1998) and the
agreement expires on March 31, 2000, at which time the balance is
due. As of September 30, 1998, total borrowings under this credit
arrangement were $15.0 million and have been classified as long-term
in the accompanying consolidated balance sheets.
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<PAGE>
NOTE 4. INVESTMENTS IN AFFILIATES
In February 1996, a wholly-owned subsidiary of Polaris entered into a
partnership agreement with Transamerica Distribution Finance ("TDF")
to form Polaris Acceptance. Polaris Acceptance provides floor plan
financing to dealer and distributor customers of Polaris, and will in
the future provide other financial services to dealers, distributors
and retail customers of Polaris. In January 1997, Polaris exercised
its option to increase its equity interest in Polaris Acceptance to
50 percent. Polaris has guaranteed 50 percent of the outstanding
indebtedness of Polaris Acceptance under a credit agreement between
Polaris Acceptance and TDF. At September 30, 1998, Polaris'
contingent liability with respect to the guarantee was approximately
$146.8 million.
Polaris is a partner with Fuji Heavy Industries Ltd. in Robin
Manufacturing, U.S.A. ("Robin"). Polaris has a 40 percent ownership
interest in Robin, which builds engines in the United States for
recreational and industrial products.
Investments in affiliates are accounted for under the equity method.
Polaris' allocable share of the income of Polaris Acceptance and
Robin has been included as a component of non-operating expense
(income) in the accompanying consolidated statements of operations.
NOTE 5. SHAREHOLDERS' EQUITY
During the first nine months of 1998, Polaris paid $23.7 million to
repurchase and retire 696,500 shares of its common stock with cash on
hand and borrowings under its line of credit. Polaris has 2,326,600
remaining shares available to repurchase under this authorization as
of September 30, 1998.
The Polaris Board of Directors declared a regular cash dividend of
$0.18 per share payable to holders of record on July 31, 1998, which
was paid on August 17, 1998.
On October 22, 1998, the Polaris Board of Directors declared a
regular cash dividend of $0.18 per share payable on or about November
16, 1998, to holders of record on November 2, 1998.
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<PAGE>
Net income per share for the periods ended September 30, 1998 and
1997 was calculated based on the weighted average number of common
and potential common shares outstanding.
Polaris adopted SFAS No. 128 "Earnings per share" effective December
31, 1997. As a result, the prior period presented has been restated
to conform to the provisions of SFAS No. 128, which requires the
presentation of basic and diluted earnings per share. Basic earnings
per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares
outstanding during each year, including shares earned under the First
Rights plan, the Director plan and the ESOP. Diluted earnings per
share is computed under the treasury stock method and is calculated
to reflect the dilutive effect of the Option Plan. A reconciliation
of these amounts is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
For Three Months For Nine Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (loss) available $(14,504) $21,640 $ 8,341 $46,953
to common shareholders
Weighted average number of 25,614 26,172 25,848 26,549
Common shares outstanding
First Rights 10 98 24 153
Director Plan 17 13 17 11
ESOP 170 170 170 170
------- ------ ------ ------
Common shares outstanding - basic 25,811 26,453 26,059 26,883
------- ------ ------ ------
------- ------ ------ ------
Dilutive effect of Option Plan 0 23 42 9
------- ------ ------ ------
Common and potential common
shares outstanding - diluted 25,811 26,476 26,101 26,892
------- ------ ------ ------
------- ------ ------ ------
Basic and diluted net income (loss)
per share $(0.56) $ 0.82 $ 0.32 $ 1.75
------- ------ ------ ------
------- ------ ------ ------
</TABLE>
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<PAGE>
NOTE 6. COMMITMENTS AND CONTINGENCIES
Polaris is subject to product liability claims in the normal course
of business and prior to June 1996 elected not to purchase insurance
for product liability losses. Effective June 1996, Polaris purchased
excess insurance coverage for catastrophic product liability claims
for incidents occurring subsequent to the policy date that exceed a
self-insured retention. The estimated costs resulting from any losses
are charged to expense when it is probable a loss has been incurred
and the amount of the loss is reasonably determinable.
Injection Research Specialists ("IRS") commenced an action in 1990
against Polaris and Fuji Heavy Industries, Ltd. ("Fuji"), one of
Polaris' engine suppliers, in Colorado Federal Court alleging various
claims relating to electronic fuel injection systems for snowmobiles.
In October 1998, following entry of judgement against Polaris for
$34.0 million (before pre- and post-judgement interest) and
affirmance thereof by the Federal Court of Appeals, IRS, Polaris, and
Fuji entered into a confidential settlement agreement to settle all
outstanding claims between the parties. The resulting provision for
litigation loss of $61.4 million has been reflected as non-operating
expense in the accompanying consolidated statement of operations for
the quarter ended September 30, 1998. The related payment to IRS was
made subsequent to the end of the quarter in connection with entering
into the confidential settlement agreement. Polaris utilized its
existing line of credit arrangement to fund the payment. Polaris no
longer uses any of the technology in dispute.
In addition to the aforementioned matter, Polaris is a defendant in
lawsuits and subject to claims arising in the normal course of
business. In the opinion of management, it is not probable that any
legal proceedings pending against or involving Polaris will have a
material adverse effect on Polaris' financial position or results of
operations.
NOTE 7. FOREIGN CURRENCY CONTRACTS
Polaris' Canadian subsidiary uses the United States dollar as its
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.
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<PAGE>
Polaris enters into foreign exchange contracts to manage currency
exposures of its purchase commitments denominated in foreign
currencies and transfers of funds from its Canadian subsidiary.
Polaris does not use any financial contract for trading purposes.
These contracts are accounted for as hedges, thus market value gains
and losses are recognized at the time of purchase or transfer of
funds, respectively. The criteria to determine if hedge accounting is
appropriate are (1) the designation of a hedge to an underlying
exposure, (2) whether or not overall risk is reduced and (3) if there
is a correlation between the value of the foreign exchange contract
and the underlying exposure. Gains and losses related to purchase
commitments are recorded as adjustments to cost of sales while gains
and losses related to transfers of funds are recorded as other
expense (income) on the accompanying statement of operations. At
September 30, 1998, Polaris had open Japanese yen foreign exchange
contracts with notional amounts totaling $16.9 million United States
dollars, and open Canadian dollar foreign exchange contracts with
notional amounts totaling $36.2 million United States dollars which
mature throughout the remainder of 1998.
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
SFAS 131
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS No. 131) in June
1997. SFAS No. 131 requires that public business enterprises report
information about operating segments in annual financial statements
and requires selected information in interim financial reports issued
to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers and is effective for fiscal years beginning after December
15, 1997. Polaris is currently evaluating the impact of SFAS No. 131,
which may effect disclosures in its 1998 annual financial statements.
SFAS 133
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) in June 1998. SFAS
No. 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement, and requires that a company must
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<PAGE>
formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting.
Polaris will be required to adopt SFAS No. 133 no later than January
1, 2000. Polaris has not quantified the impacts of adopting SFAS No.
133 on the financial statements and has not determined the timing of
adoption of SFAS No. 133. However, SFAS No. 13 could increase
volatility in earnings and other comprehensive income.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion pertains to the results of operations and financial
position of Polaris Industries Inc., a Minnesota corporation ("Polaris" or
the "Company"), for the quarters ended September 30, 1998 and 1997. Due to
the seasonality of the snowmobile, all terrain vehicle (ATV) and personal
watercraft (PWC) business, and to certain changes in production and shipping
cycles, results of such periods are not necessarily indicative of the results
to be expected for the complete year.
RESULTS OF OPERATIONS
Sales were $359.9 million in the third quarter of 1998, representing a 23
percent increase from $293.4 million in sales for the same period in 1997.
North American sales of snowmobiles and related Parts, Garments and
Accessories ("PG&A") of $175.3 million for third quarter 1998 were four
percent lower than $182.2 million for the comparable period in 1997. The
decrease is due to lower snowmobile shipments in 1998.
North American sales of ATVs and related PG&A of $157.9 million for the third
quarter 1998 were 67 percent higher than $94.7 million for the comparable
period in 1997. The increase is related to increased unit sales reflecting
the continuing growth in the ATV industry.
North American sales of PWC and related PG&A of $2.9 million for the third
quarter 1998 were 18 percent lower than $3.6 million for the comparable
period in 1997. The decrease is related to the Company's previously announced
decision to lower PWC production in response to the industry wide softening
in consumer demand.
Sales of Victory motorcycles and related PG&A totaled $3.3 million for the
third quarter 1998. Victory motorcycle production and shipments began in July
1998.
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<PAGE>
International sales of snowmobiles, ATVs, PWC and related PG&A of $20.5
million for the third quarter 1998 were 60 percent higher than $12.9 million
for the comparable period in 1997 primarily as a result of earlier timing of
snowmobile unit sales.
Sales increased to $844.6 million for the year-to-date period ended September
30, 1998, representing a ten percent increase from $768.0 million sales for
the same period in 1997. The sales increase was led by strong ATV demand and
earlier snowmobile shipments partially offset by lower PWC production.
Gross profit of $86.4 million in the third quarter of 1998 represents a ten
percent increase from gross profit of $78.6 million for the same period in
1997. Gross profit of $197.4 million in the year-to-date period ended
September 30, 1998 represents a five percent increase from gross profit of
$188.3 million for the same period in 1997. These increases in gross profit
dollars resulted primarily from higher sales volume in the current year
periods. The gross profit margin percentage decreased to 24.0 percent for the
third quarter of 1998 from 26.8 percent for the comparable 1997 period and to
23.4 percent for the year-to-date period ended September 30, 1998, as
compared to 24.5 percent for the year-to-date period in 1997. These declines
in gross profit margin percentage are primarily due to a) mix impact of the
substantial increase in sales of lower margin ATVs; b) negative impact of the
Canadian dollar exchange rate when compared to the prior year periods; c)
initial production rollout of the Victory motorcycles; and d) reduced pricing
on 1998 model ATVs implemented in the Fall of 1997.
Operating expenses in the third quarter of 1998 increased five percent to
$50.0 million from the comparable 1997 period, but as a percentage of sales,
decreased to 13.9 percent for the third quarter of 1998 compared to 16.2
percent for the same period in 1997. Operating expenses in the year-to-date
period ended September 30, 1998 increased six percent to $128.2 million from
the comparable 1997 period, but as a percentage of sales, decreased to 15.2
percent for the nine months ended September 30, 1998 compared to 15.8 percent
for the same period in 1997. The lower levels of operating expenses as a
percentage of sales are related to lower promotional spending to assist
retail PWC sales in 1998 and the leveraging effect of higher sales, partially
offset by a planned increase in advertising expenditures.
Non-operating expense (income) in the third quarter and year-to-date period
ended September 30, 1998 includes a provision in the amount of $61.4 million
for litigation loss related to the settlement of the Injection Research
Specialists litigation. This is a one-time charge that does not effect the
ongoing operations of the Company. Polaris no longer uses the technology in
dispute.
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<PAGE>
CASH DIVIDENDS
On July 16, 1998, the Polaris Board of Directors declared a regular cash
dividend of $0.18 per share payable to holders of record on July 31, 1998,
which was paid on August 17, 1998.
On October 22, 1998, the Polaris Board of Directors declared a regular cash
dividend of $0.18 per share payable on or about November 16, 1998, to holders
of record on November 2, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The seasonality of production and shipments causes working capital
requirements to fluctuate during the year. Polaris maintains an unsecured
bank line of credit arrangement maturing on March 31, 2000 under which it may
borrow up to $175.0 million. Interest is charged at rates based on LIBOR or
"prime". At September 30, 1998, Polaris had borrowings under its bank line of
credit arrangement of $15.0 million and cash and cash equivalents of $14.5
million, compared to $24.4 million in borrowings and cash and cash
equivalents of $1.2 million at December 31, 1997.
During the first nine months of 1998, Polaris paid $23.7 million to
repurchase and retire 696,500 shares of its common stock with cash on hand
and borrowings under its line of credit arrangement. Polaris has 2,326,600
remaining shares available to repurchase under this authorization as of
September 30, 1998.
Injection Research Specialists ("IRS") commenced an action in 1990 against
Polaris and Fuji Heavy Industries, Ltd. ("Fuji"), one of Polaris' engine
suppliers, in Colorado Federal Court alleging various claims relating to
electronic fuel injection systems for snowmobiles. In October 1998, following
entry of judgement against Polaris for $34.0 million (before pre- and
post-judgement interest) and affirmance thereof by the Federal Court of
Appeals, IRS, Polaris, and Fuji entered into a confidential settlement
agreement to settle all outstanding claims between the parties. The resulting
provision for litigation loss of $61.4 million has been reflected as
non-operating expense in the accompanying consolidated statement of
operations for the quarter ended September 30, 1998. The related payment to
IRS was made subsequent to the end of the quarter in connection with entering
into the confidential settlement agreement. Polaris utilized its existing
line of credit arrangement to fund the payment. Polaris no longer uses any of
the technology in dispute.
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<PAGE>
Polaris proforma results adjusted to exclude the provision for litigation
loss are as follows:
<TABLE>
<CAPTION>
Third Quarter For the Nine Months
Ended September 30, 1998 Ended September 30, 1998
1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Income before taxes $38,922 $33,813 $74,617 $73,364
Provision for income taxes 13,817 12,173 26,667 26,411
------- -------- ------- --------
Net Income $25,105 $21,640 $47,950 $46,953
------- -------- ------- --------
------- -------- ------- --------
Basic and Diluted Net Income Per Share $ 0.97 $ 0.82 $ 1.84 $ 1.75
</TABLE>
Management believes that existing cash balances and bank borrowings, cash
flow to be generated from operating activities and available borrowing
capacity under the line of credit arrangement will be sufficient to fund
operations, regular dividends, share repurchases, the litigation loss
payable, and capital requirements for 1998. At this time, management is not
aware of any factors that would have a materially adverse impact in cash flow
beyond 1998.
YEAR 2000
During 1998, Polaris has continued with its company-wide program to prepare
the company's computer systems for Year 2000 compliance. In order for a
computer system to be Year 2000 compliant, its time sensitive software must
recognize a date using "00" as the year 2000 rather than the year 1900.
Polaris' project is divided into two major areas: internal information
systems and embedded manufacturing systems/third party suppliers.
Polaris has implemented a plan to make its critical internal information
systems Year 2000 compliant by the end of 1998 and to make its remaining
internal information systems compliant by mid-1999. As of September 30, 1998,
approximately 50% of the estimated programming requirements had been
completed. These systems are being tested as completed with testing expected
to continue throughout 1999.
Polaris has completed inventories of equipment and machines with embedded
systems that are used at each of the facilities. Polaris is in the process of
assessing whether the critical equipment will be Year 2000 compliant through
simulations and testing of the equipment as well as Year 2000 compliance letters
from vendors. Polaris has identified its critical suppliers and sent them
questionnaires to address their Year 2000 plans and progress.
The cost of the Year 2000 initiatives (which are expensed as incurred) are not
expected to be material to Polaris financial position. The total cost is
estimated to be approximately $1 million of which $450,000 has been incurred to
date.
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<PAGE>
Polaris is beginning a comprehensive analysis of the operational issues and
costs that would most likely result from failure by the company or third parties
to achieve Year 2000 compliance on a timely basis. Although the company has not
yet identified the most likely worst case scenario, the risk would be primarily
delivery timing to customers in January 2000. Polaris believes it will have
sufficient time to recover, although some delayed deliveries may result in
cancellations of orders.
Polaris has not yet developed contingency plans to protect the business from
Year 2000 related interruptions but anticipates developing these plans
throughout 1999.
The costs of the project and the date when Polaris believes it will complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events. However, there can be
no guarantee these estimates will be achieved and actual results could differ
materially from those anticipated.
INFLATION AND EXCHANGE RATES
Polaris does not believe that inflation has had a material impact on the results
of its recent operations. However, the changing relationships of the U.S. dollar
to the Japanese yen and Canadian dollar have had a material impact from time to
time. In 1997, purchases totaling 17 percent of Polaris' cost of sales were from
yen-denominated suppliers. The strengthening of the U.S. dollar in relation to
the Japanese yen since late 1995 has resulted in lower raw material purchase
prices. Polaris' cost of sales in the third quarter ended September 30, 1998 was
positively impacted by the Japanese yen-U.S. dollar exchange rate fluctuation
when compared to the same period in 1997. In view of the foreign exchange
hedging contracts currently in place, Polaris anticipates that the Japanese
yen-U.S. dollar exchange rate will continue to have a slightly positive impact
on cost of sales during the remaining period of 1998 when compared to the same
period in 1997.
Polaris operates in Canada through a wholly owned subsidiary. Over the past
several years, strengthening of the U.S. dollar in relationship to the Canadian
dollar has resulted in lower gross margin levels on a comparable basis. The
fluctuation of the Canadian dollar exchange rate did impact the gross margin
achieved in the third quarter of 1998 and the year-to-date period ended
September 30, 1998 when compared to the same periods in 1997.
In the past, Polaris has been a party to, and in the future may enter into,
foreign exchange hedging contracts for both the Japanese yen and the Canadian
dollar to minimize the impact of exchange rate fluctuations within each year. At
September 30, 1998, Polaris had open Japanese yen and Canadian dollar foreign
exchange hedging contracts which mature throughout 1998.
Certain matters discussed in this report are "forward-looking statements"
intended to qualify for the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These "forward-looking statements" can
generally be identified as such because
-16-
<PAGE>
the context of the statement will include words such as the Company or
management "believes", "anticipates", "expects", "estimates" or words of
similar import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking. Shareholders, potential
investors and others are cautioned that all forward-looking statements
involve risks and uncertainty that could cause results to differ materially
from those anticipated by some of the statements made herein. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ materially are the following: product offerings and pricing
strategies by competitors; future conduct of litigation processes; warranty
expenses; foreign currency exchange rate fluctuations; environmental and
product safety regulatory activity; effects of weather; uninsured product
liability claims; and overall economic conditions, including inflation and
consumer confidence and spending.
-17-
<PAGE>
FORM 10-Q
FOR QUARTERLY PERIOD ENDED
MARCH 31, 1998
POLARIS INDUSTRIES INC.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In 1990, Injection Research Specialists ("IRS") commenced an action
against the Company and Fuji Heavy Industries Ltd. ("Fuji") alleging
various claims relating to electronic fuel injection systems for
snowmobiles. In October 1998, IRS, the Company and Fuji entered into
a confidential settlement agreement, which settled all outstanding
claims in the litigation.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
On August 14, 1998, the company filed a current
report on Form 8-K announcing that the U.S. Court of
Appeals for the Federal Circuit had upheld a Colorado
District Court jury verdict on a trade secret
misappropriation claim brought by Injection Research
Specialists.
-18-
<PAGE>
POLARIS INDUSTRIES INC.
SIGNATURES
Pursuant to the requirements 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.
POLARIS INDUSTRIES INC.
(Registrant)
Date: November 6, 1998 /s/ W. Hall Wendel, Jr.
-----------------------
W. Hall Wendel, Jr.
Chairman of the Board
and Chief Executive Officer
Date: November 6, 1998 /s/ Michael W. Malone
---------------------
Michael W. Malone
Vice President Finance, Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Chief Accounting Officer)
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF POLARIS INDUSTRIES INC. AS OF SEPTEMBER 30, 1998,
AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS EQUITY AND
CASH FLOWS FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,487
<SECURITIES> 0
<RECEIVABLES> 64,612
<ALLOWANCES> 0
<INVENTORY> 127,726
<CURRENT-ASSETS> 240,733
<PP&E> 229,715
<DEPRECIATION> 113,030
<TOTAL-ASSETS> 430,590
<CURRENT-LIABILITIES> 268,913
<BONDS> 0
0
0
<COMMON> 257
<OTHER-SE> 146,420
<TOTAL-LIABILITY-AND-EQUITY> 430,590
<SALES> 844,573
<TOTAL-REVENUES> 844,573
<CGS> 647,130
<TOTAL-COSTS> 647,130
<OTHER-EXPENSES> 128,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,086
<INCOME-PRETAX> 13,208
<INCOME-TAX> 4,867
<INCOME-CONTINUING> 8,341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,341
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
