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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-11411
POLARIS INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1790959
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
1225 HIGHWAY 169 NORTH 55441
MINNEAPOLIS, MN (Zip Code)
(Address of principal executive offices)
(612) 542-0500
(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required 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 ___
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. [ ]
The aggregate market value of Common Stock of the registrant as of March 11,
1999 (based upon the closing reported sale price of the Common Stock at that
date on the New York Stock Exchange) held by non-affiliates (22,769,383 shares)
was approximately $646,081,243.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 11, 1999, 25,287,614 shares of Common Stock of the registrant
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1998 furnished to the Securities and Exchange Commission (the
"1998 Annual Report") are incorporated by reference into Parts II and III of
this Form 10-K.
2. Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held May 20, 1999 filed with the Securities and Exchange Commission (the
"1999 Proxy Statement") are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Polaris Industries Inc. (the "Company"), a Minnesota corporation, was formed
in 1994 for the purpose of merging (the "Merger") a subsidiary of the Company
into Polaris Industries Partners L.P., a Delaware limited partnership (the
"Partnership") and merging Polaris Industries L.P., a Delaware limited
partnership, into the Partnership. The Merger took place on December 22, 1994.
Upon consummation of the Merger, each unit of Beneficial Assignment of Class A
Limited Partnership Interests of the Partnership was exchanged for one share of
common stock, $.01 par value of the Company. On December 31, 1996, the
Partnership was merged with and into Polaris Industries Inc., a Delaware
corporation (the "Operating Subsidiary"). The Company owns 100% of the Operating
Subsidiary. The term "Polaris" as used herein refers to the business and
operations of the Operating Subsidiary and its predecessors, Polaris Industries
Partners L.P. and Polaris Industries L.P.
Polaris designs, engineers and manufactures snowmobiles, all terrain
vehicles ("ATVs"), motorcycles and personal watercraft ("PWC") and markets them,
together with related replacement parts, garments and accessories ("PG&A")
through dealers and distributors principally located in the United States,
Canada and Europe. Sales of snowmobiles, ATVs, motorcycles and PWC in North
America and International sales (each of which includes PG&A for these markets)
accounted for the following approximate percentages of Polaris' sales for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 SNOWMOBILES ATVS MOTORCYCLES PWC INTERNATIONAL
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<S> <C> <C> <C> <C> <C>
1998................................. 32% 57% 1% 4% 6%
1997................................. 42% 45% N/A 7% 6%
1996................................. 43% 37% N/A 16% 4%
</TABLE>
INDUSTRY BACKGROUND
SNOWMOBILES. In the early 1950s, a predecessor to Polaris produced a "gas
powered sled" which became the forerunner of the Polaris snowmobile. Snowmobiles
have been manufactured under the Polaris name since 1954.
Originally conceived as a utility vehicle for northern, rural environments,
the snowmobile gained popularity as a recreational vehicle. From the mid-1950s
through the late 1960s, over 100 producers entered the snowmobile market and
snowmobile sales reached a peak of approximately 495,000 units in 1971. The
Polaris product survived the industry decline in which snowmobile sales fell to
a low point of approximately 87,000 units in 1983 and the number of snowmobile
manufacturers serving the North American market declined to four: Yamaha,
Bombardier, Arctic Cat and Polaris. Polaris estimates that industry sales of
snowmobiles on a worldwide basis were approximately 256,000 units for the season
ended March 31, 1998.
ALL TERRAIN VEHICLES. ATVs are four-wheel vehicles with balloon style tires
designed for off road use and traversing rough terrain, swamps and marshland.
ATVs are used for recreation, in such sports as fishing and hunting, as well as
for utility purposes on farms, ranches and construction sites.
ATVs were introduced to the North American market in 1971 by Honda. Other
Japanese motorcycle manufacturers, Yamaha, Kawasaki and Suzuki, entered the
North American market in the late 1970s and early 1980s. By 1980, the number of
ATV units sold in North America annually had increased to approximately 140,000
units. Polaris entered the ATV market in 1985, Arctic Cat entered in 1995 and
Bombardier entered in 1998. In 1985, the number of three- and four-wheel ATVs
sold in North America peaked at approximately 650,000 units per year, then
dropped dramatically to a low of 148,000 in 1989.
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Polaris estimates that the industry grew 19% with approximately 520,000 ATVs
sold worldwide during the calendar year 1998.
MOTORCYCLES. Heavyweight motorcycles are over the road vehicles utilized as
a mode of transportation as well as for recreational purposes. There are four
segments: cruisers, touring bikes, sport bikes, and standards.
Polaris entered the worldwide motorcycle market in 1998 with an initial
entry product in the cruiser segment. U.S. retail cruiser sales doubled from
1993 to 1998. Polaris estimates that approximately 152,000 cruiser motorcycles
were sold in the U.S. market in 1998. Other major cruiser motorcycle
manufacturers include Harley Davidson, Honda, Yamaha, Kawasaki and Suzuki.
PERSONAL WATERCRAFT. PWC are sit-down versions of water scooter vehicles,
and designed for use on lakes, rivers, oceans and bays. PWC are used primarily
for recreational purposes and are designed for one, two, three or four
passengers. Polaris entered the PWC market in 1992. After many years of rapid
growth, the number of PWC sold peaked at approximately 225,000 units in 1996.
Polaris estimates that worldwide industry retail sales for PWC were
approximately 160,000 units for the season ended September 30, 1998. Other major
PWC manufacturers are Bombardier, Yamaha, Kawasaki and Arctic Cat.
PRODUCTS
ALL TERRAIN VEHICLES. Polaris entered the ATV market in the spring of 1985
with both a three-wheel and a four-wheel product. Polaris currently produces
four-wheel ATVs, which provide more stability for the rider than the earlier
three-wheel versions. Polaris' line of ATVs consisting of fourteen models
includes general purpose, sport and four-wheel drive utility models, with 1999
suggested retail prices ranging from approximately $3,000 to $7,500.
In addition, Polaris has a six-wheel off-road utility vehicle and a
six-wheel drive off-road Polaris RANGER side by side utility and recreational
vehicle. Polaris also markets a full line of ATV accessories such as winches,
mowers, blades, cargo racks, utility trailers, sprayers, seeders, tires, oils,
lubricants and parts.
Polaris' ATVs feature the totally automatic Polaris variable transmission,
which requires no manual shifting, and a MacPherson strut front suspension,
which enhances control and stability. Polaris' ATVs include two cycle and four
cycle engines and both shaft and concentric chain drive. In 1998, Polaris
introduced a diesel powered ATV and in early 1999 Polaris introduced its first
manual transmission ATV.
Prior to 1989, the ATV industry experienced some reduced demand arising from
publicity surrounding safety-related and environmental concerns. However,
management believes that this market has stabilized since 1989 and has sustained
consistent growth.
For the year ended December 31, 1998, North American sales of ATVs and
related PG&A accounted for approximately 57% of Polaris' sales.
SNOWMOBILES. Polaris produces a full line of snowmobiles, consisting of
thirty-three models, ranging from utility and economy models to performance and
competition models, with 1999 suggested United States retail prices ranging from
approximately $3,000 to $8,500. Polaris snowmobiles are sold principally in the
United States, Canada and Europe. Polaris believes it is the worldwide market
share leader.
Polaris believes that the Polaris snowmobile has a long-standing reputation
for quality, dependability and performance. Polaris believes that it and its
predecessors were the first to develop several features for commercial use in
snowmobiles, including independent front suspension, variable transmission,
hydraulic disc brakes, liquid cooled engines and brakes and a three cylinder
engine. Polaris also markets a full line of snowmobile accessories, such as
luggage, covers, tow hitches, hand warmers, specialized instrumentation, reverse
gear, electric start, special traction products, cargo racks, oils, lubricants,
and parts.
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For the year ended December 31, 1998, North American sales of snowmobiles
and related PG&A accounted for approximately 32% of Polaris' sales.
MOTORCYCLES. In 1998, Polaris began manufacturing an American-made V-twin
cruiser motorcycle, the "Victory V92C." Design and assembly of the engine is in
Polaris' Osceola, Wisconsin facility and final assembly is at Polaris' Spirit
Lake, Iowa facility. The two facilities provide sufficient capacity to handle
the first few years production of Victory motorcycles. The 1998 Victory V92C
motorcycle suggested retail price is $12,995.
For the year ended December 31, 1998, sales of Victory motorcycles and
related PG&A accounted for approximately 1% of Polaris' sales.
PERSONAL WATERCRAFT. In 1992, Polaris introduced the SL650 personal
watercraft, Polaris' first entry into this product category. Polaris' 1999 line
of PWC consists of six models across the touring, performance and racing
segments and includes the industry's first four passenger PWC. Management
believes that its models had the industry's first three-cylinder engines
developed specifically for PWC. The 1999 suggested retail prices for Polaris'
PWC range from approximately $5,900 to $9,500.
For the year ended December 31, 1998, North American sales of PWC and
related PG&A accounted for approximately 4% of Polaris' sales.
INTERNATIONAL. Polaris sales to customers outside of North America include
snowmobiles, ATVs, PWC, and related PG&A. Polaris currently markets its products
through 44 distributors in 116 countries. This is a growth opportunity for
Polaris in the future from a market share perspective for existing product lines
as well as the planned introduction of Victory motorcycles to the international
market within a few years.
For the year ended December 31, 1998, International sales accounted for 6%
of Polaris' sales.
PARTS, GARMENTS AND ACCESSORIES. Polaris produces or supplies a variety of
replacement parts and accessories for its snowmobiles, ATVs, motorcycles and
PWC. Polaris also markets a full line of recreational clothing, which includes
suits, helmets, gloves, boots, hats, sweaters and jackets for its snowmobile,
ATV, motorcycle and PWC lines. The clothing is designed to Polaris'
specifications, purchased from independent vendors and sold by Polaris through
its dealers and distributors under the Polaris brand name. Polaris also markets
replacement parts and accessories.
MANUFACTURING OPERATIONS
Polaris' products are assembled at its original manufacturing facility in
Roseau, Minnesota and since 1994 at its facility in Spirit Lake, Iowa. Since
snowmobiles, ATVs, motorcycles and PWC incorporate similar technology,
substantially the same equipment and personnel are employed in their production.
Polaris emphasizes vertical integration in its manufacturing process, which
includes machining, stamping, welding, clutch assembly and balancing, painting,
cutting and sewing, and manufacture of foam seats. Fuel tanks, hulls, tracks,
tires and instruments, and certain other component parts are purchased from
third party vendors. Polaris manufactures a number of other components for its
snowmobiles, ATVs, motorcycles, and PWC. Raw materials or standard parts are
readily available from multiple sources for the components manufactured by
Polaris. Polaris' work force is familiar with the use, operation and maintenance
of the product, since many employees' own snowmobiles, ATVs, motorcycles and
PWC. In 1991, Polaris acquired a manufacturing facility in Osceola, Wisconsin to
manufacture component parts previously produced by third party suppliers. In
1998, the Victory motorcycle began production at Polaris' Spirit Lake, Iowa
facility. The production includes welding, finish painting, and final assembly.
Certain operations, including engine assembly, seat manufacturing, and the
bending of frame tubes are conducted at the Osceola, Wisconsin facility.
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In 1998, Polaris completed construction of a 58,000 square foot plastic
injection molding facility adjacent to the Roseau, Minnesota facility. This is a
vertical integration project for Polaris in the manufacture of snowmobile hoods
and certain large plastic molded parts on ATVs.
Pursuant to informal agreements between Polaris and Fuji Heavy Industries
Ltd. ("Fuji"), Fuji had been the exclusive manufacturer of the Polaris two-cycle
snowmobile engines since 1968. Fuji has manufactured engines for Polaris' ATV
products since their introduction in the spring of 1985 and also supplies
engines for Polaris' PWC products. Fuji develops such engines to the specific
requirements of Polaris. Polaris believes its relationship with Fuji to be
excellent. If, however, Fuji terminated its informal relationship, interruption
in the supply of engines would adversely affect Polaris' production pending the
continued development of substitute supply arrangements.
Since 1995, Polaris has been designing and producing its own engines for
selected models of PWC, snowmobiles and, most recently, Victory motorcycles.
Polaris purchased a 90,000 square foot building adjacent to the Osceola facility
to house the manufacturing of these Polaris designed and built domestic engines.
In addition, in 1995, Polaris entered into an agreement with Fuji to form Robin
Manufacturing, U.S.A. ("Robin"). Under the agreement, Polaris made an investment
for a 40% ownership position in Robin, which builds engines in the United States
for recreational and industrial products. Potential advantages to Polaris of
these additional sources of engines include reduced foreign exchange risk, lower
shipping costs and less dependence in the future on a single supplier for
engines.
Polaris anticipates no significant difficulties in obtaining substitute
supply arrangements for other raw materials or components for which it relies
upon limited sources of supply.
A contract carrier ships Polaris' products from its manufacturing
facilities.
PRODUCTION SCHEDULING
Polaris products are produced and delivered throughout the year. Delivery of
snowmobiles to consumers begins in autumn and continues during the winter
season. Orders for each year's production of snowmobiles are placed in the
spring. Orders for ATVs are placed twice a year, spring and fall, and orders for
PWC are placed in autumn after meetings with dealers and distributors. Units are
built to order each year. In addition, non-refundable deposits made by consumers
to dealers in the spring for snowmobiles assist in production planning. The
budgeted volume of units to be produced each year is substantially sold to
dealers and distributors prior to production. Retail sales activity at the
dealer level is monitored by Polaris for each of snowmobiles, ATVs, motorcycles
and PWC. In 1998, motorcycle production began based on orders placed after the
initial Victory dealer meeting held in January 1998. Currently, Polaris has
orders for all units being manufactured. In the future, orders for motorcycles
will be placed in the autumn after meeting with Victory dealers.
Manufacture of snowmobiles commences in the spring and continues through
late autumn or early winter. Polaris manufactures PWC during the fall, winter
and spring months. Since 1993, Polaris has had the ability to manufacture ATVs
year round. Motorcycle manufacturing began in July 1998 and will continue year
round.
SALES AND MARKETING
Polaris products are sold through a network of over 2,000 dealers in North
America and 44 distributors in 116 countries.
With the exception of Illinois, upper Michigan and eastern Wisconsin, where
Polaris sells its snowmobiles through an independent distributor, Polaris sells
its snowmobiles directly to dealers in the snowbelt regions of the United States
and Canada. Snowmobile sales in Europe and other offshore markets are handled
through independent distributors. See Note 1 of Notes to Consolidated Financial
Statements for discussion of international operations.
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Many dealers and distributors of Polaris snowmobiles also distribute
Polaris' ATVs and PWC. At the end of 1998, approximately 700 dealerships were
located in areas of the United States where snowmobiles are not regularly sold.
Unlike its primary competitors, which market their ATV products principally
through their affiliated motorcycle dealers, Polaris also sells its ATVs and PWC
through lawn and garden, boat and marine, and farm implement dealers.
Victory motorcycles are distributed directly through authorized Victory
dealers. Polaris has a high quality dealer network in North America for its
other product lines from which most of the current 250 Victory dealers were
selected. Polaris expects to develop a Victory dealer network of approximately
500 to 600 dealers over the next three to four years.
Dealers and distributors sell Polaris' products under contractual
arrangements pursuant to which the dealer or distributor is authorized to market
specified products, required to carry certain replacement parts and perform
certain warranty and other services. Changes in dealers and distributors take
place from time to time. Polaris believes that a sufficient number of qualified
dealers and distributors exists in all areas to permit orderly transition
whenever necessary.
In 1996, Polaris entered into a partnership agreement with Transamerica
Distribution Finance ("TDF") to form Polaris Acceptance. Polaris Acceptance
provides floor plan financing to Polaris' dealers and distributors and beginning
in February 1999 provides other financial services to dealers, distributors and
retail customers such as retail financing and extended service contracts. Under
the partnership agreement, Polaris has a 50% equity interest in Polaris
Acceptance and guarantees 50% of the outstanding indebtedness of Polaris
Acceptance under a credit agreement between Polaris Acceptance and TDF. At
December 31, 1998, Polaris' contingent liability with respect to the guarantee
was approximately $139.0 million.
Polaris has arrangements with Polaris Acceptance, TDF, and Deutsche
Financial Services Canada Corporation, a Deutsche Bank Company, to provide floor
plan financing for its dealers and distributors. Substantially all of Polaris'
sales of snowmobiles, ATVs, PWC and motorcycles are financed under arrangements
in which Polaris is paid within a few days of shipment of its product. Polaris
participates in the cost of dealer and distributor financing and is required to
repurchase products from the finance companies under certain circumstances and
subject to certain limitations. Polaris has not historically recorded a sales
return allowance because it has not been required to repurchase a significant
number of units. However, there can be no assurance that this will continue to
be the case. If necessary, Polaris will record a sales return allowance at the
time of sale should management anticipate material repurchases of units financed
through the finance companies. See Notes 1 and 3 of Notes to Consolidated
Financial Statements.
Polaris has historically not directly financed the purchase of its products
by consumers. In February 1999, Polaris made consumer financing available
through its Polaris Acceptance joint venture. Polaris will not guarantee the
debt or be required to repurchase products related to the retail financing
programs but will share in the losses of the program through its 50% equity
interest in Polaris Acceptance.
Polaris' marketing activities are designed primarily to promote and
communicate directly with consumers and secondarily to assist the selling and
marketing efforts of its dealers and distributors. From time to time, Polaris
makes available discount or rebate programs or other incentives for its dealers
and distributors to remain price competitive in order to accelerate reduction of
retail inventories. Polaris advertises its products directly using print
advertising in the industry press and in user group publications, on billboards,
and, less extensively, on television and radio. Polaris also provides media
advertising and partially underwrites dealer and distributor media advertising
to a degree and on terms which vary by product and from year to year. Polaris
also co-sponsors a car on the NASCAR auto racing circuit. Each season, Polaris
produces a promotional film for each of its products, which is available to
dealers for use in the showroom or at special promotions. Polaris also provides
product brochures, leaflets, posters, dealer signs, and miscellaneous other
promotional items for use by dealers.
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ENGINEERING, RESEARCH AND DEVELOPMENT, AND NEW PRODUCT INTRODUCTION
Polaris employs approximately 325 persons who are engaged in the development
and testing of existing products and research and development of new products
and improved production techniques. Polaris believes that Polaris and its
predecessors were the first to develop, for commercial use, independent front
end suspension for snowmobiles, long travel rear suspension for snowmobiles,
direct drive of the snowmobile track, the use of liquid cooling in snowmobile
engines and brakes, the use of hydraulic brakes in snowmobiles, the three
cylinder engine in snowmobiles and PWC, the adaptation of the MacPherson strut
front suspension, "on demand" four-wheel drive systems and the Concentric Drive
System for use in ATVs, the application of a forced air cooled variable power
transmission system to ATVs, and the diesel fuel powered ATV.
Polaris utilizes internal combustion engine testing facilities to design and
optimize engine configurations for its products. Polaris utilizes specialized
facilities for matching engine, exhaust system and clutch performance parameters
in its products to achieve desired fuel consumption, power output, noise level
and other objectives. Polaris' engineering department is equipped to make small
quantities of new product prototypes for testing by Polaris' testing teams and
for the planning of manufacturing procedures. In addition, Polaris maintains
numerous test facilities where each of the products is extensively tested under
actual use conditions.
Polaris expended for research and development approximately $28.4 million
for 1998, $26.7 million for 1997, and $28.3 million for 1996, which amounts were
included as a component of operating expenses in the period incurred.
COMPETITION
The snowmobile, ATV, motorcycle and PWC markets in the United States and
Canada are highly competitive. Competition in such markets is based upon a
number of factors, including price, quality, reliability, styling, product
features and warranties. At the dealer level, competition is based on a number
of factors including sales and marketing support programs (such as financing and
cooperative advertising). Certain of Polaris' competitors are more diversified
and have financial and marketing resources which are substantially greater than
those of Polaris.
Polaris products are competitively priced and management believes Polaris'
sales and marketing support programs for dealers are comparable to those
provided by its competitors. Polaris' products compete with many other
recreational products for the discretionary spending of consumers, and, to a
lesser extent, with other vehicles designed for utility applications.
PRODUCT SAFETY AND REGULATION
Snowmobiles, ATVs, motorcycles and PWC are motorized machines, which may be
operated at high speeds and in a careless or reckless manner. Accidents
involving property damage, personal injuries and deaths occur in the use of
snowmobiles, ATVs, motorcycles and PWC.
Laws and regulations have been promulgated or are under consideration in a
number of states relating to the use or manner of use of Polaris products. State
approved trails and recreational areas for snowmobile and ATV use have been
developed in response to environmental and safety concerns. Some states may pass
legislation and local ordinances or regulations have been and may from time to
time be considered which restrict the use of PWC to specified hours and
locations. Polaris is unable to predict the outcome of such actions or the
possible effect on its PWC business. Polaris has supported laws and regulations
pertaining to safety and noise abatement and believes that its products would be
no more adversely affected than those of its competitors by the adoption of any
pending laws or regulations. Polaris continues to monitor these activities
together with the industry associations and supports balanced and appropriate
programs that educate the customer on safe use of the product and protect the
environment.
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In September 1986, the staff of the Consumer Products Safety Commission
("CPSC") ATV Task Force issued a report on regulatory options for ATVs with
recommendations for ATV marketing activities and warning labels. In February
1987, the CPSC formally requested that the Justice Department initiate an
enforcement action against the ATV industry seeking a voluntary recall of all
three-wheel ATVs and four-wheel ATVs sold with the intention that they be used
by children under 16, as well as a requirement that ATV purchasers receive
"hands-on" training.
Except for 1,700 three-wheel models initially produced, Polaris manufactures
only four-wheel ATVs and six-wheel off-road vehicle products. Polaris has always
placed warning labels on its ATVs stating that they are designed for use only by
persons of a specified minimum age, that operators should always wear approved
safety helmets and that riders should complete proper training prior to
operating an ATV.
On December 30, 1987, Polaris reached an agreement with the CPSC regarding
ATV safety, which was confirmed in a ten-year Consent Decree in April 1988. In
April 1998, the Consent Decree with the CPSC expired. Polaris has filed with the
CPSC a Voluntary Action Plan under which Polaris undertook to continue various
activities including age recommendations, dealer monitoring for ascertaining
dealer compliance with safety obligations including age recommendations and
training requirements, warning labels, point of purchase materials, hands on
training and an information education effort. Polaris conditions its ATV
warranties described below under "Warranty" on completion of the mandatory
"hands on" consumer training program. In December 1998, the CPSC issued a
resolution commending Polaris and certain other industry members for their ATV
Action Plans
The Company does not believe that the Polaris Voluntary Action Plan will
have a material adverse effect on Polaris. Nevertheless, there can be no
assurance that future recommendations or regulatory actions by the CPSC, the
Justice Department or individual states would not have an adverse effect on the
Company. Polaris will continue to attempt to assure that its dealers are in
compliance with their safety obligations. Polaris has notified its dealers that
it will terminate or not renew any dealer it determines has violated such safety
obligations. To date, it has terminated or not renewed at least eight dealers
for such reasons.
In May 1998, the National Transportation Safety Board ("NTSB") issued a
report regarding PWC safety and made various recommendations regarding PWC.
Prior to May 1998, Polaris was working and continues to work with the Coast
Guard to develop standards and to evaluate PWC safety matters, including the
NTSB recommendations. Polaris PWC have always complied with industry standards
relevant to PWCs.
California has adopted regulations setting maximum emission standards for
ATVs and the federal Environmental Protection Agency ("EPA") has indicated its
intent to establish emission standards for non-road engines, including ATVs and
snowmobiles. The EPA already has required PWC manufacturers to gradually reduce
their emission by 75% between 1999 and 2006. For the State of California, the
California Air Resources Board has accelerated this scheduled emission reduction
by requiring that manufacturers meet the EPA 2006 level in 2001 and required
that manufacturers meet further emission reductions by 2004 and 2008.
Conventional two-stroke cycle engines cannot meet these more restrictive
emission requirements.
In 1997, Polaris signed an agreement with Outboard Marine Corporation
("OMC") licensing the Ficht fuel injection technology. During 1998, Polaris
introduced the new Genesis PWC model utilizing the Ficht technology which
complies with the EPA 2006 emission requirements. This technology may be used in
other Polaris vehicles to meet emission standards in the future, particularly in
Polaris vehicles with two-cycle engines. Polaris is unable to predict the
ultimate impact of the adopted or proposed regulations on Polaris and its
operations.
Victory motorcycles are subject to federal and state emissions, vehicle
safety and other standards. Polaris believes that its motorcycles comply fully
with all such applicable standards and related regulations.
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PRODUCT LIABILITY
Polaris' product liability insurance limits and coverages have been
adversely affected by the general decline in the availability of liability
insurance. As a result of the high cost of premiums, and in view of the
historically small amount of claims paid by Polaris, Polaris was self-insured
from June 1985 to June 1996. In 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.
Product liability claims are made against Polaris from time to time. Since
its inception in 1981 through December 31, 1998, Polaris has paid an aggregate
of approximately $4.2 million in product liability claims and accrued $7.4
million at December 31, 1998 for the defense and possible payment of pending
claims. Polaris believes such accruals are adequate. Polaris does not believe
that the outcome of any pending product liability litigation will have a
material adverse effect on the operations of Polaris. However, no assurance can
be given that its historical claims record, which did not include ATVs prior to
1985, PWC prior to 1992, or motorcycles prior to 1998, will not change or that
material product liability claims against Polaris will not be made in the
future. Adverse determination of material product liability claims made against
Polaris would have a material adverse effect on Polaris' financial condition.
See Note 8 of Notes to Consolidated Financial Statements.
WARRANTY
Polaris provides a limited warranty for ATVs for a period of six months and
for its snowmobiles, motorcycles and PWC for a period of one year. Although
Polaris employs quality control procedures, a product is sometimes distributed
which needs repair or replacement. Historically, product recalls have been
administered through Polaris' dealers and distributors and have not had a
material effect on Polaris' business.
EFFECTS OF WEATHER
Lack of snowfall in any year in any particular region of the United States
or Canada may adversely affect snowmobile retail sales in that region. Polaris
seeks to minimize this potential effect by stressing pre-season sales (see
"Production Scheduling") and shifting dealer inventories from one location to
another. However, there is no assurance that weather conditions would not have a
material effect on Polaris' sales of snowmobiles, ATVs, motorcycles or PWC.
EMPLOYMENT
Due to the seasonality of the Polaris business and certain changes in
production cycles, total employment levels vary throughout the year. Despite
such variations in employment levels, employee turnover has not been high.
During 1998, Polaris employed an average of approximately 3,050 persons.
Approximately 900 of its employees are salaried. Polaris considers its relations
with its personnel to be excellent. Polaris' employees have not been represented
by a union since July 1982.
YEAR 2000 COMPLIANCE
During 1998, Polaris has continued its company-wide program to prepare the
Company's computer systems for Year 2000 compliance. In order for a computer
system to by Year 2000 compliant, its time sensitive software must recognize a
date using "00" as the year 2000 rather than 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 Year 2000 compliant by mid-1999. As of December 31,
1998, approximately 90% of the programming requirements for the
8
<PAGE>
Company's manufacturing systems were complete and 70% of the programming
requirements for the sales, distribution and finance systems had been completed.
Manufacturing mission critical applications are all currently in the test phase.
The remaining systems are being tested when the programming modifications are
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. Polaris has
received responses from approximately 75% of these suppliers and is in the
process of tabulating the results.
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 $1.5 million of which approximately $0.8 million
has been incurred to date.
Polaris has begun 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 Polaris 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 customer orders.
Polaris is in the process of developing contingency plans to protect the
business from Year 2000 related interruptions and anticipates their completion
by the third quarter of 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.
ITEM 2. PROPERTIES
Polaris owns its principal manufacturing facility in Roseau, Minnesota. The
facility consists of approximately 509,000 square feet of manufacturing space
located on approximately 100 acres. In 1991, Polaris acquired a fabricating
facility in order to bring more component parts manufacturing in-house. This
facility consists of a 190,000 square foot plant situated on 38 acres and is
located in Osceola, Wisconsin. In August 1994, Polaris signed a one-year lease
agreement for a 223,000 square foot assembly facility located on 24 acres of
land in Spirit Lake, Iowa. Polaris exercised its option to purchase the facility
during 1995. Polaris currently uses the facility to assemble all of its PWC
product line, certain ATV models and, beginning in 1998, its motorcycle product
line. In August 1995, Polaris purchased a 90,000 square foot building adjacent
to the Osceola facility to house the manufacturing of Polaris designed and built
domestic engines. In 1998, Polaris completed construction and began operating a
58,000 square foot plastic injection molding facility adjacent to the Roseau,
Minnesota facility. This is a vertical integration project for Polaris in the
manufacture of snowmobile hoods and certain large plastic molded parts on ATVs.
Polaris makes ongoing capital investments in its facilities. These investments
have increased production capacity for snowmobiles, ATVs, motorcycles and PWC.
The Company believes that Polaris' manufacturing facilities are adequate in size
and suitability for its present manufacturing needs.
In 1997, Polaris completed construction of a 250,000 square foot state of
the art parts, garments and accessories distribution center on 50 acres in
Vermillion, South Dakota.
Polaris owns all tooling and machinery (including heavy presses,
conventional and computer controlled welding facilities for steel and aluminum,
assembly lines, paint lines, and sewing lines) used in the manufacture of its
products. Although Polaris holds numerous patents and uses various registered
9
<PAGE>
trademarks and names, it believes that the loss of any of them would not have a
material effect on its business.
Polaris leases 92,000 square feet of headquarters and warehouse space in
Minneapolis, Minnesota pursuant to a lease that will terminate in 2002. Polaris
also leases an additional 24,000 square feet of office space in Minneapolis,
Minnesota, 42,000 square feet of office and warehouse space in Winnipeg,
Manitoba, and 10,000 square feet of warehouse space in Spirit Lake, Iowa.
Polaris does not anticipate any difficulty in securing alternate facilities on
competitive terms, if necessary, upon the termination of any of its leases.
ITEM 3. LEGAL PROCEEDINGS
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
the entry of judgement against Polaris for $34.0 million (before pre-and
post-judgment 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 year ended
December 31, 1998. The related payment to IRS was made during the fourth quarter
in connection with entering into the confidential settlement agreement. Polaris
no longer uses any of the technology in dispute.
Polaris pro forma results adjusted to exclude the provision for litigation
loss are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
Income before taxes................................................... $ 109,771 $ 102,162
Provision for income taxes............................................ 39,147 36,779
---------- ----------
Net Income............................................................ $ 70,624 $ 65,383
Diluted Net Income Per Share.......................................... $ 2.72 $ 2.45
</TABLE>
In addition to the aforementioned matter, Polaris is involved in a number of
legal proceedings, none of which is expected to have a material effect on the
financial condition or the business of Polaris.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
10
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names of the executive officers of the Company as of
March 3, 1999, their ages, titles, the year first appointed as an executive
officer of the Company and employment for the past five years:
<TABLE>
<CAPTION>
NAME AGE TITLE
- -------------------------- --- ------------------------------------------------------
<S> <C> <C>
W. Hall Wendel, Jr. 56 Chairman and Chief Executive Officer
Thomas C. Tiller 37 President and Chief Operating Officer
Charles A. Baxter 51 Vice President--Engineering and General Manager
Engines
Jeffrey A. Bjorkman 39 Vice President--Manufacturing
John B. Corness 44 Vice President--Human Resources
Michael W. Malone 40 Vice President--Finance, Chief Financial Officer and
Secretary
Thomas H. Ruschhaupt 50 Vice President--Sales and Services
Ed Skomoroh 61 Vice President--Marketing
</TABLE>
Executive officers of the Company are elected at the discretion of the Board
of Directors with no fixed term. There are no family relationships between or
among any of the executive officers or directors of the Company.
Mr. Wendel has served as Chairman and Chief Executive Officer since the
Company's formation in 1994. Mr. Wendel was the Chief Executive Officer of
Polaris Industries Capital Corporation ("PICC"), which was the managing general
partner of Polaris Industries Associates L.P., which was the operating general
partner of Polaris Industries L.P. from 1987 to December 1994. From 1981 to
1987, Mr. Wendel was Chief Executive Officer of a predecessor of Polaris, which
was formed to purchase the snowmobile assets of the Polaris E-Z-GO Division of
Textron Inc. Before that time, Mr. Wendel was President of the Polaris E-Z-GO
Division for two years and prior thereto, held marketing positions as Vice
President of Sales and Marketing and National Sales Manager since 1974.
Mr. Tiller was named President and Chief Operating Officer of the Company in
July 1998. Prior to joining Polaris, Mr. Tiller was employed by General Electric
Company in various management positions for fifteen years.
Mr. Baxter has been Vice President--Engineering of the Company since
December 1994 and held that position with PICC or its predecessor since 1981.
Prior thereto, since 1970, Mr. Baxter was employed as Director of Engineering of
the Polaris E-Z-GO Division of Textron.
Mr. Bjorkman has been Vice President--Manufacturing of the Company since
January 1995, and prior thereto held positions of Plant Manager and
Manufacturing Engineering Manager since July 1990. Prior to joining Polaris, Mr.
Bjorkman was employed by General Motors Corporation in various management
positions for nine years.
Mr. Corness has been Vice President--Human Resources of the Company since
January 1999. Prior to joining Polaris, Mr. Corness was employed by General
Electric Company in various human resource positions for nine years. Before that
time, Mr. Corness held various human resource positions with Maple Leaf Foods
and Transalta Utilities.
Mr. Malone has been Vice President--Finance, Chief Financial Officer and
Secretary of the Company since January 1997. Mr. Malone was Vice President and
Treasurer of the Company from December 1994 to January 1997 and was Chief
Financial Officer and Treasurer of PICC from January 1993 to December 1994.
Prior thereto and since 1986, he was Assistant Treasurer of PICC or its
predecessor. Mr. Malone joined Polaris in 1984 after four years with Arthur
Andersen LLP.
11
<PAGE>
Mr. Ruschhaupt has been Vice President--Sales and Service of the Company
since March 1998. Prior to joining Polaris, Mr. Ruschhaupt was employed by
Goodyear Tire and Rubber Corporation in various management positions for twenty
years.
Mr. Skomoroh has been Vice President--Marketing of the Company since
February 1998. Mr. Skomoroh was Vice President--Sales and Marketing of the
Company from December 1994 and held that position with PICC since October 1988.
Prior thereto he was Vice President, Polaris Canada and President, Secretary and
Director of Polaris Industries Inc., an Ontario corporation and a wholly owned
subsidiary of Polaris Industries Partners L.P. Mr. Skomoroh joined Polaris in
1982 as General Manager, Canada, and was prior thereto the General Manager of
the Canadian operations of Arctic Enterprises, Inc.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the caption "Investor Information" included in the
Company's 1998 Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Data" included in the
Company's 1998 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis" included in the Company's 1998 Annual
Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information under the caption "Management's Discussion and
Analysis--Inflation and Exchange Rates" and Note 1 to the financial statements
of the Registrant, included in the Company's 1998 Annual Report, are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Registrant, included in the
Company's 1998 Annual Report, are incorporated herein by reference:
Consolidated Balance Sheets December 31, 1998 and 1997.
Consolidated Statements of Operations Years Ended December 31, 1998, 1997, and
1996.
Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998,
1997, and 1996.
Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997, and
1996.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant
The information under the caption "Election of Directors Information
Concerning Nominees and Directors" in the Company's 1999 Proxy Statement is
incorporated herein by reference.
(b) Executive Officers of the Registrant
Information concerning Executive Officers of the Company is included in this
Report after Item 4, under "Executive Officers of the Registrant."
(c) Compliance with Section 16(a) of the Exchange Act
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1999 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Information" and "Election of Directors--Directors' Remuneration" in the
Company's 1999 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's 1999 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions" in the Company's 1999 Proxy Statement is incorporated herein by
reference.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements
Information concerning financial statements of Polaris Industries Inc.
included in the Company's 1998 Annual Report are incorporated by reference
to this Report under Item 8 "Financial Statements and Supplementary Data".
(2) Financial Statement Schedules
All supplemental financial statement schedules have been omitted because
they are not applicable or are not required or the information required to
be set forth therein is included in the Consolidated Financial Statements or
notes thereto.
(3) Exhibits
The Exhibits to this Report are listed in the Exhibit Index on page E-1.
A copy of any of these Exhibits will be furnished at a reasonable cost
to any person who was a shareholder of the Company as of March 22, 1999,
upon receipt from any such person of a written request for any such exhibit.
Such request should be sent to Polaris Industries Inc., 1225 Highway 169
North, Minneapolis, Minnesota 55441, Attention: Investor Relations.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal
year ended December 31, 1998.
(c) Exhibits
Included in Item 14(a)(3) above.
14
<PAGE>
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, in the City of
Minneapolis, State of Minnesota on March 29, 1999.
<TABLE>
<S> <C> <C>
POLARIS INDUSTRIES INC.
By: /s/ W. HALL WENDEL, JR.
-----------------------------------------
W. Hall Wendel, Jr.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
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 in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ -------------------------- --------------
<S> <C> <C> <C>
/s/ W. HALL WENDEL, JR. Chief Executive Officer
- ------------------------------------ and Director (Principal March 29, 1999
W. Hall Wendel, Jr. Executive Officer)
Vice President Finance,
/s/ MICHAEL W. MALONE Chief Financial Officer
- ------------------------------------ and Secretary (Principal March 29, 1999
Michael W. Malone Financial and Accounting
Officer)
*
- ------------------------------------ Director March 29, 1999
Andris A. Baltins
*
- ------------------------------------ Director March 29, 1999
Raymond J. Biggs
*
- ------------------------------------ Director March 29, 1999
Beverly F. Dolan
*
- ------------------------------------ Director March 29, 1999
Robert S. Moe
*
- ------------------------------------ Director March 29, 1999
Gregory R. Palen
*
- ------------------------------------ Director March 29, 1999
Stephen G. Shank
*
- ------------------------------------ Director March 29, 1999
Bruce Thomson
*
- ------------------------------------ Director March 29, 1999
Thomas C. Tiller
*By: /s/ W. HALL WENDEL, JR. March 29, 1999
------------------------------
(W. Hall Wendel, Jr.
Attorney-in-Fact)
</TABLE>
- ------------------------
* W. Hall Wendel, Jr., pursuant to Powers of Attorney executed by each of the
officers and directors listed above whose name is marked by an "*" and filed
as an exhibit hereto, by signing his name hereto does hereby sign and execute
this Report of Polaris Industries Inc. on behalf of each of such officers and
directors in the capacities in which the names of each appear above.
15
<PAGE>
POLARIS INDUSTRIES INC.
EXHIBIT INDEX TO ANNUAL REPORT ON
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------
<C> <S>
3.(a) Articles of Incorporation of Polaris Industries Inc. ("the Company"),
as amended, incorporated by reference to Exhibit 3(a) to the Company's
Registration Statement on Form S-4 (No. 33-55769) (the "Form S-4").
(b) Bylaws of the Company, incorporated by reference to Exhibit 3(b) to
the Form S-4.
4. Specimen Stock Certificate of the Company, incorporated by reference
to Exhibit 4 to the Form S-4.
10.(a) Agreement for Deferred Compensation and Disability Income and
Amendment No. 1 thereto with W. Hall Wendel, Jr. incorporated by
reference to Exhibit 10 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(b) [RESERVED]
(c) Retirement Savings Plan, incorporated by reference to Exhibit 10(g) to
the Form S-1.
(d) Polaris Industries Inc. Employee Stock Ownership Plan effective
January 1, 1997 incorporated by reference to Exhibit 10(a) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
(e) Fourth Amendment to Credit Agreement by and between the Company and
First Bank incorporated by reference to Exhibit 10(e) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
(f) Management Bonus Plan, incorporated by reference to Exhibit 10(j) to
the Form S-1.
(g) Polaris Industries Inc. 1995 Stock Option Plan, incorporated by
reference to the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on June 12, 1995 (No.
33-60157).
(h) Polaris Industries Inc. Deferred Compensation Plan for Directors
incorporated by reference to Exhibit 10(h) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(i) Joint Venture Agreement between the Company and Transamerica
Commercial Finance Corporation, now known as Transamerica Distribution
Finance ("TDF") dated February 7, 1996 incorporated by reference to
Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(j) Manufacturer's Repurchase Agreement between the Company and Polaris
Acceptance dated February 7, 1996 incorporated by reference to Exhibit
10(j) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
(k) Credit Agreement by and between the Company and First Bank National
Association and Bank of America Illinois and First Union National Bank
of North Carolina, dated May 8, 1995 (the "Credit Agreement")
incorporated by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q dated May 15, 1995.
(l) Plymouth, Minnesota, Executive Office Lease, incorporated by reference
to Exhibit 10(m) to the Form S-1 ("the Executive Office Lease").
(m) Shareholder Agreement with Fuji Heavy Industries LTD., incorporated by
reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------
<C> <S>
(n) Registration Rights Agreement between and among the Company, Victor K.
Atkins, EIP I Inc., EIP Holdings, Inc. and LB I Group Inc.,
incorporated by reference to Exhibit 10(1) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
(o) Amended and Restated Polaris Industries Inc. 1996 Restricted Stock
Plan, incorporated by reference to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on June 7, 1996 (No. 333-05463).
(p) Polaris Industries Inc. Employee Stock Purchase Plan, incorporated by
reference to the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on February 3, 1997 (No.
333-21007).
(q) Form of Change of Control Agreement entered into with executive
officers of Company incorporated by reference to Exhibit 10(q) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
(r) Amendment to Executive Office Lease dated November 22, 1996
incorporated by reference to Exhibit 10(r) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
(s) Employment Agreement between the Company and Thomas Tiller
incorporated by reference to Exhibit 10(s) to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1998.
(t) Fifth Amendment to Credit Agreement by and between the Company and
U.S. Bank National Association et al. dated August 24, 1998.
(u) Sixth Amendment to Credit Agreement by and between the Company and
U.S. Bank National Association et al. dated December 7, 1998.
13. Portions of the Annual Report to Security Holders for the Year Ended
December 31, 1998 included pursuant to Note 2 to General Instruction
G.
21. Subsidiaries of Registrant
23. Consent of Arthur Andersen LLP
24. Power of Attorney
27. Financial Data Schedule
</TABLE>
17
<PAGE>
FIFTH AMENDMENT TO
CREDIT AGREEMENT
This Fifth Amendment to Credit Agreement, dated as of August 24, 1998
("Fifth Amendment"), is made by and between POLARIS INDUSTRIES INC., a
Minnesota corporation (the "Borrower"); U.S. BANK NATIONAL ASSOCIATION, formerly
known as FIRST BANK NATIONAL ASSOCIATION, BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, formerly known as BANK OF AMERICA ILLINOIS and FIRST UNION
NATIONAL BANK, formerly known as FIRST UNION NATIONAL BANK OF NORTH CAROLINA
(collectively, the "Banks"); and U.S. BANK NATIONAL ASSOCIATION, as
administrative agent for the Banks (the "Administrative Agent").
WHEREAS, the Borrower, the Banks and the Administrative Agent have entered
into that certain Credit Agreement dated as of May 8, 1995, as amended by First
Amendment to Credit Agreement dated as of November 15, 1995, Second Amendment
to Credit Agreement dated as of February 13, 1996, Third Amendment to Credit
Agreement dated as of September 30, 1996 and Fourth Amendment to Credit
Agreement dated as of March 31, 1997 (as so amended, the "Credit Agreement").
WHEREAS, the Borrower has requested the Banks and the Administrative Agent
to modify certain provisions of the Credit Agreement, and the Banks and the
Administrative Agent are willing to do so on the terms and conditions set forth
herein.
NOW THEREFORE, in consideration of the premises and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto covenant and agree to be bound as follows:
Section 1. CAPITALIZED TERMS. All capitalized terms used herein and
not otherwise defined herein shall have the meanings assigned to them in the
Credit Agreement.
Section 2. AMENDMENTS.
(a) The definitions of "EBIT", "EBITDA", "Revolving Commitment
Amount" and "Revolving Note" in Section 1.1 of the Credit Agreement are amended
to read in their entirety as follows:
"EBIT": For any period of determination, the consolidated net income
of the Borrower before deductions for income taxes and Interest Expense (and for
fiscal year 1998, before deduction for litigation loss in connection with the
litigation
<PAGE>
described in paragraph 1 of Exhibit 4.6 hereto), but after deductions for
depreciation and amortization, all as determined in accordance with GAAP.
"EBITDA": For any period of determination, the consolidated net
income of the Borrower before deductions for income taxes, Interest Expense,
depreciation and amortization (and for fiscal year 1998, before deduction for
litigation loss in connection with the litigation described in paragraph 1 of
Exhibit 4.6 hereto), all as determined in accordance with GAAP.
"REVOLVING COMMITMENT AMOUNT": With respect to a Bank:
(a) during the period commencing August 24, 1998 and ending on and
including March 30, 1999, the amount set opposite such Bank's name in the
table immediately below or as specified in the most recent Assignment
Agreement to which such Bank is a party, but as the same may be from time
to time reduced pursuant to Section 2.14:
<TABLE>
<CAPTION>
BANK REVOLVING COMMITMENT AMOUNT PRIOR TO
MARCH 31, 1999
- ------------------------------------------------------------------------------
<S> <C>
U.S. Bank National Association $63,000,000
Bank of America $56,000,000
First Union National Bank $56,000,000
</TABLE>
(b) during the period beginning on March 31, 1999 and ending on March
30, 2000, the amount set opposite such Bank's name in the table immediately
below or as specified in the most recent Assignment Agreement to which such
Bank is a party, but as the same may be from time to time reduced pursuant
to Section 2.14:
<TABLE>
<CAPTION>
BANK REVOLVING COMMITMENT AMOUNT ON AND
AFTER MARCH 31, 1999 THRU MARCH 30,
2000
- ----------------------------------------------------------------------------
<S> <C>
U.S. Bank National Association $54,000,000
Bank of America $48,000,000
First Union National Bank $48,000,000
</TABLE>
(c) during the period beginning on March 31, 2000 and ending on the
Revolving Commitment Ending Date, the amount set opposite such Bank's
-2-
<PAGE>
name in the table immediately below or as specified in the most recent
Assignment Agreement to which such Bank is a party, but as the same may be
from time to time reduced pursuant to Section 2.14:
<TABLE>
<CAPTION>
BANK REVOLVING COMMITMENT AMOUNT ON AND
AFTER MARCH 30, 2000 THRU THE
REVOLVING COMMITMENT ENDING DATE
- -----------------------------------------------------------------------------
<S> <C>
U.S. Bank National Association $45,000,000
Bank of America $40,000,000
First Union National Bank $40,000,000
</TABLE>
"REVOLVING NOTE": A promissory note of the Borrower in the form of
Exhibit 1.1-2-5 hereto.
(b) Section 6.13 of the Credit Agreement is amended to read in its
entirety as follows:
Section 6.13 TANGIBLE NET WORTH. The Borrower will not permit its
Tangible Net Worth at any time to be less than: (a) $75,000,000 at all
times through December 30, 1999; and (b) $100,000,000 at all times on and
after December 31, 1999.
Section 3. CONDITIONS TO EFFECTIVENESS OF FIFTH AMENDMENT. The
Amendments contained in this Fifth Amendment shall not become effective until,
and shall become effective when, the Administrative Agent shall have received
each of the following, in sufficient number to distribute to each Bank:
(a) The Agent shall have received, with a counterpart for each Bank,
this Amendment, duly executed by the Borrower, the Banks and the Agent,
and consented to by the Guarantors;
(b) The Agent shall have received a Revolving Note in the form of
Exhibit 1.1-2-5 to this Amendment, duly executed by the Borrower, payable
to each Bank in the amount shown as that Bank's Revolving Commitment Amount
in clause (a) of the definition of that term in Section 1.1, as amended by
this Agreement (each, a "Replacement Revolving Note;" collectively as to
all the Banks, the "Replacement Revolving Notes");
(c) The Agent shall have received, with a counterpart for each Bank,
a copy of resolutions adopted by the Borrower, authorizing the
-3-
<PAGE>
execution, delivery and performance of this Amendment and the Replacement
Revolving Notes by the Borrower, certified by the Borrower's secretary or
assistant secretary;
(d) The Agent shall have received, with a counterpart for each Bank,
a copy of resolutions adopted by each Guarantor, authorizing the execution,
delivery and performance of that Guarantor's consent to this Amendment,
certified by that Guarantor's secretary or assistant secretary;
(e) The Agent shall have received, with a counterpart for each Bank,
a certificate signed by the secretary or assistant secretary of the
Borrower certifying (i) as to the incumbency of the person or persons
authorized to execute and deliver on behalf of the Borrower this Amendment
and the Replacement Revolving Notes, and (ii) that the articles or
certificate of incorporation and bylaws of the Borrower have not been
repealed, rescinded, amended or otherwise modified since copies of the same
were delivered to the Banks on or about May 8, 1995, pursuant to Section
3.1 of the Credit Agreement;
(f) The Agent shall have received, with a counterpart for each Bank,
a certificate signed by the secretary or assistant secretary of each
Guarantor certifying (i) as to the incumbency of the person or persons
authorized to execute and deliver on behalf of that Guarantor its consent
to this Amendment, and (ii) that the articles or certificate of
incorporation and bylaws of that Guarantor have not been repealed,
rescinded, amended or otherwise modified since copies of the same were
delivered to the Banks on or about (x) May 8, 1995, pursuant to Section 3.1
of the Credit Agreement, or (y) the date such Guarantor became a Guarantor,
pursuant to Section 6.5 of the Credit Agreement;
(g) The Agent shall have received certificates of good standing for
the Borrower and each Guarantor, in the jurisdiction of its incorporation
or organization, in the State of Iowa (with respect to the Borrower), in
the State of Wisconsin (with respect to Polaris Real Estate Corporation),
in the State of Iowa (with respect to Polaris Real Estate Corporation of
Iowa), and in the State of Minnesota (with respect to Polaris Industries
Inc.), certified by the appropriate governmental officials as of a date not
more than 15 days prior to the date hereof;
(h) The Agent shall have received, for the account of each Bank, a
written opinion from Kaplan, Strangis & Kaplan, P.A. covering the matters
set forth on Exhibit A attached hereto; and
-4-
<PAGE>
(i) The Agent shall have received, with a counterpart for each Bank,
such other documents, instruments, approvals and, if requested by the
Agent, certified duplicates of executed copies thereof, that the Agent may
reasonably request.
(j) Each Bank shall have received a fee equal to .20% of the increase
such Bank's Revolving Commitment Amount.
Upon execution and delivery by the Borrower of the Replacement Revolving Notes
and the satisfaction of all of the conditions specified in this Section 3: (i)
all amounts of principal and interest due and payable on those certain Revolving
Notes dated March 31, 1997, in the aggregate principal amount of $150,000,000,
shall be due and payable under the appropriate Replacement Revolving Notes; and
(ii) each reference to the Revolving Notes in the Credit Agreement, any Loan
Document or any other document related thereto shall be deemed to be a reference
to the Replacement Revolving Notes in the form of Exhibit 1.1-2-5 attached
hereto.
Section 4. ACKNOWLEDGMENT. The Borrower acknowledges and agrees that
its obligations to the Banks and the Administrative Agent under the Credit
Agreement, as amended hereby, and the Revolving Notes exist and are owing
without offset, defense or counterclaim assertable by the Borrower against the
Banks and the Administrative Agent.
Section 5. WAIVER. Pursuant to the provisions of Section 7.1(i) of the
Credit Agreement the entry of judgment against the Borrower in excess of
$500,000 is an Event of Default if either (i) the judgment creditor executes on
such judgment or (ii) such judgment remains unpaid or undischarged for more than
the longer of 60 days from the date of entry thereof or such longer period
during which execution of such judgment shall be stayed during an appeal from
such judgment. The Borrower has informed the Banks that it may be in violation
of such Section 7.1(i) due to the entry of judgment against the Borrower in the
litigation described in paragraph 1 of Exhibit 4.6 to the Credit Agreement and
the subsequent ruling on the Borrower's appeal of such judgment. The Banks
hereby waive the Event of Default under Section 7.1(i) of the Credit Agreement,
if any, due to the entry of judgment against the Borrower in the litigation
described in paragraph 1 of Exhibit 4.6 to the Credit Agreement and the
subsequent ruling on the Borrower's appeal of such judgment. This waiver is
limited to the express terms hereof and shall not apply to any other Default or
Event of Default. This waiver is not and shall not be deemed a course of
performance upon which the Borrower may rely with respect to any other Default,
Event of Default or request for a waiver and the Borrower expressly waives any
such claim.
Section 6. EFFECT OF FIFTH AMENDMENT; REPRESENTATIONS AND WARRANTIES;
NO WAIVER. The Banks, the Administrative Agent and the Borrower agree that
after
-5-
<PAGE>
this Fifth Amendment becomes effective, the Credit Agreement, as hereby amended,
shall remain in full force and effect. The Borrower represents and warrants
that on and as of the date hereof and after giving effect to this Fifth
Amendment: (i) all of the representations and warranties contained in the Credit
Agreement are correct and complete in all material respects as of the date
hereof, as though made on and as of such date, except to the extent such
representations and warranties specifically relate to an earlier date, in which
case they were true and correct as of such earlier date; (ii) there will exist
no Default or Event of Default on such date except as waived herein; (iii) there
has been no change in any of the certificates or articles of incorporation,
bylaws or partnership agreements of the Borrower or any Guarantor since the
Closing Date or (if later) the date such Guarantor became a Guarantor; (iv) the
Borrower has the power and legal right and authority to enter into this Fifth
Amendment; (v) neither this Fifth Amendment, nor the agreements contained herein
or therein contravene or constitute a default under any agreement, instrument or
indenture to which the Borrower is a party or signatory or a provision of the
Borrower's articles of incorporation or, to the best of the Borrower's
knowledge, any other agreement or requirement of law; and (vi) no consent,
approval or authorization of or registration or declaration with any Person,
including but not limited to any governmental authority, is required in
connection with the execution and delivery by the Borrower of this Fifth
Amendment, or the performance of obligations of the Borrower herein or therein
described.
Section 7. INCORPORATION OF CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS
BY REFERENCE; RATIFICATION OF LOAN DOCUMENTS. Except as expressly modified
under this Fifth Amendment, all of the terms, conditions, provisions,
agreements, requirements, promises, obligations, duties, covenants and
representations of the Borrower under the Credit Agreement, the Revolving Notes
and any and all other documents and agreements entered into with respect to the
obligations under the Credit Agreement are incorporated herein by reference and
are hereby ratified and affirmed in all respects by the Borrower. All
references in the Credit Agreement to "this Agreement," "herein," "hereof," and
similar references, and all references in the other Loan Documents to the
"Credit Agreement," shall be deemed to refer to the Credit Agreement, as amended
by this Fifth Amendment.
Section 8. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Fifth
Amendment, from and after the date hereof, embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes and has merged into it all prior oral and written
agreements on the same subjects by and between the parties hereto with the
effect that this Fifth Amendment shall control.
Section 9. EXPENSES. As provided in Section 9.2 of the Credit
Agreement, the Borrower agrees to pay all of the expenses, including reasonable
attorneys'
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<PAGE>
fees and expenses, incurred by the Administrative Agent in connection with this
Fifth Amendment.
Section 10. COUNTERPARTS. This Fifth Amendment may be executed in any
number of counterparts, and by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original but all such
counterparts together shall constitute but one and the same instrument.
Section 11. GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF THIS FIFTH AMENDMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF
THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES
THEREOF.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to
Credit Agreement to be executed as of the date and year first above written.
POLARIS INDUSTRIES INC., a Minnesota corporation
By /s/ Michael Malone
------------------------------------
Michael Malone
Vice President
U.S. BANK NATIONAL ASSOCIATION,
as Administrative Agent and a Bank
By /s/ Carleton L. Olmanson
------------------------------------
Name Carleton L. Olmanson
------------------------------------
Title SVP
------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Documentation Agent
and a Bank
By /s/ R. Guy Stapleton
------------------------------------
Name R. Guy Stapleton
------------------------------------
Title Managing Director
------------------------------------
FIRST UNION NATIONAL BANK, as a Documentation
Agent and a Bank
By /s/ Brian Mulvaney
------------------------------------
Name Brian Mulvaney
------------------------------------
Title Vice President
------------------------------------
S-1
<PAGE>
SIXTH AMENDMENT TO
CREDIT AGREEMENT
This Sixth Amendment to Credit Agreement, dated as of December 7, 1998
("Sixth Amendment"), is made by and between POLARIS INDUSTRIES INC., a
Minnesota corporation (the "Borrower"); U.S. BANK NATIONAL ASSOCIATION, formerly
known as FIRST BANK NATIONAL ASSOCIATION, BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, formerly known as BANK OF AMERICA ILLINOIS and FIRST UNION
NATIONAL BANK, formerly known as FIRST UNION NATIONAL BANK OF NORTH CAROLINA
(collectively, the "Banks"); and U.S. BANK NATIONAL ASSOCIATION, as
administrative agent for the Banks (the "Administrative Agent").
WHEREAS, the Borrower, the Banks and the Administrative Agent have entered
into that certain Credit Agreement dated as of May 8, 1995, as amended by First
Amendment to Credit Agreement dated as of November 15, 1995, Second Amendment
to Credit Agreement dated as of February 13, 1996, Third Amendment to Credit
Agreement dated as of September 30, 1996, Fourth Amendment to Credit Agreement
dated as of March 31, 1997 and Fifth Amendment to Credit Agreement dated as of
August 24, 1998 (as so amended, the "Credit Agreement").
WHEREAS, the Borrower has requested the Banks and the Administrative Agent
to modify certain provisions of the Credit Agreement to reflect the formation of
a new subsidiary (the "New Subsidiary") by the Borrower, subject to the terms
and conditions of the Credit Agreement, and to allow the Subsidiaries to
guarantee the obligations of the Borrower under interest rate protection
agreements, and the Banks and the Administrative Agent are willing to do so on
the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the premises and for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto covenant and agree to be bound as follows:
Section 1. CAPITALIZED TERMS. All capitalized terms used herein and
not otherwise defined herein shall have the meanings assigned to them in the
Credit Agreement.
Section 2. AMENDMENTS.
(a) The definition of "Guarantors" in Section 1.1 of the Credit
Agreement is amended to read in its entirety as follows:
<PAGE>
"GUARANTORS": Collectively, Polaris Acceptance Inc., Polaris
Industries Inc., Polaris Industries Export Ltd., Polaris Real Estate Corporation
of Iowa, Inc., Polaris Real Estate Corporation, Polaris Sales Inc. and any
Additional Guarantors.
(b) Section 6.12 of the Credit Agreement is amended in its entirety
to read as follows:
Section 6.12 CONTINGENT LIABILITIES. The Borrower will not, and will
not permit any Subsidiary to, be or become liable on any Contingent Obligations
except: (i) Contingent Obligations existing on the date of this Agreement and
described on Exhibit 6.12-4; (ii) the Borrower's guarantee of up to a percentage
of Acceptance Partnership's Indebtedness under the Acceptance Partnership Credit
Agreement equal to PAI's percentage ownership of Acceptance Partnership and the
Borrower's guarantee of PAI's obligation to make additional capital
contributions to Acceptance Partnership, PROVIDED that the Borrower's maximum
liability under such guarantee does not exceed $250,000,000 (with respect to
loans) and $50,000,000 (with respect to capital contributions); (iii) PAI's
liability as general partner for up to a percentage of Acceptance Partnership's
Indebtedness under the Acceptance Partnership Credit Agreement equal to PAI's
percentage ownership of Acceptance Partnership, PROVIDED that PAI's maximum
liability with respect thereto does not exceed $250,000,000; (iv) PAI's
obligation to make additional capital contributions to Acceptance Partnership,
PROVIDED that the sum of such obligation, to the extent quantified at any time,
and all Investments in Acceptance Partnership then existing does not exceed
$50,000,000; and (v) the guarantee by the Subsidiaries of the Borrower's
obligations under interest rate protection agreements.
(c) Exhibit 4.19 is deleted from the Credit Agreement and new Exhibit
4.19-6, in the form of Exhibit 4.19-6 attached hereto, is added to the Credit
Agreement.
Section 3. CONDITIONS TO EFFECTIVENESS OF SIXTH AMENDMENT. The
Amendments contained in this Sixth Amendment shall not become effective until,
and shall become effective when, the Administrative Agent shall have received
each of the following, in sufficient number to distribute to each Bank:
(a) The Agent shall have received, with a counterpart for each Bank,
this Amendment, duly executed by the Borrower, the Banks and the Agent,
and consented to by the Guarantors (except the New Subsidiary);
(b) The Agent shall have received, with a counterpart for each Bank,
a copy of resolutions adopted by the Borrower, authorizing the execution,
delivery and performance of this Amendment by the Borrower, and authorizing
the formation of the New Subsidiary and the transfer of
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<PAGE>
certain assets of the Borrower thereto, certified by the Borrower's
secretary or assistant secretary;
(d) The Agent shall have received, with a counterpart for each Bank,
a copy of resolutions adopted by each Guarantor (except the New
Subsidiary), authorizing the execution, delivery and performance of that
Guarantor's consent to this Amendment, certified by that Guarantor's
secretary or assistant secretary;
(e) The Agent shall have received, with a counterpart for each Bank,
a certificate signed by the secretary or assistant secretary of the
Borrower certifying (i) as to the incumbency of the person or persons
authorized to execute and deliver on behalf of the Borrower this Amendment,
and (ii) that the articles or certificate of incorporation and bylaws of
the Borrower have not been repealed, rescinded, amended or otherwise
modified since copies of the same were delivered to the Banks on or about
May 8, 1995, pursuant to Section 3.1 of the Credit Agreement;
(f) The Agent shall have received, with a counterpart for each Bank,
a certificate signed by the secretary or assistant secretary of each
Guarantor (except the New Subsidiary) certifying (i) as to the incumbency
of the person or persons authorized to execute and deliver on behalf of
that Guarantor its consent to this Amendment, and (ii) that the articles or
certificate of incorporation and bylaws of that Guarantor have not been
repealed, rescinded, amended or otherwise modified since copies of the same
were delivered to the Banks on or about (x) May 8, 1995, pursuant to
Section 3.1 of the Credit Agreement, or (y) the date such Guarantor became
a Guarantor, pursuant to Section 6.5 of the Credit Agreement;
(g) The Agent shall have received with a counterpart for each Bank, a
copy of the corporate resolution of the New Subsidiary authorizing the
execution, delivery and performance of its Guaranty, certified as of the
date of execution thereof by the Secretary or an Assistant Secretary of the
New Subsidiary.
(h) The Agent shall have received with a counterpart for each Bank,
an incumbency certificate showing the names and titles and bearing the
signatures of the officers of the New Subsidiary authorized to execute the
Guaranty, certified as of the date of execution thereof by the Secretary or
an Assistant Secretary of the New Subsidiary.
(i) A copy of the Articles of Incorporation of the New Subsidiary,
with all amendments thereto, certified by the appropriate governmental
-3-
<PAGE>
official of the jurisdiction of its incorporation as of a date not more
than 15 days prior to the date of this Sixth Amendment.
(j) A certificate of good standing for the New Subsidiary in the
jurisdiction of its incorporation certified by the appropriate governmental
official as of a date not more than 15 days prior to the date of this Sixth
Amendment.
(k) A copy of the bylaws of the New Subsidiary certified as of the
date of this Sixth Amendment by the Secretary or an Assistant Secretary of
the New Subsidiary.
(l) The Agent shall have received with a counterpart for each Bank,
the Guaranty of the New Subsidiary duly executed by an authorized officer
of the same.
(m) The Agent shall have received, for the account of each Bank, a
written opinion from Kaplan, Strangis & Kaplan, P.A. covering the matters
set forth on Exhibit A attached hereto; and
(n) The Agent shall have received, with a counterpart for each Bank,
such other documents, instruments, approvals and, if requested by the
Agent, certified duplicates of executed copies thereof, that the Agent may
reasonably request.
Section 4. ACKNOWLEDGMENT. The Borrower acknowledges and agrees that
its obligations to the Banks and the Administrative Agent under the Credit
Agreement, as amended hereby, and the Revolving Notes exist and are owing
without offset, defense or counterclaim assertable by the Borrower against the
Banks and the Administrative Agent.
Section 5. EFFECT OF SIXTH AMENDMENT; REPRESENTATIONS AND WARRANTIES;
NO WAIVER. The Banks, the Administrative Agent and the Borrower agree that
after this Sixth Amendment becomes effective, the Credit Agreement, as hereby
amended, shall remain in full force and effect. The Borrower represents and
warrants that on and as of the date hereof and after giving effect to this Sixth
Amendment: (i) all of the representations and warranties contained in the Credit
Agreement are correct and complete in all material respects as of the date
hereof, as though made on and as of such date, except to the extent such
representations and warranties specifically relate to an earlier date, in which
case they were true and correct as of such earlier date; (ii) there will exist
no Default or Event of Default on such date except as waived herein; (iii) there
has been no change in any of the certificates or articles of incorporation,
bylaws or partnership agreements of the Borrower or any Guarantor since the
Closing Date or (if later) the date such
-4-
<PAGE>
Guarantor became a Guarantor; (iv) the Borrower has the power and legal right
and authority to enter into this Sixth Amendment; (v) neither this Sixth
Amendment, nor the agreements contained herein or therein contravene or
constitute a default under any agreement, instrument or indenture to which the
Borrower is a party or signatory or a provision of the Borrower's articles of
incorporation or, to the best of the Borrower's knowledge, any other agreement
or requirement of law; and (vi) no consent, approval or authorization of or
registration or declaration with any Person, including but not limited to any
governmental authority, is required in connection with the execution and
delivery by the Borrower of this Sixth Amendment, or the performance of
obligations of the Borrower herein or therein described.
Section 6. INCORPORATION OF CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS
BY REFERENCE; RATIFICATION OF LOAN DOCUMENTS. Except as expressly modified
under this Sixth Amendment, all of the terms, conditions, provisions,
agreements, requirements, promises, obligations, duties, covenants and
representations of the Borrower under the Credit Agreement, the Revolving Notes
and any and all other documents and agreements entered into with respect to the
obligations under the Credit Agreement are incorporated herein by reference and
are hereby ratified and affirmed in all respects by the Borrower. All
references in the Credit Agreement to "this Agreement," "herein," "hereof," and
similar references, and all references in the other Loan Documents to the
"Credit Agreement," shall be deemed to refer to the Credit Agreement, as amended
by this Sixth Amendment.
Section 7. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Sixth
Amendment, from and after the date hereof, embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes and has merged into it all prior oral and written
agreements on the same subjects by and between the parties hereto with the
effect that this Sixth Amendment shall control.
Section 8. EXPENSES. As provided in Section 9.2 of the Credit
Agreement, the Borrower agrees to pay all of the expenses, including reasonable
attorneys' fees and expenses, incurred by the Administrative Agent in connection
with this Sixth Amendment.
Section 9. COUNTERPARTS. This Sixth Amendment may be executed in any
number of counterparts, and by the parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed an original but all such
counterparts together shall constitute but one and the same instrument.
Section 10. GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND
ENFORCEABILITY OF THIS SIXTH AMENDMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF
THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES
THEREOF.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Sixth Amendment to
Credit Agreement to be executed as of the date and year first above written.
POLARIS INDUSTRIES INC., a Minnesota corporation
By /s/ Michael Malone
------------------------------------
Michael Malone
Vice President
U.S. BANK NATIONAL ASSOCIATION,
as Administrative Agent and a Bank
By /s/ David Shapiro
------------------------------------
Name David Shapiro
------------------------------------
Title Assistant Vice President
-----------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a
Documentation Agent and a Bank
By /s/ Gretchen Spoo
------------------------------------
Name Gretchen Spoo
------------------------------------
Title Vice President
-----------------------------------
FIRST UNION NATIONAL BANK, as a Documentation
Agent and a Bank
By /s/ C. Jeffrey Staton
------------------------------------
Name C. Jeffrey Staton
------------------------------------
Title SVP
-----------------------------------
S-1
<PAGE>
FINANCIAL DATA IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA
The selected financial data presented below are qualified in their entirety by,
and should be read in conjunction with, the Consolidated Financial Statements
and Notes thereto and other financial and statistical information referenced
elsewhere herein, including the information referenced under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales data
Total dollars $ 1,175,520 $ 1,048,296 $ 1,191,901 $ 1,113,852
% change from prior year 12% (12%) 7% 35%
Sales mix by product (%)
Snowmobiles 32% 42% 43% 46%
All-terrain vehicles 57% 45% 37% 33%
Personal watercraft 4% 7% 16% 16%
Motorcycles 1% -- -- --
International 6% 6% 4% 5%
Gross profit data
Total dollars $ 278,287 $ 262,538 $ 263,816 $ 247,993
% of sales 24% 25% 22% 22%
Operating expense data
Amortization of intangibles and noncash compensation $ 8,703 $ 5,887 $ 5,325 $ 5,616
Conversion costs -- -- -- --
Other operating expenses 169,478 163,549 161,074 140,719
% of sales 14% 16% 14% 13%
Actual, adjusted,(1) and pro forma data(2)
Net income $ 70,624(1) $ 65,383 $ 62,293 $ 60,776
Diluted net income per share $ 2.72(1) $ 2.45 $ 2.24 $ 2.19
CASH FLOW DATA
Cash flow from operating activities $ 121,385 $ 102,308 $ 89,581 $ 77,749
Purchase of property and equipment 61,532 36,798 45,336 47,154
Repurchase and retirement of common stock 37,728 39,903 13,587 --
Cash dividends to shareholders 18,582 16,958 16,390 116,639
Cash dividends per share $ 0.72 $ 0.64 $ 0.60 $ 4.27
Cash distributions declared to partners -- -- -- --
Cash distributions declared per unit -- -- -- --
BALANCE SHEET DATA
(AT END OF YEAR)
Cash and cash equivalents $ 1,466 $ 1,233 $ 5,812 $ 3,501
Current assets 183,840 217,458 193,405 175,271
Total assets 378,697 384,746 351,717 314,436
Current liabilities 204,964 191,111 161,387 155,722
Borrowings under credit agreement 20,500 24,400 35,000 40,200
Shareholders' equity/Partners' capital 153,233 169,235 155,330 118,514
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
1994
- ---------------------------------------------------------------------------------
<S> <C>
STATEMENT OF OPERATIONS DATA
Sales data
Total dollars $ 826,286
% change from prior year 56%
Sales mix by product (%)
Snowmobiles 52%
All-terrain vehicles 30%
Personal watercraft 14%
Motorcycles --
International 4%
Gross profit data
Total dollars $ 196,783
% of sales 24%
Operating expense data
Amortization of intangibles and noncash compensation $ 14,321
Conversion costs 12,315
Other operating expenses 94,485
% of sales 11%
Actual, adjusted,(1) and pro forma data(2)
Net income $ 54,703
Diluted net income per share $ 1.98
CASH FLOW DATA
Cash flow from operating activities $ 111,542
Purchase of property and equipment 32,656
Repurchase and retirement of common stock --
Cash dividends to shareholders --
Cash dividends per share --
Cash distributions declared to partners 50,942
Cash distributions declared per unit $ 1.68
BALANCE SHEET DATA
(AT END OF YEAR)
Cash and cash equivalents $ 62,881
Current assets 206,489
Total assets 331,166
Current liabilities 161,457
Borrowings under credit agreement --
Shareholders' equity/Partners' capital 169,709
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
(1) IN 1998, POLARIS ENTERED INTO A SETTLEMENT AGREEMENT RELATED TO A TRADE
SECRET INFRINGEMENT CLAIM BROUGHT BY INJECTION RESEARCH SPECIALISTS, INC.
THE ONE-TIME PROVISION FOR LITIGATION LOSS OF $61.4 MILLION, OR $1.53 PER
DILUTED SHARE, HAS BEEN EXCLUDED FROM THE 1998 FINANCIAL DATA PRESENTED.
(2) THE COMPARABILITY OF THE INFORMATION REFLECTED IN THE SELECTED FINANCIAL
DATA IS MATERIALLY AFFECTED BY THE CONVERSION FROM A MASTER LIMITED
PARTNERSHIP TO A CORPORATION ON DECEMBER 22, 1994, WHICH RESULTED IN THE
COMPANY RECORDING A NET DEFERRED TAX ASSET OF $65.0 MILLION, CONVERSION
EXPENSES OF $12.3 MILLION AND A CORRESPONDING NET INCREASE IN 1994 NET
INCOME. PRO FORMA DATA IS PRESENTED TO ASSIST IN COMPARING THE CONTINUING
RESULTS OF OPERATIONS OF THE COMPANY EXCLUSIVE OF THE CONVERSION COSTS AND
AS IF THE COMPANY WAS A TAXABLE CORPORATION FOR EACH PERIOD PRESENTED.
<PAGE>
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 the Company for each of the three years in the period ended December
31, 1998, and should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
1998 VS. 1997
Sales increased to $1.176 billion in 1998, representing a 12 percent increase
from $1.048 billion in 1997. The increase in sales was primarily due to higher
all-terrain vehicle (ATV) sales, partially offset by a decline in snowmobile
sales.
In 1998, Polaris achieved its ninth consecutive year of increased ATV
sales. North American sales of ATVs and related parts, garments and accessories
(PG&A) of $673.9 million in 1998 were 42 percent higher than $473.2 million in
1997. The increased sales reflect the continued strong growth of the industry as
consumers find new and expanded uses for the product. Additionally, management
believes that Polaris increased its market share of ATV sales as the result of
continued expansion of the popular Sportsman line of ATVs and other new model
introductions. The average per unit sales price increased six percent for ATVs
in 1998 as the sales mix continued to move to new, higher performance models.
Sales of ATVs and related PG&A comprised 57 percent of total Company sales in
1998 compared to 45 percent in 1997.
North American sales of snowmobiles and related PG&A of $374.4 million in
1998 were 16 percent lower than $443.0 million in 1997. The decline is due to
lower snowmobile production levels in 1998 in response to poor snow conditions,
warmer than normal temperatures in North America, and higher dealer inventories
at the end of the 1997-1998 selling season. Sales of snowmobiles and related
PG&A comprised of 32 percent of total Company sales in 1998 compared to 42
percent in 1997.
North American sales of personal watercraft (PWC) and related PG&A of $50.4
million in 1998 were 31 percent lower than $73.4 million in 1997. The decrease
is attributable to significantly lower production levels of PWC in 1998 to
compensate for the increased dealer inventory remaining from the prior season
reflecting the reduction of industry growth. Sales of PWC and related PG&A
comprised four percent of total Company sales in 1998 compared to seven percent
in 1997.
North American sales of Victory motorcycles and related PG&A were $9.9
million in 1998. Victory shipments to our dealers began in July 1998. Sales of
Victory motorcycles and related PG&A comprised one percent of total Company
sales in 1998, the initial year of production.
International sales of snowmobiles, ATVs, PWC, and related PG&A of $61.7
million in 1998 were five percent higher than $58.7 million in 1997. The
increase in international sales was primarily due to an increase in ATV
shipments. Polaris continues to focus on international markets as an opportunity
for future growth. International sales comprised six percent of total Company
sales in 1998, the same as 1997.
Gross profit increased to $278.3 million in 1998, representing a six
percent increase over $262.5 million gross profit in 1997. However, the gross
profit margin percentage of 23.7 percent in 1998 decreased from 25.0 percent in
1997. The decrease in gross profit margin percentage is primarily a result of
the (a) mix impact of the substantial increase in sales of ATVs, which have a
lower margin than snowmobiles, (b) negative impact of the Canadian dollar
exchange rate when compared to the prior year, (c) initial production rollout of
the Victory motorcycles, and (d) reduced pricing on 1998 model ATVs implemented
in the Fall of 1997. These negative factors have been partially offset by the
continued improvement in overall product quality, which has resulted in a
decrease in warranty expenses.
Polaris has continued to invest in new product development, innovation, and
product diversification. Research and development expenses were $28.4 million
(2.4 percent of sales) in 1998 and $26.7 million (2.5 percent of sales) in 1997.
In addition, Polaris incurred tooling expenditures for new products of $2.8
million in 1998 and $19.3 million in 1997. In 1998, 73 percent of sales came
from products introduced in the past three years.
Operating expenses in 1998 increased five percent to $178.2 million from
$169.4 million in 1997. Expressed as a percentage of sales, operating expenses
decreased to 15.2 percent in 1998 from 16.2 percent in 1997. These decreases are
primarily attributable to the leveraging effect of higher sales and reduced
level of promotional and advertising costs related to assisting dealers in
selling their PWC and snowmobile inventories partially offset by a planned
increase in advertising expenditures.
Nonoperating expense (income) in 1998 includes a $61.4 million provision
for litigation loss related to the settlement of the Injection Research
Specialists litigation. This is a one-time charge that should not effect the
ongoing operations of the Company. The remaining improvement in nonoperating
expense (income) in 1998 from 1997 primarily reflects the positive financial
impact of the Company's equity in the income of Polaris Acceptance.
The provision for income taxes was reduced to a rate of 35.5 percent of
pretax income beginning in the third quarter of 1998 from 36.0 percent in prior
periods as a result of certain tax planning strategies.
Net income in 1998 was $31.0 million, a decrease from $65.4 million in
1997, primarily as a result of the litigation settlement. Net income as a
result of sales was 2.6 percent in 1998, a decrease from 6.2 percent in 1997.
Net income per diluted share decreased to $1.19 in 1998 from $2.45 in 1997.
Net income adjusted to exclude the litigation settlement increased eight
percent to $70.6 million in 1998 from $65.4 million in 1997. Adjusted net
income as a percent of sales decreased to 6.0 percent in 1998 from 6.2
percent in 1997. Adjusted net income per diluted share increased 11 percent
to $2.72 in 1998 from $2.45 in 1997.
<PAGE>
1997 VS. 1996
Sales decreased to $1.048 billion in 1997, representing a 12 percent decrease
from $1.192 billion in 1996. The decrease in sales was primarily due to lower
PWC, and to a lesser extent, lower snowmobile sales. The Company's ATV product
line posted its eighth consecutive year of increased retail sales.
North American sales of snowmobiles and related PG&A of $443.0 million in
1997 were 13 percent lower than $506.5 million in 1996. The decline is due to
lower snowmobile production levels driven by a second consecutive year of
relatively flat industry growth. This lower production has enabled Polaris to
assist dealers in managing their field inventory levels. Sales of snowmobiles
and related PG&A comprised 42 percent of total company sales in 1997 compared to
43 percent in 1996.
North American sales of ATVs and related PG&A of $473.2 million in 1997
were six percent higher than $445.9 million in 1996. The increased sales reflect
the continued growth of the industry and Polaris' ability to provide the
consumer with a quality product at a competitive price. Sales of ATVs and
related PG&A comprised 45 percent of total company sales in 1997 compared to 37
percent in 1996.
North American sales of PWC and related PG&A of $73.4 million in 1997 were
61 percent lower than $190.4 million in 1996. The decrease is attributable to
significantly lower production levels of PWC in 1997 to compensate for the
increased dealer inventory remaining from the prior season reflecting the
reduction of industry growth. Sales of PWC and related PG&A comprised seven
percent of total company sales in 1997 compared to 16 percent in 1996.
International sales of snowmobiles, ATVs, PWC, and related PG&A of $58.7
million in 1997 were 20 percent higher than $49.1 million in 1996. The increase
in international sales was across all product lines. International sales
comprised six percent of total Company sales in 1997 compared to four percent in
1996.
Gross profit of $262.5 million decreased slightly in 1997 from $263.8
million in 1996. However, the gross profit margin percentage of 25.0 percent in
1997 increased 13 percent from 22.1 percent in 1996. The increase in gross
profit margin percentage is primarily a result of (a) continued cost reduction
efforts, including expanded domestic engine production, (b) reduced warranty
costs, (c) decreases in costs of certain purchased components due to the
strengthening of the U.S. dollar in relation to the Japanese yen when compared
to 1996, and (d) change in sales mix with less sales of the lower margin PWC
product when compared to 1996.
Operating expenses in 1997 increased two percent to $169.4 million from
$166.4 million in 1996. Expressed as a percentage of sales, operating expenses
increased to 16.2 percent in 1997 from 14.0 percent in 1996. These increases are
primarily attributable to the higher level of promotional and advertising costs
related to assisting dealers in selling their remaining snowmobile and PWC
inventory.
The improvement in nonoperating expense (income) in 1997 from 1996
primarily reflects (a) the positive impact of the Canadian dollar exchange rate
hedging activity, (b) the positive financial impact of the Company's equity in
the income of Polaris Acceptance, and (c) lower interest expense resulting from
lower average outstanding borrowings in 1997 as compared to 1996.
The provision for income taxes has been recorded at a rate of 36.0 percent
of pretax income for each of 1997 and 1996.
Net income increased five percent to $65.4 million in 1997 from $62.3
million in 1996. Net income as a percent of sales increased to 6.2 percent in
1997 from 5.2 percent in 1996. Net income per basic and diluted share
increased nine percent to $2.45 in 1997 from $2.24 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Polaris' primary sources of funds have been cash provided by operating
activities, a $175 million bank line of credit and a dealer floor plan financing
program. Polaris' primary uses of funds have been for cash dividends to
shareholders, repurchase and retirement of common stock, capital investments,
payment of litigation expenses and new product development.
During 1998, Polaris generated net cash from operating activities of $121.4
million, which was utilized to fund capital expenditures of $61.5 million, cash
dividends of $18.6 million and the repurchase of common stock of $37.7 million.
During 1997, Polaris generated net cash from operating activities of $102.3
million which was utilized to fund capital expenditures of $36.8 million,
investments in affiliates of $2.6 million, cash dividends of $17.0 million, and
the repurchase of common stock of $39.9 million. During 1996, Polaris generated
net cash from operating activities of $89.6 million, which was utilized to fund
capitalized expenditures of $36.8 million, net investments in affiliates of $6.8
million, cash dividends of $16.4 million and the repurchase of common stock of
$13.6 million.
The seasonality of production and shipments causes working capital
requirements to fluctuate during the year. Polaris has an unsecured bank line of
credit arrangement maturing on March 31, 2000, under which it may borrow up to
$175 million until March 31, 1999 and $150 million thereafter until maturity.
The arrangement provides borrowing for working capital needs and the repurchase
and retirement of common stock. Borrowings under the line of credit bear
interest, 5.95 percent at December 31, 1998, based on LIBOR or "prime" rates. At
December 31, 1998, Polaris had total borrowings under the line of credit of
$20.5 million compared to $24.4 million at December 31, 1997. In addition, at
December 31, 1998, Polaris had letters of credit outstanding of $7.8 million
related to purchase obligations for raw materials.
During 1996, the Polaris Board of Directors authorized the repurchase of up
to 1.0 million shares of the company's common stock. During 1997, the Board of
Directors expanded the share repurchase program, authorizing the cumulative
repurchase of up to 3.0 million shares. On May 21, 1998, the Board of Directors
expanded the share repurchase program, authorizing the cumulative repurchase of
up to 5.0 million shares. During 1998, Polaris paid $37.7 million to repurchase
and retire 1,090,500 shares. Polaris has 1,932,600 shares available to
repurchase under its current Board authorization as of December 31, 1998.
<PAGE>
In February 1996, a wholly owned subsidiary of Polaris entered into a
partnership agreement with a wholly owned subsidiary of Transamerica
Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance
provides floor plan financing to Polaris's dealers and distributors and
beginning in 1999 will provide other financial services to dealers, distributors
and retail customers of Polaris including retail credit, leasing and extended
service contracts. Under the partnership agreement, Polaris' subsidiary has a 50
percent equity interest in Polaris Acceptance and guarantees 50 percent of the
outstanding indebtedness of Polaris Acceptance under a credit agreement between
Polaris Acceptance and TDF. At December 31, 1998, Polaris' contingent liability
with respect to the guarantee was approximately $139.0 million.
Polaris has arrangements with certain finance companies, including Polaris
Acceptance, to provide floor plan financing for its distributors and dealers.
These arrangements provide liquidity by financing distributor and dealer
purchases of Polaris products. Substantially all of the sales of snowmobiles,
ATVs, motorcycles and PWC (but not parts, garments and accessories) are financed
under these arrangements whereby Polaris receives payment within a few days of
shipment of the product. The amounts financed by distributors and dealers under
these arrangements at December 31, 1998 and 1997, were approximately $384.0
million and $289.0 million, respectively. Polaris participates in the cost of
dealer and distributor financing up to certain limits. Polaris has agreed to
repurchase products repossessed by the finance companies to an annual maximum of
15 percent of the average amount outstanding during the prior calendar year.
Polaris' financial exposure under these agreements is limited to the difference
between the amount paid to the finance companies and the amount received on the
resale of the repossessed product. No material losses have been incurred under
these agreements. However, an adverse change in retail sales could cause this
situation to change and thereby require Polaris to repurchase financed units.
Polaris has made significant capital investments to increase production
capacity, quality, and efficiency, and for new product development and
diversification. Improvements in manufacturing and distribution capacity
include: (a) tooling expenditures for new product development across all
product lines of $24.8 million during 1998, (b) An investment of $9.7 million
since late 1996 for the construction of a 250,000 square foot
state-of-the-art parts, garments and accessories distribution center in
Vermillion, South Dakota which was operational by mid-1997, and (c) in 1998,
Polaris completed construction and began operating a new 58,000 square foot
injection molding facility in Roseau, MN, which required an investment of
$11.2 million. Polaris anticipates that capital expenditures, including
tooling, for 1999 will range from $65 million to $75 million.
Management believes that existing cash balances, cash flows 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, and capital expenditure requirements for 1999. At this time,
management is not aware of any factors that would have a materially adverse
impact on cash flow beyond 1999.
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
the entry of judgment 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 year ended
December 31, 1998. The related payment to IRS was made during the fourth quarter
1998 in connection with entering into the confidential settlement agreement.
Polaris no longer uses any of the technology in dispute.
Polaris proforma results adjusted to exclude the provision for litigation
loss are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Adjusted income before income taxes $ 109,771 $ 102,162
Provision for income taxes 39,147 36,779
- --------------------------------------------------------------
Adjusted net income $ 70,624 $ 65,383
- --------------------------------------------------------------
Adjusted net income per diluted share $ 2.72 $ 2.45
- --------------------------------------------------------------
</TABLE>
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 1900. Polaris' project is divided
into two major areas: internal information systems and embedded manufacturing
system/third party suppliers.
Polaris has implemented a plan to make its internal information systems
Year 2000 compliant by mid-1999. As of December 31, 1998, approximately 90
percent of the programming requirements for the company's manufacturing systems
were complete and 70 percent of the programming requirements for the sales,
distribution and finance systems had been completed. Manufacturing mission
critical applications are all currently in the test phase. The remaining systems
are being tested when the programming modifications are 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. Polaris has
received responses from approximately 75 percent of these suppliers and is in
the process of tabulating the results.
<PAGE>
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 $1.5 million of which approximately $0.8 million
was incurred by December 31, 1998.
Polaris has begun 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 Polaris 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 customer orders.
Polaris is in the process of developing contingency plans to protect the
business from Year 2000 related interruptions and anticipates their completion
by the third quarter of 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 operations. However, the changing relationships of the U.S. dollar to the
Canadian dollar and Japanese yen have had a material impact from time-to-time.
During 1998, purchases totaling 14 percent of Polaris cost of sales were
from Japanese 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 1998 and 1997 were positively
impacted by the Japanese yen exchange rate fluctuation when compared to the
prior year. However, the dollar has recently weakened in relation to the yen and
in view of the foreign exchange hedging contracts currently in place, Polaris
anticipates that the yen-dollar exchange rate will have a negative impact on
cost of sales during 1999 when compared to 1998.
Polaris operates in Canada through a wholly owned subsidiary. Sales of the
Canadian subsidiary comprised 12 percent of total Company sales in 1998. Polaris
utilizes foreign exchange hedging contracts to manage its exposure to the
Canadian dollar. Since the U.S. dollar strengthened in relation to the Canadian
dollar in 1998 on average, Polaris had a negative financial impact on its gross
margins when compared to the same periods in 1997. In view of the foreign
exchange hedging contracts currently in place, Polaris anticipates a negative
impact on net income during 1999 when compared to the same periods in 1998.
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
December 31, 1998, Polaris had open Japanese yen foreign exchange hedging
contracts with notional amounts totaling $51.0 million U.S. dollars, which
mature throughout 1999.
Since October 1995, Polaris has been manufacturing its own engines for
selected models of PWC and snowmobiles at its Osceola, Wisconsin facility. In
addition, earlier in 1995, Polaris entered into an agreement with Fuji Heavy
Industries Ltd. to form Robin Manufacturing U.S.A., Inc. ("Robin"). Under the
terms of the agreement, Polaris has a 40 percent ownership interest in Robin,
which builds engines in the United States for recreational and industrial
products. Potential advantages to Polaris of these additional sources of engines
include reduced foreign exchange risk, lower shipping costs and less dependence
in the future on a single supplier for engines.
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 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.
<PAGE>
CONSOLIDATED
BALANCE SHEETS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,466 $ 1,233
Trade receivables 43,035 42,593
Inventories 107,436 139,544
Prepaid expenses and other 2,903 5,088
Deferred tax assets 29,000 29,000
- ---------------------------------------------------------------------------------
Total current assets 183,840 217,458
- ---------------------------------------------------------------------------------
DEFERRED TAX ASSETS 21,000 26,000
- ---------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land, buildings and improvements 37,226 31,367
Equipment and tooling 192,255 153,005
- ---------------------------------------------------------------------------------
229,481 184,372
Less-accumulated depreciation (105,227) (86,352)
- ---------------------------------------------------------------------------------
Total property and equipment 124,254 98,020
- ---------------------------------------------------------------------------------
INVESTMENTS IN AFFILIATES 26,636 19,767
INTANGIBLE ASSETS, NET 22,967 23,501
- ---------------------------------------------------------------------------------
$ 378,697 $ 384,746
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 77,258 $ 61,027
Accrued expenses:
Compensation 41,664 40,240
Warranties 37,921 35,594
Other 41,110 38,033
Income taxes payable 7,011 16,217
- ----------------------------------------------------------------------------------------------------
Total current liabilities 204,964 191,111
- ----------------------------------------------------------------------------------------------------
BORROWINGS UNDER CREDIT AGREEMENT 20,500 24,400
- ----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 3, 5, 7 AND 8)
SHAREHOLDERS' EQUITY
Preferred stock $0.01 par value, 20,000 shares authorized,
no shares issued and outstanding -- --
Common stock $0.01 par value, 80,000 shares authorized,
25,355 and 26,014 shares issued and outstanding 253 260
Additional paid-in capital 48,622 72,955
Deferred compensation (6,726) (3,133)
Compensation payable in common stock 6,844 7,346
Retained earnings 104,240 91,807
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 153,233 169,235
- ----------------------------------------------------------------------------------------------------
$ 378,697 $ 384,746
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
<PAGE>
CONSOLIDATED
STATEMENTS OF OPERATIONS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 1,175,520 $ 1,048,296 $ 1,191,901
Cost of Sales 897,233 785,758 928,085
- ----------------------------------------------------------------------------------------------------------
Gross profit 278,287 262,538 263,816
- ----------------------------------------------------------------------------------------------------------
Gross profit percent 23.7% 25.0% 22.1%
- ----------------------------------------------------------------------------------------------------------
Operating Expenses
Selling and marketing 118,688 112,978 112,146
Research and development 28,387 26,722 28,270
General and administrative 31,106 29,736 25,983
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 178,181 169,436 166,399
- ----------------------------------------------------------------------------------------------------------
Operating income 100,106 93,102 97,417
Nonoperating Expense (income)
Interest expense 2,959 2,829 4,339
Equity in (income) of affiliates (7,819) (6,718) (3,107)
Other expense (income), net (4,805) (5,171) (1,148)
Provision for litigation loss (Note 2) 61,409 -- --
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 48,362 102,162 97,333
Provision for income taxes 17,347 36,779 35,040
- ----------------------------------------------------------------------------------------------------------
Net income $ 31,015 $ 65,383 $ 62,293
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Basic Net Income Per Share 1.20 2.45 2.24
Diluted Net Income Per Share $ 1.19 $ 2.45 $ 2.24
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE>
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY IN THOUSANDS
<TABLE>
<CAPTION>
Compensation Retained
Additional Payable in Earnings
Preferred Common Paid-in Deferred Common (Accumulated
Stock Stock Capital Compensation Stock Deficit) Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 -- 273 109,344 -- 11,418 (2,521) 118,514
First Rights conversion
to stock -- 2 5,717 -- (5,769) -- (50)
Employee stock compensation -- 1 1,466 (978) 4,061 -- 4,550
Dividends -- -- -- -- -- (16,390) (16,390)
Repurchase and retirement
of common shares -- (6) (13,581) -- -- -- (13,587)
Net income -- -- -- -- -- 62,293 62,293
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 -- 270 102,946 (978) 9,710 43,382 155,330
First Rights conversion
to stock -- 3 7,164 -- (7,210) -- (43)
Employee stock compensation -- 2 2,733 (2,155) 4,846 -- 5,426
Dividends -- -- -- -- -- (16,958) (16,958)
Repurchase and retirement
of common shares -- (15) (39,888) -- -- -- (39,903)
Net income -- -- -- -- -- 65,383 65,383
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 -- 260 72,955 (3,133) 7,346 91,807 169,235
First Rights conversion
to stock -- 1 1,841 -- (1,864) -- (22)
Employee stock compensation -- 3 11,543 (3,593) 1,362 -- 9,315
Dividends -- -- -- -- -- (18,582) (18,582)
Repurchase and retirement
of common shares -- (11) (37,717) -- -- -- (37,728)
Net income -- -- -- -- -- 31,015 31,015
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ -- $ 253 $ 48,622 $ (6,726) $ 6,844 $ 104,240 $ 153,233
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE>
CONSOLIDATED
STATEMENTS OF CASH FLOWS IN THOUSANDS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 31,015 $ 65,383 $ 62,293
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 36,192 33,168 31,053
Noncash compensation 7,808 5,010 4,550
Equity in (income) of affiliates (7,819) (6,718) (3,107)
Deferred income taxes 5,000 -- --
Changes in current operating items
Trade receivables (443) (6,435) 4,244
Inventories 32,108 (16,633) (18,278)
Accounts payable 16,231 10,513 (6,874)
Accrued expenses 6,828 11,551 16,568
Income taxes payable (9,206) 7,660 (4,029)
Other 3,671 (1,191) 3,161
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 121,385 102,308 89,581
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (61,532) (36,798) (45,336)
Investments in and advances to affiliates (9,112) (16,627) (10,998)
Distributions and repayments from affiliates 9,702 13,999 4,241
- -------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (60,942) (39,426) (52,093)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under credit agreement 338,200 290,100 276,900
Repayments under credit agreement (342,100) (300,700) (282,100)
Repurchase and retirement of common shares (37,728) (39,903) (13,587)
Cash dividends to shareholders (18,582) (16,958) (16,390)
- -------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (60,210) (67,461) (35,177)
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 233 (4,579) 2,311
CASH AND CASH EQUIVALENTS
Beginning 1,233 5,812 3,501
- -------------------------------------------------------------------------------------------------------------
Ending $ 1,466 $ 1,233 $ 5,812
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the year $ 24,731 $ 25,838 $ 31,673
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Income taxes paid during the year $ 21,475 $ 29,007 $ 39,069
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND SIGNIFICANT
ACCOUNTING POLICIES
Polaris Industries Inc. ("Polaris" or the "Company") is engaged in a single
industry segment consisting of the design, engineering, manufacturing and
marketing of innovative, high-quality, high-performance motorized products for
recreation and utility use, including snowmobiles, all-terrain vehicles,
motorcycles and personal watercraft. Polaris products, together with related
parts, garments and accessories are sold worldwide through a network of dealers,
distributors and its subsidiaries.
BASIS OF PRESENTATION: All significant intercompany transactions and balances
have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
INTERNATIONAL OPERATIONS: The following data relates to Polaris' international
operations (in thousands of United States dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Canadian Subsidiary:
Sales $ 142,502 $ 154,318 $ 166,471
Operating income 2,992 6,399 6,024
Identifiable assets 18,902 20,279 21,703
- --------------------------------------------------------------
Other export sales $ 61,669 $ 58,739 $ 49,134
</TABLE>
CASH EQUIVALENTS: Polaris considers all highly liquid investments purchased with
an original maturity of 90 days or less to be cash equivalents. Such investments
have consisted principally of commercial paper and money market mutual funds.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Except as noted, the carrying value of all
financial instruments approximates their fair value.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out
method) or market. The major components of inventories are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Raw materials and purchased components $ 32,235 $ 17,614
Service parts, garments and accessories 41,085 45,619
Finished goods 34,116 76,311
- ----------------------------------------------------------------
$ 107,436 $ 139,544
- ----------------------------------------------------------------
- ----------------------------------------------------------------
</TABLE>
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation
is provided using the straight-line method over the estimated useful life of the
respective assets, ranging from 10-20 years for buildings and improvements and
from 1-7 years for equipment and tooling. Fully depreciated tooling is
eliminated from the accounting records annually.
INTANGIBLE ASSETS: Intangible assets are stated net of accumulated amortization
totaling $11.6 million at December 31, 1998, and $10.7 million at December 31,
1997, and consist principally of cost in excess of the net assets of the
business acquired which is amortized on a straight-line basis over 40 years.
Other intangible assets are amortized using the straight-line method over their
estimated useful lives ranging from 5 to 17 years.
Polaris periodically assesses the amortization period and recoverability of
the carrying amount of its intangible assets to determine potential impairment
based upon expected future cash flows from the related business. To date,
management has determined that no such impairment exists.
PRODUCT WARRANTIES: Polaris provides for estimated warranty costs at the time of
sale to the dealer or distributor customer and for other costs associated with
specific items at the time their existence and amounts are determinable.
FOREIGN CURRENCY: 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.
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 overall risk is reduced and (3) whether 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
statements of operations. At December 31, 1998, Polaris had open Japanese yen
foreign exchange contracts with notional amounts totaling U.S. $51.0 million
which mature throughout 1999.
REVENUE RECOGNITION: Revenues are recognized at the time of shipment to the
dealer or distributor. Product returns, whether in the normal course of business
or resulting from repossession under its customer financing program (Note 3),
have not been material. Polaris provides for estimated sales promotion expenses
at the time of sale to the dealer or distributor customer.
<PAGE>
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAJOR SUPPLIER: During 1998, 1997, and 1996, purchases of engines and related
components totaling 12, 16 and 22 percent respectively of Polaris' cost of sales
were from a single Japanese supplier. Polaris has agreed with the supplier to
share the impact of fluctuations in the exchange rate between the United States
dollar and the Japanese yen.
NEW ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board issued
Statement of Financial Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No.131) in June 1997. Polaris is a
single operating segment business and is not impacted by SFAS No. 131.
The Financial Accounting Standards Board issued Statement of Financial Standards
No.133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No.133) in June 1998. Polaris is not required to adopt SFAS No. 133 until
January 1, 2000. However, Polaris does not believe the adoption of SFAS No. 133
will have a material effect on its Financial Statements.
NOTE 2 LITIGATION SETTLEMENT
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 a
judgment 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 statement of operations for the year ended December 31, 1998. The
net income impact of the litigation loss was $39.6 million or $1.53 per diluted
share. Adjusted net income excluding the IRS litigation provision was $70.6
million or $2.72 per diluted share. The related payment to IRS was made in the
fourth quarter 1998 in connection with entering into the confidential settlement
agreement. Polaris utilized its existing bank line of credit arrangement to fund
the payment. Polaris no longer uses any of the technology in dispute.
NOTE 3 FINANCING
BANK FINANCING: Polaris is a party to an unsecured bank line of credit
arrangement under which it may borrow up to $175 million until March 31, 1999
and up to $150 million thereafter until maturity. Interest is charged at rates
based on LIBOR or "prime" and the agreement expires on March 31, 2000, at which
time the outstanding balance is due. The following summarizes activity under
Polaris' credit arrangement (in thousands):
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total borrowings at December 31 $ 20,500 $ 24,400
Average outstanding borrowings
during year $ 48,410 $ 47,950
Maximum outstanding borrowings
during year $ 77,000 $ 80,000
Interest rate at December 31 5.95% 6.76%
</TABLE>
LETTERS OF CREDIT: At December 31, 1998, Polaris had open letters of credit
totaling approximately $7.8 million. The amounts outstanding are reduced as
inventory purchases pertaining to the contracts are received.
CUSTOMER FINANCING PROGRAM: Certain finance companies, including Polaris
Acceptance, an affiliate (Note 7), provide floor plan financing to distributors
and dealers on the purchase of Polaris products. The amount financed by
distributors and dealers under these arrangements at December 31, 1998, was
approximately $384 million. Polaris has agreed to repurchase products
repossessed by the finance companies up to an annual maximum of 15 percent of
the average amounts outstanding during the prior calendar year. Polaris'
financial exposure under these arrangements is limited to the difference between
the amount paid to the finance companies for repurchases and the amount received
on the resale of the repossessed product. No material losses have been incurred
under these agreements during the periods presented. As a part of its marketing
program, Polaris contributes to the cost of dealer and distributor financing up
to certain limits and subject to certain conditions. Such expenditures are
included with operating expenses in the accompanying statements of operations.
NOTE 4 INCOME TAX MATTERS
Components of Polaris' provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 10,362 $ 31,575 $ 30,063
State 739 2,255 2,233
Foreign 1,246 2,949 2,744
Deferred 5,000 -- --
- --------------------------------------------------------------
Total $ 17,347 $ 36,779 $ 35,040
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
<PAGE>
Reconciliations of the Federal statutory income tax rate to the effective
tax rate are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 2.5 2.5 2.6
Other permanent differences (1.6) (1.5) (1.6)
- -----------------------------------------------------------------------------
Effective income tax rate 35.9% 36.0% 36.0%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
Polaris utilizes the liability method of accounting for income taxes whereby
deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of enacted tax laws. The net deferred tax asset
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current deferred tax assets:
Inventories $ 4,100 $ 4,000 $ 3,000
Accrued expenses 24,700 24,000 19,300
Compensation payable in
common stock 200 1,000 2,700
- -------------------------------------------------------------------
Total current 29,000 29,000 25,000
- -------------------------------------------------------------------
Noncurrent deferred tax assets:
Cost in excess of net assets
of business acquired 25,200 27,600 30,000
Property and equipment (4,900) (2,000) (1,000)
Compensation payable in
common stock 700 400 1,000
- -------------------------------------------------------------------
Total noncurrent 21,000 26,000 30,000
- -------------------------------------------------------------------
Total $ 50,000 $ 55,000 $ 55,000
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
NOTE 5 STOCK-BASED COMPENSATION
Polaris maintains a stock option plan (Option Plan) under which incentive and
nonqualified stock options for a maximum of 2,350,000 shares of common stock may
be issued to certain employees. Options granted to date generally vest three
years from the award date and expire after tenyears.
Polaris maintains a restricted stock plan (Restricted Plan) under which a
maximum of 800,000 shares of common stock may be awarded as an incentive to
certain employees with no cash payments required from the recipient. The
restrictions on awards granted to date lapse after a three to four year period
if Polaris achieves certain performance measures.
In 1997, Polaris adopted a qualified non-leveraged Employee Stock Ownership
Plan (ESOP) under which a maximum of 1,250,000 shares of common stock can be
awarded. Shares vest immediately and require no cash payments from the
recipient. Substantially all employees are eligible to participate in the ESOP.
Polaris has historically maintained a plan in which rights to receive
shares of common stock (First Rights) are issued to management (Management Plan)
and other employees (Employee Plan). First Rights are converted to common stock
with no cash payments required from the recipient. At December 31, 1998, no
additional rights are available to be granted under the Management Plan or the
Employee Plan.
The following summarizes share activity in the above plans, and the
weighted average exercise price for the Option Plan:
<TABLE>
<CAPTION>
Restricted Management Employee
Option Plan Plan Plan Plan ESOP
- --------------------------------------------------------------------------------------------
Weighted
Average
Exercise
Shares Price Shares Shares Shares Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding as
of December 31,
1995 254,550 $ 29.00 -- 317,250 153,000 --
Granted 136,830 $ 33.75 61,795 -- 171,005 --
Converted -- -- -- (57,000) (153,000) --
Forfeited -- -- -- -- -- --
- --------------------------------------------------------------------------------------------
Outstanding as
of December 31,
1996 391,830 $ 30.66 61,795 260,250 171,005 --
Granted 142,980 $ 25.75 64,915 -- -- --
Converted -- -- -- (147,750) (171,005) --
Forfeited (38,617) $ 29.50 (2,835) (15,000) -- --
- --------------------------------------------------------------------------------------------
Outstanding as
of December 31,
1997 495,743 $ 29.33 123,875 97,500 -- 170,000
Granted 691,590 $ 40.15 147,765 -- -- 173,206
Exercised/
Converted (33,425) $ 29.00 -- (87,750) -- --
Forfeited (76,183) $ 30.94 (28,605) (1,500) -- --
- ---------------------------------------------------------------------------------------------
Outstanding as
of December 31,
1998 1,077,725 $ 36.17 243,035 8,250 -- 343,206
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Exercisable/
Vested as
of December 31,
1998 180,815 $ 29.00 -- -- -- 343,206
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Shares outstanding under the Option Plan have exercise prices ranging from
$25.75 to $49.45 and a weighted average remaining contractual life of 8.6 years.
In 1995, Polaris approved a nonqualified deferred compensation plan
(Director Plan) under which directors who are not Polaris officers or employees
can elect to receive common stock equivalents in lieu of director's fees, which
will be converted into common stock when board service ends. A maximum of 75,000
shares of common stock has been authorized under this plan and 20,529 have been
earned as of December 31, 1998.
Polaris, which accounts for all stock based compensation plans under
APB Opinion No. 25, and recorded compensation costs of $7.8 million, $5.0
million, and $4.6 million in 1998, 1997 and 1996, respectively. Had
compensation costs for these plans been recorded at fair value consistent
with the methodology prescribed by SFAS No. 123 "Accounting for Stock-Based
Compensation," Polaris' net income and net income per share would have been
reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Net Income (in thousands)
As Reported $ 31,015 $ 65,383 $ 62,293
Pro Forma 29,336 64,346 61,475
Diluted Net Income Per Share
As Reported $ 1.19 $ 2.45 $ 2.24
Pro Forma 1.13 2.41 2.21
</TABLE>
The fair value of each award under the Option Plan is estimated on the date
of grant using the Black-Scholes option-pricing model. The following assumptions
were used to estimate the fair value of options:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.6% 6.6% 6.8%
Expected life 7 years 7 years 7 years
Expected volatility 14% 23% 27%
Expected dividend yield 2.0% 2.5% 1.8%
</TABLE>
The weighted average fair values at the grant dates of First Rights and
shares awarded under the above plans are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Option Plan $ 5.57 $ 7.45 $ 12.16
Restricted Plan $ 34.89 $ 25.75 $ 33.75
Employee Plan -- -- $ 23.75
ESOP $ 39.19 $ 30.56 --
</TABLE>
NOTE 6 SHAREHOLDERS' EQUITY
STOCK REPURCHASE PROGRAM: The Polaris Board of Directors has authorized the
cumulative repurchase of up to 5,000,000 shares of the Company's common stock.
During 1998, Polaris paid $37.7 million to repurchase and retire 1,090,500
shares. Cumulative repurchases through December 31, 1998 are 3,067,400 shares
for $91.2 million.
NET INCOME PER SHARE: Polaris calculates net income per share in accordance with
Statement of Financial Accounting Standards 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 compute the dilutive effect of outstanding stock options. A
reconciliation of these amounts is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Net income available to common
shareholders $ 31,015 $ 65,383 $ 62,293
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Weighted average number
of common shares outstanding 25,709 26,403 27,338
First Rights 21 139 458
Director Plan 17 12 5
ESOP 170 170 --
- ------------------------------------------------------------------------
Common shares outstanding-- basic 25,917 26,724 27,801
- ------------------------------------------------------------------------
Dilutive effect of Option Plan 69 15 14
- ------------------------------------------------------------------------
Common and potential common
shares outstanding-- diluted 25,986 26,739 27,815
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Basic net income per share $ 1.20 $ 2.45 $ 2.24
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Diluted net income per share $ 1.19 $ 2.45 $ 2.24
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
Polaris also has shares issued under the Restricted Plan, which will not be
included in the above calculations until certain performance criteria are met.
STOCK PURCHASE PLAN: In 1997, Polaris adopted an Employee Stock Purchase Plan
(Purchase Plan). A total of 750,000 shares of common stock are reserved for this
plan. The Purchase Plan permits eligible employees to purchase common stock at
85 percent of the average market price each month.
<PAGE>
NOTE 7 INVESTMENTS IN AFFILIATES
In February 1996, a wholly owned subsidiary of Polaris entered into a
partnership agreement with a wholly owned subsidiary of Transamerica
Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance
provides floor plan financing to Polaris' dealers and distributors and will in
the future provide other financial services to dealers, distributors and retail
customers of Polaris. Under the partnership agreement, Polaris' subsidiary has a
50 percent equity interest in Polaris Acceptance and guarantees 50 percent of
the outstanding indebtedness of Polaris Acceptance under a credit agreement
between Polaris Acceptance and TDF. At December 31, 1998, Polaris' contingent
liability with respect to the guarantee was approximately $139.0 million.
In February 1995, Polaris entered into an agreement with Fuji Heavy
Industries Ltd. to form Robin Manufacturing, U.S.A. (Robin). Under the
agreement, Polaris has a 40 percent ownership interest in Robin, which builds
engines in the United States for recreational and industrial products.
Polaris' investments in joint ventures 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 nonoperating expense (income) in the
accompanying statements of operations. Polaris Acceptance is a partnership and
the payment of income taxes is the responsibility of each of the partners. Robin
is a corporation responsible for the payment of its own income taxes.
Summarized combined financial information for the joint ventures is
presented as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 64,996 $ 67,228
Cost of goods sold, interest and operating expenses 48,945 53,620
- ------------------------------------------------------------------------------
Net income before income taxes $ 16,051 $ 13,608
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Finance Receivables, net $ 323,728 $ 231,137
Other assets 17,288 18,424
- ------------------------------------------------------------------------------
$ 341,016 $ 249,561
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Note Payable $ 278,439 $ 184,835
Other Liabilities 12,084 14,125
Shareholders' equity and Partners' capital 50,493 50,601
- ------------------------------------------------------------------------------
$ 341,016 $ 249,561
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
NOTE 8 COMMITMENTS AND CONTINGENCIES
PRODUCT LIABILITY: 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 operating expenses
when it is probable a loss has been incurred and the amount of the loss is
reasonably determinable.
LITIGATION: 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.
LEASES: Polaris leases buildings and equipment under noncancelable operating
leases. Total rent expense under all lease agreements was $2.5 million, $2.8
million and $2.9 million, for 1998, 1997 and 1996, respectively. Future minimum
payments, exclusive of other costs, required under noncancelable operating
leases at December 31, 1998, total $2.2 million cumulatively through 2003.
NOTE 9 QUARTERLY FINANCIAL DATA
(Unaudited) (In thousands, except per share data)
<TABLE>
<CAPTION>
Diluted
Net
Gross Net Income
Sales Profit Income Per Share
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
First Quarter $ 210,001 $ 46,804 $ 8,361 $ .32
Second Quarter 274,711 64,209 14,484 .55
Third Quarter 359,861 86,430 (14,504) (.56)
Fourth Quarter 330,947 80,844 22,674 .88
- ----------------------------------------------------
Totals $1,175,520 $ 278,287 $ 31,015 $ 1.19
- -----------------------------------------------------------------
- -----------------------------------------------------------------
1997:
First Quarter $ 224,634 $ 49,492 $ 12,019 $ .44
Second Quarter 248,888 60,258 13,294 .49
Third Quarter 293,428 78,568 21,640 .82
Fourth Quarter 280,346 74,220 18,430 .70
- ----------------------------------------------------
Totals $1,048,296 $ 262,538 $ 65,383 $ 2.45
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
<PAGE>
REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
TO POLARIS INDUSTRIES INC.:
We have audited the accompanying consolidated balance sheets of Polaris
Industries Inc. (a Minnesota corporation) and Subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
Polaris' 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Polaris
Industries Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
MINNEAPOLIS, MINNESOTA
JANUARY 29, 1999
<PAGE>
Polaris Industries Inc.
1225 Highway 169 North
Minneapolis, MN 55441
INVESTOR INFORMATION
INDEPENDENT AUDITORS
Arthur Andersen LLP
Minneapolis, MN
FORM 10-K
The Form 10-K annual report to the Securities and Exchange Commission is
available without charge to shareholders upon written request to:
Investor Relations
Polaris Industries Inc.
1225 Highway 169 North
Minneapolis, MN 55441-5078
ANNUAL SHAREHOLDERS' MEETING
The meeting will be held at 9:00 a.m., Thursday, May 20, 1999 at the Radisson
Hotel and Conference Center, 3131 Campus Drive, Plymouth, MN. A proxy statement
will be mailed on or about March 29, 1999 to each shareholder of record on March
22, 1999.
SUMMARY OF TRADING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------------
Quarter High Low High Low
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $ 38.00 $ 27.81 $ 26.25 $ 22.75
Second 39.00 33.00 32.56 22.25
Third 38.19 30.31 32.50 28.50
Fourth 39.19 24.75 33.25 28.75
</TABLE>
STOCK EXCHANGES
Shares of common stock of Polaris Industries Inc. trade on the New York Stock
Exchange and on the Pacific Stock Exchange under the symbol PII.
CASH DISTRIBUTIONS AND DIVIDENDS DECLARED
<TABLE>
<CAPTION>
Quarter 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First $ .18 $ .16
Second .18 .16
Third .18 .16
Fourth .18 .16
- ----------------------------------------------------------------------------------------------------------------
Total $ .72 $ .64
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Shareholders of record of the Company's common stock on February 26, 1999:
3,306.
Share price on February 26, 1999: $28.25.
[LOGO]
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
COMPANY ORGANIZATION SHARES OUTSTANDING % OF OWNERSHIP
- --------- ------------ ------------------ --------------
<S> <C> <C> <C>
Polaris Industries Inc. Delaware Corporation 100 100%
Polaris Real Estate Corporation of Iowa, Delaware Corporation 1,000 100% (1)
Inc.
Polaris Real Estate Corporation Delaware Corporation 1,000 100% (2)
Polaris Acceptance Inc. Minnesota Corporation 1 100%
Polaris Industries Export Ltd. Barbados Corporation 1,000 100%
Polaris Industries Ltd. Manitoba Corporation 101 100% (3)
Polaris Sales Inc. Minnesota Corporation 100 100% (4)
</TABLE>
- -----------------------
(1), (2), (3) and (4) Owned 100% by Polaris Industries Inc., a Delaware
Corporation.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements File Nos. 33-60157, 333-05463,
333-21007 and 33-57503.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
March 29, 1999
<PAGE>
POWER OF ATTORNEY
(FORM 10-K)
KNOW ALL MEN BY THESE PRESENTS, that POLARIS INDUSTRIES INC., a Minnesota
corporation (the "Company"), and each of the undersigned directors of the
Company, hereby constitutes and appoints W. Hall Wendel, Jr. and Michael W.
Malone and each of them (with full power to each of them to act alone) its/his
true and lawful attorney-in-fact and agent, for it/him and on its/his behalf and
in its/his name, place and stead, in any and all capacities to sign, execute,
affix its/his seal thereto and file the Annual Report on Form 10-K for the year
ended December 31, 1998 under the Securities Exchange Act of 1933, as amended,
with any amendment or amendments thereto, with all exhibits and any and all
documents required to be filed with respect thereto with any regulatory
authority.
There is hereby granted to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in respect of the foregoing as fully as it/he or itself/himself might
or could do if personally present, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause to be
done by virtue hereof.
This Power of Attorney may be executed in any number of counterparts, each
of which shall be an original, but all of which taken together shall constitute
one and the same instrument and any of the undersigned directors may execute
this Power of Attorney by signing any such counterpart.
POLARIS INDUSTRIES INC. has caused this Power of Attorney to be executed in
its name by its Chief Executive Officer on the 21st day of January, 1999.
POLARIS INDUSTRIES INC.
By: /s/ W. Hall Wendel, Jr.
-------------------------------------
W. Hall Wendel, Jr.
Chief Executive Officer
<PAGE>
The undersigned, directors of POLARIS INDUSTRIES INC., have hereunto set
their hands as of the 21st day of January, 1999.
/s/ W. Hall Wendel, Jr. /s/ Thomas C. Tiller
- --------------------------------- ---------------------------------
W. Hall Wendel, Jr. Thomas C. Tiller
/s/ Bruce A. Thomson /s/ Stephen G. Shank
- --------------------------------- ---------------------------------
Bruce A. Thomson Stephen G. Shank
/s/ Andris A. Baltins /s/ Gregory R. Palen
- --------------------------------- ---------------------------------
Andris A. Baltins Gregory R. Palen
/s/ Beverly F. Dolan /s/ Robert S. Moe
- --------------------------------- ---------------------------------
Beverly F. Dolan Robert S. Moe
/s/ Raymond J. Biggs
- ---------------------------------
Raymond J. Biggs
D I R E C T O R S
2
<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 DECEMBER 31, 1998,
AND THE RELATED STATEMENTS OF OPERATIONS, SHAREHOLDERS EQUITY AND CASH FLOWS FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,466
<SECURITIES> 0
<RECEIVABLES> 43,035
<ALLOWANCES> 0
<INVENTORY> 107,436
<CURRENT-ASSETS> 183,840
<PP&E> 229,481
<DEPRECIATION> 105,227
<TOTAL-ASSETS> 378,697
<CURRENT-LIABILITIES> 204,964
<BONDS> 20,500
0
0
<COMMON> 253
<OTHER-SE> 152,980
<TOTAL-LIABILITY-AND-EQUITY> 378,697
<SALES> 1,175,520
<TOTAL-REVENUES> 1,175,520
<CGS> 897,233
<TOTAL-COSTS> 897,233
<OTHER-EXPENSES> 178,181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,959
<INCOME-PRETAX> 48,362
<INCOME-TAX> 17,347
<INCOME-CONTINUING> 31,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,015
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
</TABLE>
