-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VIguwFMUn1renwifhNMtcVHGAAb5m0KDpUE3jsmummWB4R3FzyPFmOAek2vMwwso dbSnaHvgqJQf8lxrDXBE3w== 0000912057-96-004997.txt : 19960325 0000912057-96-004997.hdr.sgml : 19960325 ACCESSION NUMBER: 0000912057-96-004997 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960322 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS INDUSTRIES INC/MN CENTRAL INDEX KEY: 0000931015 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411790959 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20503 FILM NUMBER: 96537651 BUSINESS ADDRESS: STREET 1: 1225 HIGHWAY 169 NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6125420500 MAIL ADDRESS: STREET 1: 1225 HIGHWAY 169 NORTH STREET 2: 425 LEXINGTON AVE CITY: MINNESOTA STATE: MN ZIP: 55441 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) 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 - ---------------------------------------- -------------------------------------- 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, 1996 (based upon the closing reported sale price of the Common Stock at that date on the New York Stock Exchange) held by non-affiliates (24,681,175 shares) was approximately $737,350,103. 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 15, 1996, 27,532,086 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, 1995 furnished to the Securities and Exchange Commission (the "1995 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 9, 1996 filed with the Securities and Exchange Commission (the "1996 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. The Company, directly or indirectly, owns 100% of the Partnership and continues to conduct the business and operations of Polaris Industries L.P. The term "Polaris" as used herein refers to the business and operations of the Partnership and its predecessor, Polaris Industries L.P. Polaris designs, engineers and manufactures snowmobiles, four-and six-wheel all terrain recreational and utility vehicles ("ATVs"), and personal watercraft ("PWC") and markets them, together with related accessories, clothing and replacement parts through dealers and distributors principally located in the United States, Canada and Europe. Snowmobiles, ATVs, PWC and clothing, accessories and parts, accounted for the following approximate percentages of Polaris' sales for the periods indicated.
CLOTHING, YEAR ENDED ACCESSORIES DECEMBER 31 SNOWMOBILES ATVS PWC AND PARTS - -------------------- ----------- ----- ----- ----------- 1995.............. 40% 33% 16% 11% 1994.............. 44% 29% 14% 13% 1993.............. 50% 26% 9% 15%
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, Arctco and Polaris. Polaris estimates that industry sales of snowmobiles on a world wide basis were approximately 212,000 units for the season ended March 31, 1995. ALL TERRAIN VEHICLES. ATVs are four-wheel and six-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. By 1980, the number of ATV units sold in the North American market annually had increased to approximately 140,000 units. Other Japanese motorcycle manufacturers, Yamaha, Kawasaki and Suzuki, entered the North American market in the late 1970s and early 1980s, and Arctco entered the ATV market in 1995. In 1985, the number of three-and four-wheel ATVs sold in North America peaked at approximately 650,000 units per year. Polaris estimates that, since declining from that level, the industry has stabilized and begun growing slowly with approximately 325,000 ATVs sold worldwide during the calendar year 1995. 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 1 for one, two or three passengers. Polaris entered the PWC market in 1992. Polaris estimates that worldwide sales for PWC was approximately 225,000 units during the calendar year 1995. Other major PWC manufacturers are Yamaha, Bombardier, Kawasaki and Arctco. PRODUCTS SNOWMOBILES. Polaris produces a full line of snowmobiles, consisting of thirty-six models, ranging from utility and economy models to performance and competition models, with 1995 suggested 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 has the largest share of the worldwide snowmobile market. 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, tow hitches, hand warmers, specialized instrumentation, reverse gear, special traction products, cargo racks, oils, lubricants, paints and parts. For the year ended December 31, 1995, snowmobiles accounted for approximately 40% of Polaris' sales. 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 and six-wheel ATV products, which provide more stability for the rider than the earlier three-wheel versions. Polaris' line of ATVs consisting of twelve models, includes general purpose, sport and four-and six-wheel drive utility models, with 1995 suggested retail prices ranging from approximately $2,950 to $6,300. Polaris' ATV features the totally automatic Polaris variable transmission which requires no manual shifting and a MacPherson strut front suspension, which Polaris believes enhances control and stability. Polaris' ATV is also the only ATV in its class that uses a two cycle engine and chain drive, which Polaris believes improves performance and efficiency. 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 somewhat since 1989 and has begun to resume modest growth. For the year ended December 31, 1995 ATVs accounted for approximately 33% of Polaris' sales. PERSONAL WATERCRAFT. In 1992, Polaris introduced the SL650 personal watercraft, Polaris' first entry into this product category. In 1993, Polaris added other models with more power and performance. Management believes that its models had the industry's first three-cylinder engines developed specifically for PWC. The introduction of the PWC made use of Polaris' engineering, production and distribution strengths, and also reduced Polaris' dependence on its then existing product lines for overall sales and earnings. The 1995 suggested retail prices for Polaris' PWC range from approximately $5,000 to $6,300. For the year ended December 31, 1995, PWC accounted for approximately 16% of Polaris' sales. CLOTHING, ACCESSORIES AND REPLACEMENT PARTS. Polaris produces or supplies a variety of replacement parts and accessories for its snowmobiles, ATVs 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 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. Replacement parts and accessories are also marketed by Polaris. For the year ended December 31, 1995, clothing, accessories and parts accounted for approximately 11% of Polaris' sales. 2 MANUFACTURING OPERATIONS Polaris' products are assembled at its original manufacturing facility at Roseau, Minnesota and since October, 1994 at its facility in Spirit Lake, Iowa. Since snowmobiles, ATVs 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. Engines, fuel tanks, hoods and 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 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 and PWC. In August of 1991, Polaris acquired a manufacturing facility in Osceola, Wisconsin to manufacture component parts previously produced by third party suppliers. Pursuant to informal agreements between Polaris and Fuji Heavy Industries Ltd. ("Fuji"), Fuji has 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. Such engines are developed by Fuji to the specific requirements of Polaris. Polaris believes its relationship with Fuji to be excellent. If, however, its informal relationship were terminated by Fuji, interruption in the supply of engines would adversely affect Polaris' production pending the continued development of substitute supply arrangements. In October, 1995, Polaris announced it will begin producing its own engines for selected 1996 models of PWC and 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 February, 1995, Polaris entered into an agreement with Fuji to form Robin Manufacturing, U.S.A. ("Robin"). Under the agreement, Polaris initially invested $800,000 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. Polaris' products are shipped from its manufacturing facilities by a contract carrier. PRODUCTION SCHEDULING Snowmobiles are used principally in the northern United States, Canada and northern Europe in what is referred to as the "snow belt." 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 and orders for ATVs and PWC are placed in autumn after meetings with dealers and distributors, and 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 sold to dealers and distributors prior to production. Sales activity at the dealer level is monitored on a monthly basis for each of snowmobiles, ATVs and PWC. 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 May 1993, Polaris has the ability to manufacture ATVs year round. Generally, Polaris commences ATV production in late autumn and continues through early autumn of the following year. For the past several years, Polaris has had minimal carryover inventory at the dealer level of its production of snowmobiles, ATVs and PWC. SALES AND MARKETING With the exception of Illinois, upper Michigan and eastern Wisconsin, where Polaris sells its snowmobiles through independent distributors, Polaris sells its snowmobiles directly to dealers in the 3 snowbelt regions of the United States and Canada. Over the past several years, Polaris has placed an increasing emphasis on dealer-direct, as opposed to independent distributor, sales. Snowmobile sales in Europe and other offshore markets are handled through independent distributors. See Note 1 of Notes to Financial Statements for discussion of foreign and domestic operations and export sales. Most dealers and distributors of Polaris snowmobiles also distribute Polaris' ATVs and PWC. In the southern region of the United States, where snowmobiles are not used, Polaris has established a direct dealer network. Since the beginning of 1986, Polaris has established approximately 550 dealerships in the southern United States. 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. 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. The dealer and distributor contracts may be canceled by either party on specified notice. 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. Polaris has arrangements with Transamerica Commercial Finance Corporation, Canadian Imperial Bank of Commerce, The Bank of Nova Scotia 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 and PWC 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 in the past. 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 2 of Notes to Financial Statements. In February, 1996, Polaris entered into an agreement with Transamerica Commercial Finance Corporation to form Polaris Acceptance. Polaris Acceptance will provide floor plan financing and other financial services to dealer and distributor customers of Polaris. Polaris will initially invest approximately $7.5 million for a 25 percent equity interest in Polaris Acceptance. Polaris has an option to increase its equity interest to 50 percent effective January 1, 1997. Polaris Acceptance may in the future also provide retail financing and other financial services to consumers of Polaris' products. Polaris does not directly finance the purchase of Polaris snowmobiles, ATVs or PWC by consumers. However, retail financing plans are offered by certain of the dealers and Polaris has programs to make consumer financing available to its dealers through unaffiliated third parties. 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. Most dealer and distributor advertising appears in newspapers and on radio. Each season Polaris produces a promotional film for its snowmobiles, ATVs and PWC 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. 4 ENGINEERING, RESEARCH AND DEVELOPMENT Polaris employs approximately 250 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, the 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 and "on demand" four-wheel drive systems for use in ATVs and the application of a forced air cooled variable power transmission system to ATVs. 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' manufacturing facility in Roseau, Minnesota has a proving ground where each of the products is extensively tested under actual use conditions. Polaris expended for research and development approximately $19.9 million for 1995, $15.0 million for 1994, and $12.2 million for 1993, which amounts were included as a component of the cost of sales in the period incurred. COMPETITION The snowmobile, ATV 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 marketing resources which are substantially greater than those of Polaris. Polaris snowmobiles, ATVs and PWC 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 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 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 snowmobiles, ATVs and PWC. State approved trails and recreational areas for snowmobile and ATV use have been developed in response to environmental and safety concerns. 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. In September 1986, the staff of the Consumer Products Safety Commission ("CPSC") ATV Task Force issued a report on regulatory options for ATVs. The Task Force recommended that the ATV industry voluntarily cease marketing ATVs intended for use by children under 12 years of age. It proposed that warning labels be placed on ATVs intended for use by children under age 14 stating that these ATVs are not recommended for use by children under 12, and on adult-sized ATVs stating that these ATVs are not recommended for use by children under the age of 16. Warning labels were recommended for use on all ATVs stating that operator training is necessary to reduce risk of injury or death. 5 Based upon its findings that most states have not enacted laws regulating ATVs, the Task Force recommended that the CPSC work closely with states and other federal agencies to develop practical uniform state legislation. Topics to be addressed included minimum operator age recommendations, licensing or certification standards requiring operator training, helmet requirements, and prohibitions on the use of alcohol and controlled-substances while operating ATVs. In December 1986, in a follow-up measure to the Task Force Report, the CPSC voted unanimously to continue efforts with the ATV industry to develop a voluntary standard regarding the dynamic stability characteristics of ATVs. 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 and six-wheel ATVs. Polaris has always placed warning labels on its ATVs stating that they are designed for use only by persons aged 16 or older (which warning was revised in 1987 to provide that only adults over age 18 should operate the vehicle), that operators should always wear proper 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. The agreement called for the repurchase of all three-wheel ATVs remaining in the hands of its distributors and dealers, the provision of additional safety oriented point-of-purchase materials in all Polaris ATV dealerships, and the addition of a mandatory "hands on" consumer and dealer safety training program designed to give all Polaris ATV dealers and consumers maximum exposure to safe riding techniques, as outlined by the Specialty Vehicle Institute of America. Polaris conditions its ATV warranties described below under "-- Product Liability" on completion of the mandatory "hands on" consumer training program. Pursuant to the agreement with the CPSC, Polaris has procedures in place for ascertaining dealer compliance with the provisions of the CPSC consent decree, including random "undercover" on-site inspections of dealerships to ensure compliance with the age restriction. Polaris continually attempts to assure that its dealers are in compliance with the provisions of the CPSC consent decree. Polaris has notified its dealers that it will terminate any dealer it determines to have violated the provisions of the CPSC consent decree. To date, it has terminated seven dealers for such reason. The Company does not believe that the agreement with the CPSC has had or 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. Certain state attorneys-general have asserted that the CPSC agreement is inadequate and have indicated that they will seek stricter ATV regulation. Polaris is unable to predict the outcome of such action or the possible effect on its ATV business. Certain states, notably California and New York, have proposed certain legislation involving more stringent emissions standards for two-cycle engines. Such engines are used on Polaris' snowmobiles, ATVs and PWC. However, Polaris has developed and currently sells four-cycle engines for its ATVs which produce lower emissions. Polaris currently is unable to predict whether such legislation will be enacted and, if so, the ultimate impact on Polaris and its operations. Finally, local ordinances have been and may from time to time be considered and adopted which restrict the use of PWC to specified hours and locations. 6 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 has been self-insured since June 1985. Product liability claims are made against Polaris from time to time. Since its inception in 1981 through December 31, 1995, Polaris has paid an aggregate of less than $2.0 million in product liability claims and had accrued $7.0 million at December 31, 1995, 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, or PWC prior to 1992, 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 5 of Notes to Financial Statements. Polaris warrants its snowmobiles, ATVs and PWC under a "limited warranty" for a period of one year, six months, and one year, respectively. 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 or PWC. EMPLOYMENT Polaris employed a total of approximately 3,500 persons at December 31, 1995. Approximately 750 of its employees are salaried. Polaris considers its relations with its personnel to be excellent. Historically, Polaris' snowmobile business has been seasonal, resulting in significant differences in employment levels during the year. Despite such variations in employment levels, employee turnover has not been high. With the introduction of the ATV line in 1985, Polaris' employment levels have become more stable. Polaris' employees have not been represented by a union since July 1982. 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. Polaris makes ongoing capital investments in its facilities. 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, and certain snowmobile and ATV models. 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. These investments have increased production capacity for snowmobiles, ATVs and PWC. The Company believes that Polaris' manufacturing facilities are adequate in size and suitability for its present manufacturing needs. 7 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 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 from related parties pursuant to a lease that will terminate in 1997. Polaris also leases an additional 109,000 square feet of warehouse space in Minneapolis, Minnesota and 42,000 square feet of office and warehouse space in Winnipeg, Manitoba. 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 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. Injection Research Specialists commenced an action in June 1990 against Polaris in Colorado federal court alleging various claims arising out of Polaris' advertisement and sale of electronic fuel injection snowmobiles. Injection Research Specialists seeks compensatory and punitive damages, its fees and costs, and injunctive relief. Fuji and UNISIA Japanese Electronic Control Systems also are parties to the action. Polaris has filed counterclaims in that action and has instructed its counsel to contest the matter vigorously. Management does not believe that any judgment rendered against it in this matter would have a material adverse effect on the financial condition of Polaris. In 1990, the Canadian income tax authorities proposed certain adjustments, principally relating to the original purchase price allocation to the Canadian subsidiary and transfer pricing matters for additional income taxes payable by Polaris' Canadian subsidiary for 1987 and 1988. The resolution of these proposed adjustments may also affect the Company's Canadian income tax expense for years subsequent to 1988. The Canadian income tax authorities have since initiated an audit of the tax years 1989 through 1991. Management continues to vigorously contest certain of the proposed adjustments. Management does not believe that the outcome of this matter will have a material adverse effect on Polaris' financial position or results of operations. See Note 5 of Notes to Financial Statements. 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. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names of the executive officers of the Company as of March 22, 1996, their ages, titles, the year first appointed as an executive officer of the Company and employment for the past five years:
NAME AGE TITLE - ----------------------- ---- ------------------------------------------------ W. Hall Wendel, Jr. 53 Chairman and Chief Executive Officer Kenneth D. Larson 55 President and Chief Operating Officer John H. Grunewald 59 Executive Vice President, Chief Financial Officer and Secretary Charles A. Baxter 48 Vice President -- Engineering and Product Safety Ed Skomoroh 58 Vice President -- Sales and Marketing Jeffrey A. Bjorkman 36 Vice President -- Manufacturing Michael W. Malone 37 Vice President and Treasurer
8 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 a 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. Larson has been President and Chief Operating Officer of the Company since 1994. Mr. Larson was President and Chief Operating Officer of PICC from October 1988 to December 1994. Prior thereto, Mr. Larson was Executive Vice President of The Toro Company and was responsible for its commercial, consumer and international equipment business, and had held a number of general management positions since joining The Toro Company in 1975. Mr. Grunewald has been Executive Vice President, Chief Financial Officer and Secretary of the Company since its formation and was Executive Vice President, Finance and Administration of PICC from September 1993 through December 1994. Prior to joining Polaris, Mr. Grunewald was employed for 16 years by Pentair, Inc., a diversified manufacturer of industrial products, most recently as Executive Vice President, Chief Financial Officer and Secretary. Mr. Baxter has been Vice President -- Engineering and Product Safety 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. Skomoroh has been Vice President -- Sales and Marketing of the Company since 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., a snowmobile manufacturer. 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. Malone has been Vice President and Treasurer of the Company since December 1994 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 & Co. 9 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 1995 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 1995 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 1995 Annual Report is included herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Registrant, included in the Company's 1995 Annual Report, are incorporated herein by reference: Consolidated Balance Sheets -- December 31, 1995 and 1994 Consolidated Statements of Operations -- Years Ended December 31, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity and Partners' Capital -- Years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. Report of Independent Public Accountants dated January 31, 1996. The financial statements of the Company and its predecessor, the Partnership, for the years ended December 31, 1994 and 1993 were examined by McGladrey & Pullen, LLP. The separate report of McGladrey & Pullen, LLP for such periods has been omitted from the Company's 1995 Annual Report in reliance on Rule 14a-3 of Regulation 14A under the Securities Exchange Act of 1934, as amended ("Rule 14a-3"). Pursuant to Note 1 to Rule 14a-3, the separate report of McGladrey & Pullen, LLP dated February 2, 1995 is included in this Item 8. 10 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Polaris Industries Inc. Minneapolis, Minnesota We have audited the accompanying consolidated balance sheet of POLARIS INDUSTRIES INC. as of December 31, 1994, and the related consolidated statements of operations, shareholders' equity and partners' capital and cash flows for the years ended December 31, 1994 and 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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. as of December 31, 1994, and the results of its operations and its cash flows for the years ended December 31, 1994 and 1993, in conformity with generally accepted accounting principles. McGLADREY & PULLEN, LLP Minneapolis, Minnesota February 2, 1995 11 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The disclosure required by Item 304(a) of Regulation S-K has been previously reported on the Company's Form 8-K/A#1 filed with the Securities and Exchange Commission on August 18, 1995. There are no disclosures required by the Company under Item 304(b) of Regulation S-K. 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 1996 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 "Compliance with Beneficial Ownership Reporting Rules" in the Company's 1996 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 1996 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 1996 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 1996 Proxy Statement is incorporated herein by reference. 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 1995 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. 12 (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 15, 1996, 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, 1995. (c) Exhibits Included in Item 14(a)(3) above. 13 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 22, 1996. POLARIS INDUSTRIES INC. By: /s/ W. HALL WENDEL, JR. -------------------------------------- W. Hall Wendel, Jr. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER 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.
SIGNATURE TITLE DATE - ------------------------------------ -------------------------- -------------- /s/ W. HALL WENDEL, JR. Chief Executive Officer - ------------------------------------ and Director (Principal March 22, 1996 W. Hall Wendel, Jr. Executive Officer) Executive Vice President, /s/ JOHN H. GRUNEWALD Chief Financial Officer - ------------------------------------ and Secretary (Principal March 22, 1996 John H. Grunewald Financial and Accounting Officer) * - ------------------------------------ Director March 22, 1996 Beverly F. Dolan * - ------------------------------------ Director March 22, 1996 Robert S. Moe * - ------------------------------------ Director March 22, 1996 Kenneth D. Larson * - ------------------------------------ Director March 22, 1996 Stephen G. Shank * - ------------------------------------ Director March 22, 1996 Gregory R. Palen * - ------------------------------------ Director March 22, 1996 Andris A. Baltins *By: /s/ W. HALL WENDEL, JR. March 22, 1996 ------------------------------ (W. Hall Wendel, Jr. Attorney-in-Fact)
- ------------------------ *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. 14 POLARIS INDUSTRIES INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1995
EXHIBIT NUMBER DESCRIPTION - ------------ ---------------------------------------------------------------------- 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 dated May 15, 1995. (b) Profit Sharing Plan, incorporated by reference to Exhibit 10(f) to the Registration Statement on Form S-1 (No. 33-015124)(the "Form S-1") of Polaris Industries Partners L.P. (the "Partnership"). (c) Retirement Savings Plan, incorporated by reference to Exhibit 10(g) to the Form S-1. (d) 1987 Management Ownership Plan, incorporated by reference to Exhibit 10(h) to the Form S-1. (e) 1987 Employee Ownership Plan, incorporated by reference to Exhibit 10(i) to the Form S-1. (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. (i) Joint Venture Agreement between the Company and Transamerica Commercial Finance Corporation ("Transamerica") dated February 7, 1996. (j) Manufacturer's Repurchase Agreement between the Company and Polaris Acceptance dated February 7, 1996. (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 incorporated by reference to Exhibit 10 to the Company's Quarterly Report in 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. (m) Shareholder Agreement with Fuji Heavy Industries LTD., incorporated by reference to Exhibit 10-K to the Company's Annual Report on Form 10-K dated March 24, 1995. (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 dated March 24, 1995. 11. Statement re: Computation of per share earnings. 13. Portions of the Annual Report to Security Holders for the Year Ended December 31, 1995 included pursuant to Note 2 to General Instruction G. 21. Subsidiaries of Registrant. 23.(a) Consent of Arthur Andersen LLP. (b) Consent of McGladrey & Pullen, LLP. 24. Power of Attorney. 27. Financial Data Schedule.
15 EX-10.(H) 2 EXHIBIT 10(H) POLARIS INDUSTRIES INC. DEFERRED COMPENSATION PLAN FOR DIRECTORS SECTION 1. INTRODUCTION 1.1 ESTABLISHMENT. Polaris Industries Inc., a Minnesota corporation (the "Company"), hereby establishes the Polaris Industries Inc. Deferred Compensation Plan for Directors (the "Plan") for those directors of the Company who are neither officers nor employees of the Company. The Plan provides (i) for the grant of awards in the form of Common Stock Equivalents to Directors and (ii) the opportunity for Directors to defer receipt of all or a part of their cash compensation and thereby be credited with additional Common Stock Equivalents. 1.2 PURPOSES. The purposes of the Plan are to align the interests of Directors more closely with the interests of other shareholders of the Company, to encourage the highest level of Director performance by providing the Directors with a direct interest in the Company's attainment of its financial goals, and to provide a financial incentive that will help attract and retain the most qualified Directors. 1.3 EFFECTIVE DATE. This plan shall be effective upon approval of the Plan by a vote of a majority of shares of Stock represented in person or by proxy at an annual meeting of the Company's shareholders. SECTION 2. DEFINITIONS 2.1 DEFINITIONS. The following terms shall have the meanings set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Change in Control" means any of the events set forth below: (i) The acquisition in one or more transactions, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of voting securities of the Company in excess of 30% of the voting securities of the Company unless such acquisition has been approved by the Board; or (ii) Any election has occurred of persons to the Board that causes two-thirds of the Board to consist of persons other than (A) persons who were members of the Board on the effective date of the Plan and (B) persons who were nominated for elections as members of the Board at a time when two-thirds of the Board consisted of persons who were members of the Board on the effective date of the Plan; provided, however, that any person nominated for election by a Board at least two-thirds of whom constituted persons described in clauses (A) and/or (B) or by persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of persons described in clause (A); or (iii) Approval by the stockholders of the Company of a reorganization, merger or consolidation, unless, following such reorganization, merger or consolidation, all or substantially all of the individuals and entities who were the respective beneficial owners of the voting securities of the Company immediately prior to such reorganization, merger or consolidation, following such reorganization, merger or consolidation beneficially own, directly or indirectly, more than 60% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the entity resulting from such reorganization, merger or consolidation in substantially the same proportion as their ownership of the voting securities of the Company immediately prior to such reorganization, merger of consolidation, as the case may be; or B-1 (iv) Approval by the stockholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) a sale or other disposition of all or substantially all the assets of the Company. (c) "Chief Financial Officer" means the Chief Financial Officer of the Company. (d) "Common Stock Equivalent" means a hypothetical share of Stock which shall have a value on any date equal to the Fair Market Value of one share of Stock on that date. (e) "Common Stock Equivalent Award" means an award of Common Stock Equivalents granted to a Director pursuant to Section 5.1 of the Plan. (f) "Deferred Stock Account" means the bookkeeping account established by the Company in respect to each Director pursuant to Section 5.4 hereof and to which shall be credited Common Stock Equivalents pursuant to the Plan. (g) "Director" means a member of the Board who is neither an officer nor an employee of the Company. For purposes of the Plan, an employee is an individual whose wages are subject to the withholding of federal income tax under section 3401 of the Internal Revenue Code, and an officer is an individual elected or appointed by the Board or chosen in such other manner as may be prescribed in the Bylaws of the Company to serve as such. (h) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (i) "Fair Market Value" means as of any applicable date: (i) if the Stock is listed on a national securities exchange or is authorized for quotation on the National Association of Securities Dealers Inc.'s NASDQ National Market System ("NASDQ/NMS"), the closing price, regular way, of the Stock on such exchange or NASDAQ/NMS, as the case may be, or if no such reported sale of the Stock shall have occurred on such date, on the next preceding date on which there was such a reported sale; or (ii) if the Stock is not listed for trading on a national securities exchange or authorized for quotation on NASDAQ/NMS, the closing bid price as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or if no such prices shall have been so reported for such date, on the next preceding date for which such prices were so reported; or (iii) if the stock is not listed for trading on a national securities exchange or authorized for quotation on NASDAQ, the last reported bid price published in the "pink sheets" or displayed on the NASD Electronic Bulletin Board, as the case may be; or (iv) if the Stock is not listed for trading on a national securities exchange, or is not authorized for quotation on the NASD Electronic Bulletin Board, the Fair Market Value of the Stock as determined in good faith by the Chief Financial Officer. (j) "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time. (k) "Stock" means the $.01 par value common stock of the Company. (l) "Quarterly Payment Date" means each of the four dates each year on which the Company pays retainer fees to Directors. 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definitions of any term herein in the singular shall also include the plural. SECTION 3. PLAN ADMINISTRATION The Plan shall be administered by the Chief Financial Officer. Subject to the limitations of the Plan, the Chief Financial Officer shall have the sole and complete authority: (i) to impose such limitations, restrictions, and conditions upon such awards as he or she shall deem appropriate, (ii) to interpret the Plan and to adopt, amend and rescind administrative guidelines and other rules and B-2 regulations relating to the Plan and (iii) to make all other determinations and to take all other actions necessary or advisable for the implementation and administration of the Plan. Notwithstanding the foregoing, the Chief Financial Officer shall have no authority, discretion or power to select the Directors who will receive awards pursuant to the Plan, determine the awards to be granted pursuant to the Plan, the number of shares of Stock to be issued thereunder or the time at which such awards are to be granted, established the duration and nature of awards or alter any other terms or conditions specified in the Plan, except in the sense of administering the Plan subject to the provisions of the Plan. The Chief Financial Officer's determinations on matters within his or her authority shall be conclusive and binding upon the Company and other persons. The Plan shall be interpreted and implemented in a manner so that Directors will not fail, by reason of the Plan or its implementation, to be "disinterested persons" within the meaning of Rule 16b-3 under Section 16 of the Exchange Act, as such rule may be amended. SECTION 4. STOCK SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. There shall be authorized for issuance under the Plan in accordance with the provisions of the Plan 50,000 shares of Stock. This authorization may be increased from time to time by approval of the Board and by the shareholders of the Company if such shareholder approval is required. The Company shall at all times during the terms of the Plan retain as authorized and unissued Stock at least the number of shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. The shares of Stock issuable hereunder shall be authorized and unissued shares or previously issued and outstanding shares of Common Stock reacquired by the Company. 4.2 OTHER SHARES OF STOCK. Any shares of Stock that are subject to a Common Stock Equivalent and for any reason are not issued to a Director shall automatically become available again for use under the Plan. 4.3 ADJUSTMENTS UPON CHANGES IN STOCK. If there shall be any change in the Stock of the Company, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, spinoff, split up, dividend in kind or other change in the corporate structure or distribution to the shareholders, appropriate adjustments shall be made by the Chief Financial Officer (or if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) in the aggregate number and kind of shares subject to the Plan, and the number and kind of shares which may be issued under the Plan. Appropriate adjustments may also be made by the Chief Financial Officer in the terms of Common Stock Equivalents under the Plan to reflect such changes and to modify any other terms of outstanding awards on an equitable basis as the Chief Financial Officer in his or her discretion determines. SECTION 5. COMMON STOCK EQUIVALENT AWARDS 5.1 GRANTS OF COMMON STOCK EQUIVALENT AWARDS. Common Stock Equivalents having a Fair Market Value on the date of grant equal to $1,250 shall be granted automatically, as of each Quarterly Payment Date, to each Director who is entitled to receive a retainer fee on such date; provided, however, that in the case of the first Quarterly Payment Date applicable to any person who is a Director on the date the Plan becomes effective, $3,750 shall be substituted for $1,250 in the foregoing provision. If a person becomes a member of the Board between Quarterly Payment Dates, whether by action of the shareholders of the Company or the Board, such person shall be granted automatically, as of the date his or her Board service commences, a pro rata Common Stock Equivalent Award equal to a full Award (determined pursuant to the immediately preceding sentence as if the date such Director began serving on the Board was a Quarterly Payment Date) multiplied by a fraction (not in excess of 1.0), the numerator of which is the number of days during the period beginning with the date upon which such Director commences Board service and ending with the next following Quarterly Payment Date, and the denominator of which is the total number of days during the period beginning on the Quarterly Payment Date immediately preceding the commencement of Board service by the Director and ending on the next following Quarterly Payment Date. B-3 5.2 DEFERRAL ELECTIONS. A Director may elect to defer receipt of all or a specified portion of the annual retainer and/or meeting fees otherwise payable in cash to the Director for serving on the Board or any committee thereof. A Director may make the elections permitted hereunder by giving written notice to the Company in a form approved by the Chief Financial Officer. The notice shall include: (i) the percentage of meeting fees or annual retainer to be deferred, and (ii) the time as of which deferral is to commence. Amounts deferred by a Director pursuant to this Section 5.2 shall be converted into Common Stock Equivalents in accordance with Sections 5.4. 5.3 TIME FOR ELECTING DEFERRAL. Any election to defer annual retainer and/or meeting fees shall be made prior to the date such fees are earned by the Director. Any subsequent election to (i) after the portion of such amounts deferred or (ii) revoke an election to defer such amounts, must be made no later than six months prior to the time such compensation is earned by the Director and credited to the Director's Deferred Stock Account pursuant to Section 5.4 hereof. 5.4 DEFERRED STOCK ACCOUNTS. A Deferred Stock Account shall be established for each Director. Fees deferred by a Director shall be credited to such Account as of the date such amounts would have otherwise been paid in cash to the Director, and shall be converted, based on Fair Market Value as of the date such amounts would have otherwise been paid in cash to the Director, into additional Common Stock Equivalents. A Director's Deferred Stock Account shall also be credited with dividends and other distributions pursuant to Section 5.5. 5.5 HYPOTHETICAL DIVIDENDS ON COMMON STOCK EQUIVALENTS. Dividends and other distributions on Common Stock Equivalents shall be deemed to have been paid as if such Common Stock Equivalents were actual shares of Stock issued and outstanding on the respective record or distribution dates. Common Stock Equivalents shall be credited to the Deferred Stock Account in respect of cash dividends and any other securities or property issued on the Stock in connection with reclassifications, spinoffs and the like on the basis of the value of the dividend or other asset distributed and the Fair Market Value of the Common Stock Equivalents on the date of the announcement of the dividend or asset distribution, all at the same time and in the same amount as dividends or other distributions are paid or issued on the Stock. Fractional shares shall be credited to a Director's Deferred Stock Account cumulatively but the balance of shares of Common Stock Equivalents in a Director's Deferred Stock Account shall be rounded to the next highest whole share for any payment to such Director pursuant to Section 5.7 hereof. 5.6 STATEMENT OF ACCOUNTS. A statement will be sent to each Director as to the balance of his or her Deferred Stock Account at least once each calendar year. 5.7 PAYMENT OF ACCOUNTS. A Director shall receive a distribution of his or her Deferred Stock Account as soon as practicable following his or her termination of services as a Director. Such distribution shall consist of one share of Stock for each Common Stock Equivalent credited to such Director's Deferred Stock Account as of the Quarterly Payment Date immediately preceding the date of distribution. 5.8 PAYMENTS TO A DECEASED DIRECTOR'S ESTATE. In the event of a Director's death before the balance of his or her Deferred Stock Account is fully paid to him, payment of the balance of the Director's Deferred Stock Account shall then be made to his estate in the time and manner selected by the Chief Financial Officer in the absence of a designation of a beneficiary pursuant to Section 5.9 hereof. The Chief Financial Officer may take into account the application of any duly appointed administrator or executor of a Director's estate and direct that the balance of the Director's Deferred Stock Account be paid to his estate in the manner requested by such application. 5.9 DESIGNATION OF BENEFICIARY. A Director may designate a beneficiary on a form approved by the Chief Financial Officer. 5.10 CHANGE IN CONTROL. Notwithstanding any provision of this Plan to the contrary, in the event a Change in Control of the Company occurs, within ten (10) days of the date of such Change in Control, each Director shall receive a lump sum distribution in cash equal to the value of all Common B-4 Stock Equivalents credited to such Director's Deferred Stock Account as of the Quarterly Payment Date immediately preceding the date of distribution (based upon the highest Fair Market Value during the 30 days immediately preceding the Change in Control). SECTION 6. ASSIGNABILITY The right to receive payments or distributions hereunder shall not be transferable or assignable by a Director other than by will or the laws of descent and distribution. SECTION 7. PLAN TERMINATION, AMENDMENT AND MODIFICATION The Plan shall automatically terminate at the close of business on the tenth anniversary of the effective date unless sooner terminated by the Board. The Board may at any time terminate, and from time to time may amend or modify the Plan, provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the shareholders if shareholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements, and, provided further that no amendment or modification shall be made more than once every six months that would change the amount, price or timing of the Common Stock Equivalent Awards, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules promulgated thereunder. SECTION 8. GOVERNING LAW The Plan and all agreements hereunder shall be construed in accordance with and governed by the laws of the State of Minnesota. B-5 EX-10.(I) 3 EXHIBIT 10(I) JOINT VENTURE AGREEMENT between POLARIS INDUSTRIES INC. and TRANSAMERICA COMMERCIAL FINANCE CORPORATION - ------------------------------------------------------------------------------- Dated as of February 7, 1996 - ------------------------------------------------------------------------------- TABLE OF CONTENTS
SECTION PAGE ------- ---- ARTICLE I FORMATION OF THE PARTNERSHIP...................... 1 1.1 PURPOSE........................................................... 1 1.2 NAME.............................................................. 2 1.3 LOCATION.......................................................... 2 1.4 TERM.............................................................. 2 1.5 INITIAL CAPITAL CONTRIBUTION...................................... 3 1.6 AGREEMENTS........................................................ 3 1.7 QUALIFICATION TO DO BUSINESS...................................... 4 1.8 INSURANCE......................................................... 4 1.9 CONTRIBUTION OF FINANCING BUSINESS................................ 5 1.10 REFERRAL OF FINANCING BUSINESS.................................... 5 ARTICLE II REPRESENTATIONS AND WARRANTIES..................... 6 (a) DUE ORGANIZATION; AUTHORITY....................................... 6 (b) DUE AUTHORIZATION: ENFORCEABILITY................................. 6 (c) NO VIOLATION...................................................... 6 (d) BROKERS OR FINDERS................................................ 7 (e) SUFFICIENT RESOURCES.............................................. 7 (f) LIENS............................................................. 7 ARTICLE III CONDITIONS PRECEDENT TO EFFECTIVENESS................. 7 3.1 BUSINESS PLAN..................................................... 7 3.2 REPRESENTATIONS AND WARRANTIES.................................... 8 3.3 DOCUMENTS......................................................... 8 3.4 PERFORMANCE OF COVENANTS.......................................... 8 3.5 INJUNCTIONS....................................................... 8 3.6 CLOSING........................................................... 8 ARTICLE IV CONFIDENTIALITY............................ 9 ARTICLE V INDEMNIFICATION............................ 11 ARTICLE VI DISPUTE RESOLUTION........................... 11
-i- ARTICLE VII GENERAL................................ 13 7.1 ADDITIONAL DOCUMENTS AND ACTS; FURTHER ASSURANCES................. 13 7.2 NOTICES........................................................... 13 7.3 GOVERNING LAWS; JURISDICTION...................................... 14 7.4 WAIVER OF JURY TRIAL.............................................. 15 7.5 ENTIRE AGREEMENT.................................................. 15 7.6 WAIVER............................................................ 15 7.7 SEVERABILITY...................................................... 16 7.8 EXPENSES INCURRED IN THE FORMATION OF THE PARTNERSHIP............. 16 7.9 BINDING AGREEMENT, ASSIGNMENTS.................................... 16 7.10 NO THIRD-PARTY BENEFICIARIES...................................... 17 7.11 DISCLAIMER OF AGENCY.............................................. 17 7.12 COUNTERPARTS...................................................... 17 7.13 HEADINGS.......................................................... 17 7.14 AMENDMENTS........................................................ 17 7.15 PUBLICITY......................................................... 17 7.16 OTHER BUSINESS.................................................... 18 7.17 EXCLUSIVITY....................................................... 18 7.18 TECHNOLOGY........................................................ 19 7.19 TRADENAMES........................................................ 21
-ii- JOINT VENTURE AGREEMENT This Joint Venture Agreement (this "AGREEMENT") is entered into as of this 7th day of February, 1996, between Polaris Industries Inc., a Minnesota corporation ("POLARIS"), and Transamerica Commercial Finance Corporation, a Delaware corporation ("TCFC") (collectively, Polaris and TCFC, the "PARTIES" and individually, a "PARTY"). RECITALS Polaris and TCFC desire to organize a general partnership under the laws of the State of Illinois for the ownership and operation of a commercial finance business and related finance businesses within the United States and other countries supporting the business of Polaris and its affiliates from time to time and such other businesses as the Parties subsequently may agree. Now, therefore, in consideration of the premises, recitals and mutual covenants, undertakings and obligations hereinafter set forth or referred to herein, the Parties mutually covenant and agree as follows: ARTICLE I FORMATION OF THE PARTNERSHIP 1.1 PURPOSE. Polaris shall cause its direct subsidiary, Polaris Acceptance Inc. ("PAI"), a Minnesota corporation, and TCFC shall cause its direct subsidiary, Transamerica Joint Ventures, Inc. ("TJV"), a Delaware corporation (collectively, PAI and TJV, the "PARTNERS"), pursuant to that certain Partnership Agreement, to be dated as of February 7, 1996 (the "PARTNERSHIP AGREEMENT"), to form an Illinois general partnership (the "PARTNERSHIP" or "POLARIS ACCEPTANCE") for the ownership and operation of a commercial finance business and related finance businesses within the United States supporting (i) domestic sales of products (but exclusive of (i) parts, garments and accessories and (ii) Polaris oil and lubricant products) manufactured or distributed from time to time by Polaris Industries Partners L.P., a subsidiary of Polaris ("POLARIS INDUSTRIES"), and its affiliates from time to time, to domestic dealers and distributors (each a "POLARIS PRODUCT"), except that, to the extent that the Management Committee (as defined in the Partnership Agreement) makes a determination with respect to a Polaris Product that the Partnership should not provide inventory financing for such Polaris Product (provided that such determination is made only with respect to a Polaris Product which is not manufactured or distributed by Polaris Industries or any of its affiliates as of the date of this Agreement and which Polaris Product is materially distinguishable from the Polaris Products manufactured and distributed by Polaris Industries and its affiliates as of the date of this Agreement), then such Polaris Product shall be excluded from the financing activities of the Partnership (such excluded products, if any, the "EXCLUDED PRODUCTS"), (ii) such other businesses in such geographic areas as the Parties subsequently may agree, and (iii) if requested by PAI, the business of providing financing for purchases at retail of products manufactured or distributed by Polaris Industries and its affiliates, from time to time. 1.2 NAME. The Name of the Partnership shall be Polaris Acceptance. 1.3 LOCATION. The principal place of business of the Partnership shall be in Rolling Meadows, Illinois, with an operations office in Minneapolis, Minnesota, or, in either case, in such other place or places as the Management Committee (as defined in the Partnership Agreement) may from time to time direct. 1.4 TERM. Subject to the Closing (hereinafter defined) having occurred, the Partnership shall begin on March 1, 1996 and, unless sooner dissolved or terminated under the provisions of the Partnership Agreement, shall continue until February 28, 2001, and thereafter shall be extended automatically for additional one-year terms unless at least one year prior to the expiration of the -2- initial or additional term (as applicable) either Partner gives notice to the other Partner of its intention not to extend the term, in which event the Partnership shall dissolve in accordance with the terms of the Partnership Agreement upon expiration of the then current term. 1.5 INITIAL CAPITAL CONTRIBUTION. Pursuant to the terms of the Partnership Agreement, on March 1, 1996 and concurrently with the effectiveness of the formation of the Partnership, PAI and TJV shall contribute as the initial capital of the Partnership the following amounts in cash: (i) in the case of PAI, 3.75% of the aggregate accounts receivable contributed to the Partnership by TCFC upon formation of the Partnership as contemplated by SECTION 1.9 hereof, and (ii) in the case of TJV, 11.25% of the aggregate accounts receivable contributed to the Partnership by TCFC upon formation of the Partnership as contemplated by SECTION 1.9 hereof. 1.6 AGREEMENTS. Prior to or concurrently with the Closing, the Parties shall or shall cause their respective subsidiaries, PAI and TJV (where appropriate), to execute and deliver the Partnership Agreement between PAI and TJV, the Credit and Security Agreement between Polaris Acceptance and TCFC dated as of February 7, 1996 (the "CREDIT AND SECURITY AGREEMENT"), the TCFC Services Agreement between Polaris Acceptance and TCFC dated as of February 7, 1996 (the "TCFC SERVICES AGREEMENT"), the Polaris Services Agreement between Polaris Acceptance and PAI dated as of February 7, 1996 (the "POLARIS SERVICES AGREEMENT") (collectively, the TCFC Services Agreement and the Polaris Services Agreement, the "SERVICES AGREEMENTS"), the Manufacturer's/Distributors Financing Agreement between Polaris Industries and Polaris Acceptance dated February 7, 1996, the Guarantee from Polaris given on behalf of PAI dated February 7, 1996 (the "POLARIS GUARANTEE"), the Guarantee from TCFC given on behalf of TJV dated February 7, 1996 (the "TCFC GUARANTEE"), the Contribution Agreement among TCFC and Polaris Acceptance dated as of February 7, 1996 (the "CONTRIBUTION AGREEMENT"), the Program Letter between Polaris and Polaris Acceptance dated February 7, 1996 (the "PROGRAM LETTER"), and the License Agreement -3- among Polaris, TCFC and Polaris Acceptance, dated as of February 7, 1996 (the "LICENSE AGREEMENT") (collectively, with this Agreement, all such documents, the "DEFINITIVE AGREEMENTS"), in the forms of EXHIBITS A through J hereto, respectively. Notwithstanding the foregoing, all Definitive Agreements other than this Agreement to which TCFC, Polaris or the Partnership is a party shall not be deemed to be effective until the later of (i) the date on which the Closing occurs and (ii) March 1, 1996. 1.7 QUALIFICATION TO DO BUSINESS. TCFC shall cause the Partnership, PAI and TJV to become qualified to do business in all fifty states. Each of Polaris and TCFC shall maintain the qualifications to do business in all fifty states of its respective subsidiary that is a Partner. TCFC shall also cause the Partnership, PAI and TJV to make such assumed name and fictitious name filings as are necessary for the conduct of the business of the Partnership as contemplated by this Agreement and the Partnership Agreement. In connection with all filings for, or on behalf of, the Partnership or PAI for which TCFC has responsibility, Polaris shall, and shall cause PAI to, cooperate with TCFC in causing such filings to be made in a timely manner. All fees and expenses of the initial qualification to do business and assumed name and fictitious name filings incurred by TCFC shall be charged to the Partnership. All fees and expenses of subsequent filings to maintain such qualifications and any related filings shall be borne by the Partner responsible for such filings. 1.8 INSURANCE. (a) Polaris and TCFC each shall provide at their own expense directors and officers liability insurance for the managers serving on the Management Committee (as defined in the Partnership Agreement) appointed by its respective subsidiary which is a Partner in a policy amount of not less than $10,000,000. (b) TCFC shall arrange for repossession insurance and related inventory insurance appropriate for the business of the Partnership and shall arrange for the extension of TCFC's existing single interest insurance coverage to the joint venture's business. The costs for the -4- repossession insurance, related inventory insurance and the extension of TCFC's single interest insurance to the joint venture's business shall be charged to Polaris Acceptance. (c) TCFC shall arrange for the extension of its existing national bonding coverage to dealers serviced by Polaris Acceptance. 1.9 CONTRIBUTION OF FINANCING BUSINESS. Subject to the Closing having occurred, on March 1, 1996, concurrently with the effectiveness of the formation of the Partnership and the making of the initial capital contributions by the Partners to the Partnership, TCFC shall cause its then-existing portfolio of commercial finance business supporting the business of Polaris Industries to be contributed to Polaris Acceptance pursuant to the Contribution Agreement. Such contribution shall be encumbered by a liability of equal value of the Partnership to make an equalization payment to TCFC for such contribution, in accordance with the terms of the Contribution Agreement, in order to maintain the Partners' respective initial capital contributions at levels proportional to the Partners' respective initial partnership interests in the Partnership. 1.10 REFERRAL OF FINANCING BUSINESS. During the term of the Partnership, Polaris shall use all reasonable efforts, and shall cause Polaris Industries and its affiliates to use all reasonable efforts, to recommend to all domestic dealers and distributors of Polaris Products that all of the inventory finance business associated with such Polaris Products (other than Excluded Products), including, without limitation, all the floor-plan financing of all such Polaris Products (other than Excluded Products) for all such dealers and distributors, be provided by Polaris Acceptance during the term of the Partnership. Without limiting the generality of the foregoing, during the term of the Partnership Polaris shall not, and Polaris shall not permit Polaris Industries or any of its affiliates to, recommend to any domestic dealer or distributor of Polaris Products (other than Excluded Products) that such dealer or distributor obtain inventory financing for such Polaris Products from any source other than Polaris Acceptance during the term of the Partnership. -5- ARTICLE II REPRESENTATIONS AND WARRANTIES Each Party represents and warrants to the other Party with respect to itself and its respective subsidiary that is a Partner that: (a) DUE ORGANIZATION; AUTHORITY. It is a corporation duly organized and validly existing in good standing under the laws of the state of its incorporation and has the power, authority and legal right to enter into and perform its obligations under the Definitive Agreements to which it is a party. (b) DUE AUTHORIZATION: ENFORCEABILITY. Each of the Definitive Agreements to which it is a party has been duly authorized, executed and delivered by it and, assuming due authorization, execution and delivery thereof by the other parties thereto, constitutes its valid and legally binding obligation, enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar laws affecting the rights of creditors generally and by general principles of equity. (c) NO VIOLATION. The execution and delivery by it of the Definitive Agreements to which it is a party do not, and the performance by it of its obligations thereunder will not (i) violate or conflict with any provision of its charter or by-laws or other constituent documents, any law, governmental rule or regulation, judgment or order applicable to it, or any provision of any indenture, mortgage, contract or other instrument to which it is a party or by which it or its property is bound, (ii) constitute a default under any agreement to which it is a party or by which it or its property is bound, or (iii) require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any federal or state governmental authority or agency (including any local governmental authority or agency), except such as have been duly obtained, given or accomplished and are in full force and effect. -6- (d) BROKERS OR FINDERS. Neither it nor any of its officer's, agents, representatives, employees or shareholders has employed any brokers, finders or other intermediaries, or incurred any liability for any broker's fees, finder's fees, commissions or other amounts, with respect to the Partnership or the transactions contemplated by the Definitive Agreements. (e) SUFFICIENT RESOURCES. It has sufficient resources to perform or to cause its affiliates to perform their respective financial and other obligations as contemplated by the Definitive Agreements. (f) LIENS. The performance of any transactions contemplated by this Agreement or the other Definitive Agreements will not give rise to any liens on the property of the Partnership or either Partner, except as expressly contemplated by the Credit and Security Agreement. ARTICLE III CONDITIONS PRECEDENT TO EFFECTIVENESS As conditions precedent to the effectiveness of each of the Definitive Agreements (other than this Agreement) and the obligations of each of Polaris and TCFC, respectively, to consummate the transactions contemplated by the Definitive Agreements, each of the following terms shall have been satisfied or duly waived by such Party (the satisfaction or waiver of all such conditions on or prior to March 1, 1996 (or such later date (if any) as may be mutually agreed by the Parties), and the acknowledgement by the Parties of such satisfaction and/or waiver, as applicable, the "CLOSING"): 3.1 BUSINESS PLAN. The Parties shall have agreed to a Business Plan for the Partnership (the "BUSINESS PLAN"). The Business Plan shall be prepared in conformance with TCFC's policies and shall describe the marketing and operational goals of the Partnership (including the targeted return on equity goals for the Partnership and the formula to be used for determining interest rates to be charged to Polaris Industries and its dealers and distributors in connection with the operations -7- of the Partnership) and shall include a PRO FORMA budget covering a five-year period and the assumptions upon which such PRO FORMA budget is based. 3.2 REPRESENTATIONS AND WARRANTIES. All representations and warranties contained in this Agreement shall have been true and correct as of the date hereof and shall be true and correct at the time of Closing as if such representations and warranties had been made as of the time of Closing. 3.3 DOCUMENTS. This Agreement and the other Definitive Agreements shall have been duly executed by the parties thereto, and all ancillary documents shall be acceptable to Polaris and TCFC in both form and substance (including, without limitation, the provisions set forth therein as to the rates for advances to be charged by the Partnership to Polaris Industries and the dealers and distributors of Polaris Industries). 3.4 PERFORMANCE OF COVENANTS. All covenants required to be performed by the Parties prior to or at Closing (including, without limitation, the covenants set forth in SECTION 1.6 hereof) shall have been performed by the Parties. 3.5 INJUNCTIONS. There shall be no order, decree or judgment of any kind in existence enjoining or restraining the Parties or any of their affiliates or any officers, directors or employees thereof from taking any action of any kind, or requiring the Parties or any of their affiliates or any officers, directors or employees thereof to take any action of any kind with respect to the Partnership. 3.6 CLOSING. The Closing shall be deemed to have occurred upon the satisfaction or waiver of all of the conditions precedent set forth in this ARTICLE III and the written acknowledgement by the Parties that such conditions have been satisfied or waived and that the Closing has occurred, provided that the Closing shall not occur unless such conditions precedent shall have been satisfied or waived and provided further that either Party shall have the right to -8- terminate this Agreement if the Closing shall not have occurred on or prior to March 1, 1996 (or such later date, if any, as may be mutually agreed by the Parties). Notwithstanding the foregoing, in accordance with the terms of the Partnership Agreement, the Partnership shall not be deemed to have been formed or to be operational until March 1, 1996 (provided that the Closing has occurred), and all Definitive Agreements other than this Agreement to which TCFC, Polaris or the Partnership is party shall not be deemed to be effective until March 1, 1996 (provided that the Closing has occurred). In the event that the Closing does not occur by such date (or such later date as may be mutually agreed by the parties), either Party may, by written notice to the other Party, terminate this Agreement and have no further obligations to the other Party. Notwithstanding the preceding sentence, the provisions of ARTICLE IV, ARTICLE V, ARTICLE VI, SECTION 7.4, SECTION 7.8, SECTION 7.15 and SECTION 7.18 regarding confidentiality, indemnification, dispute resolution, waiver of jury trial, expenses, publicity and Technology shall survive any termination of this Agreement. ARTICLE IV CONFIDENTIALITY During the term of the Partnership, each Party shall, and shall cause its officers, directors, employees, representatives, agents and affiliates to keep any nonpublic information which the other Party or any of its affiliates treats or designates as confidential (including, without limitation, the Technology), any nonpublic information concerning the formation and operation of the Partnership or the particulars thereof, and any other nonpublic information set forth in the Definitive Agreements or in other documents concerning the Partnership or relating to the performance by the Parties or any of their affiliates of any of the Definitive Agreements, strictly confidential and not disclose any such information to any person (except for such Party's financial and legal advisors, lenders and accountants responsible for or actively engaged in the review, performance or -9- development of the business of the Partnership, provided that such party agrees in writing to be bound by the terms of this ARTICLE IV as if such terms were directly applicable to it), or use any such information in the business of such Party or any affiliate of such Party. In addition, for five years following termination of this Agreement, Polaris shall, and shall cause its officers, directors, employees, representatives, agents and affiliates to keep all information concerning the System Technology (as defined in SECTION 7.18 hereof) strictly confidential and not disclose any such information to any person or use any such information in the business of Polaris or any affiliate of Polaris. Notwithstanding the foregoing, a Party shall be under no obligation to keep confidential (i) information which is known to the receiving Party prior to receipt thereof from the disclosing Party, (ii) information which is or becomes generally available to the public other than as a result of a disclosure in violation of the terms of this ARTICLE IV, (iii) information disclosed to a Party by a third party having the right to disclose such information to such Party, or (iv) information which a Party is legally compelled to disclose, provided that each Party agrees to use all reasonable efforts to notify the other Party of any legal requirement to disclose sufficiently in advance of the disclosure to permit the other Party to challenge the legal requirement. In addition, notwithstanding the foregoing, each Party may disclose otherwise confidential information to its accountants and legal advisors to the extent deemed necessary by such Party, provided that each party to whom such confidential information is disclosed shall first agree in writing to be bound by the terms of this ARTICLE IV as if such terms were directly applicable to it. Each Party recognizes and acknowledges that the injury to the Partnership and the other Party which would result from a breach of the provisions of this ARTICLE IV could not adequately be compensated by money damages. The Parties expressly agree and contemplate, therefore, that in the event of the breach or default by either Party of any provision of this ARTICLE IV, the Partnership or the other Party may, in addition to any -10- remedies which it might otherwise be entitled to pursue, obtain such appropriate injunctive relief in support of any such provision of this Agreement. ARTICLE V INDEMNIFICATION Each Party shall indemnify, defend and hold harmless the other Party (and its affiliates and the past, present and future officers, directors, shareholders, partners, employees, lawyers, representatives and agents of such Party and such affiliates) (collectively, the "INDEMNIFIED PARTIES") against all losses, costs, damages and expenses (including reasonable attorney's fees and expenses) incurred by the Indemnified Parties as a result of such Party's breach of any of its representations, warranties or obligations hereunder. -11- ARTICLE VI DISPUTE RESOLUTION (a) If a dispute shall arise between the Parties as to the interpretation of, or the existence or extent of a breach with respect to, any provision contained in this Agreement (but exclusive of ARTICLES IV and V and SECTIONS 7.3, 7.4, 7.15 and 7.18 of this Agreement), or if the Parties shall be unable to agree as to the determination of any accounting matter or other computation expressly contemplated by this Agreement (all such disputes and failures to agree, the "ARBITRABLE DISPUTES"), then either Party may request, by giving written notice to the other Party, that the President (or other senior executive officer) of Polaris and TCFC (the "CEO'S") confer within five business days regarding the Arbitrable Dispute. The CEO's shall confer in good faith and use all reasonable efforts to resolve the Arbitrable Dispute. (b) If the CEO's do not resolve the Arbitrable Dispute within five business days after the Arbitrable Dispute has been submitted to them, then the Arbitrable Dispute shall be submitted to arbitration in accordance with the procedures set forth below in this ARTICLE VI. (c) A panel of three arbitrators (the "PANEL") will be formed no later than ten days after the failure of the CEO's to resolve the Arbitrable Dispute. Each Party will request an accounting firm of its choice to select an arbitrator, which arbitrator may be (but need not be) a member of such accounting firm. The two arbitrators then will choose a third arbitrator who shall not be affiliated in any manner with the Parties. All of the arbitrators shall be generally familiar with the floorplan financing industry. (d) Except as otherwise provided herein, the arbitration shall be conducted in accordance with the rules of the American Arbitration Association. The Panel shall allow such discovery, submissions and hearings as it determines to be appropriate, giving consideration to the Parties' mutual desire for an efficient resolution of the Arbitrable Dispute. After conducting such hearings -12- and reviewing the submissions of the Parties, the Panel shall make its decision with respect to the Arbitrable Dispute. Such decision shall be made within ten days of the formation of the Panel or as soon as practicable thereafter, but in no event later than twenty days after the formation of the Panel. The Panel shall have the authority to award relief under legal or equitable principles and to allocate responsibility for the costs of the arbitration and to award recovery of reasonable attorney's fees and expenses in such manner as is determined to be appropriate. A full and complete record and transcript of the arbitration proceeding shall be maintained. The decision of the Panel shall be in writing accompanied concurrently by a written summary of its conclusions as well as the reasons for its conclusions. (e) Each Party shall have five business days to object to the Panel's decision, or any part thereof, by written submission made to the Panel and, if deemed appropriate by the Panel, in a hearing. After such objection, the Panel shall have three business days to reconsider and modify the decision, which modification, if any, shall be explained in writing. Thereafter, the decision of the Panel shall be final, binding and nonappealable with respect to the Parties and all other persons or entities, including persons or entities which have failed or refused to participate in the arbitration process and shall be reviewable only to the extent provided by law. (f) The initiation of the dispute resolution procedures in this ARTICLE VI shall not excuse either Party, or any of their respective affiliates, from performing its obligations hereunder or under any of the other Definitive Agreements or in connection with the transactions contemplated hereby. While the dispute procedure is pending, the Parties and their respective affiliates shall continue to perform in good faith their respective obligations hereunder and under the other Definitive Agreements, subject to any rights to terminate this Agreement or the other Definitive Agreements that may be available to the Parties or their respective affiliates. -13- (g) The provisions of this ARTICLE VII shall be the exclusive remedy of the Parties for all Arbitrable Disputes. The terms of this ARTICLE VI, including this PARAGRAPH (G), shall be without prejudice to the rights of each Party to obtain recovery from, or to seek recourse against, the other Party (or otherwise), in such manner as such Party may elect (but subject to SECTION 7.4 hereof), for all claims, damages, losses, costs and matters other than those related to Arbitrable Disputes. ARTICLE VII GENERAL 7.1 ADDITIONAL DOCUMENTS AND ACTS; FURTHER ASSURANCES. In connection with this Agreement as well as all transactions contemplated by this Agreement, each Party agrees to use all reasonable efforts to execute and deliver such additional documents and instruments, and to perform such additional acts as may be necessary or appropriate to effectuate, carry out and perform all of the terms, provisions and conditions of this Agreement, and all such transactions. All approvals of either Party hereunder shall be in writing. 7.2 NOTICES. All notices, documents, written deliveries and other communications hereunder shall be in writing and shall be deemed to have been given (i) when delivered in person, (ii) one business day after deposit with a nationally recognized overnight courier service, (iii) five business days after being deposited in the United States mail, postage prepaid, first class, registered or certified mail, or (iv) the business day on which sent and received by facsimile as follows: To: Polaris c/o Polaris Industries Inc. 1225 Highway 169 North Minneapolis, Minnesota 55441 Attention: John H. Grunewald Facsimile Number: 612-542-0595 -14- With a copy to: Kaplan, Strangis and Kaplan, P.A. 5500 Norwest Center 90 South Seventh Street Minneapolis, Minnesota 55402 Attention: James C. Melville Facsimile Number: 612-375-1143 To: TCFC c/o Transamerica Commercial Finance Corporation 2 Continental Towers 1701 Golf Road Suite 500 Rolling Meadows, Illinois 60008 Attention: Vice President, Operations Facsimile Number: 847-734-7451 With a copy to: General Counsel Transamerica Commercial Finance Corporation 2 Continental Towers 1701 Golf Road Suite 500 Rolling Meadows, Illinois 60008 Facsimile Number: 847-734-7455 7.3 GOVERNING LAWS; JURISDICTION. This Agreement shall be governed by, and construed and enforced under, the laws of the State of Illinois without regard to conflict of law principles. Subject to ARTICLE VI hereof and without prejudice to the rights of either Party to bring an action before any court having jurisdiction, Polaris and TCFC each agrees that any litigation between them or any of their respective affiliates arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Agreement or the other Definitive Agreements, and whether arising in contract, tort, equity or otherwise, may be resolved by state or federal courts located in Chicago, Illinois. -15- 7.4 WAIVER OF JURY TRIAL. Without prejudice to the provisions of ARTICLE VI hereof, Polaris and TCFC each waives, for itself and for any of its affiliates, any right to have a jury participate in resolving any litigation, whether sounding in contract, tort, equity or otherwise, between Polaris or TCFC or any of their respective affiliates arising out of, connected with, related to or incidental to the relationship established between them in connection with this Agreement or the other Definitive Agreements. Polaris and TCFC each agrees that any litigation will be resolved in a bench trial without a jury. 7.5 ENTIRE AGREEMENT. This Agreement, together with the other Definitive Agreements, contains all of the understandings and agreements of whatsoever kind and nature existing between the Parties hereto and their respective affiliates with respect to this Agreement and the other Definitive Agreements, the subject matter hereof and of the other Definitive Agreements, and the rights, interests, understandings, agreements and obligations of the Parties and their respective affiliates pertaining to the subject matter thereof and the Partnership, and supersedes any previous agreements between the Parties and their respective affiliates. 7.6 WAIVER. No consent or waiver, expressed or implied, by either Party or any of their respective affiliates to or of any breach or default by the other Party or any of its affiliates in the performance by the other Party or any of its affiliates of its obligations under this Agreement and the other Definitive Agreements to which it is a party shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by that Party or any of its affiliates of the same or any other obligations of that Party or its affiliates. Failure on the part of either Party or its affiliates to complain of any act or failure to act on the part of the other Party or its affiliates or to declare the other Party or its affiliates in default, irrespective of how long the failure continues, shall not constitute a waiver by that Party or its affiliates of its rights under this Agreement or the other Definitive Agreements. -16- 7.7 SEVERABILITY. If any provision of this Agreement or its application to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of the provisions to other persons or circumstances shall not be affected thereby, and this Agreement shall be enforced to the greatest extent permitted by law. 7.8 EXPENSES INCURRED IN THE FORMATION OF THE PARTNERSHIP. All disbursements for (i) qualification to do business and fictitious name filings contemplated by SECTION 1.7, (ii) repossession insurance, related inventory insurance and single interest insurance contemplated by Section 1.8(b), and (iii) preparation of the Business Plan contemplated by SECTION 3.1 that are incurred by the Parties in connection with the formation of the Partnership shall be charged by the Parties to the Partnership. All other fees, charges and expenses incurred by the Parties in connection with the formation of the Partnership and the transactions contemplated hereby (including all related legal fees) shall be borne by the Party incurring them. If the Closing shall not occur within the time periods set forth in SECTION 3.6, the disbursements described in the first sentence of this SECTION 7.8 shall be aggregated and assessed one-half to Polaris and one-half to TCFC, and all other disbursements and expenses shall be borne by the Party incurring them. 7.9 BINDING AGREEMENT, ASSIGNMENTS. This Agreement shall be binding upon the Parties and their respective successors and assigns and shall inure to the benefit of the Parties and their respective successors and permitted assigns. Notwithstanding the foregoing, neither Party hereto shall be permitted to assign its rights and obligations hereunder without the prior written consent of the other Party. Whenever a reference to any party or Party is made in this Agreement, such reference shall be deemed to include a reference to the successors and permitted assigns of that party or Party. -17- 7.10 NO THIRD-PARTY BENEFICIARIES. This Agreement is for the sole and exclusive benefit of the Parties, and it shall not be deemed to be for the direct or indirect benefit of the customers of either Party (or any of its affiliates) or any other person. 7.11 DISCLAIMER OF AGENCY. This Agreement shall not constitute either Party (or any of its affiliates) as a legal representative or agent of the other Party (or any of its affiliates), nor shall a Party (nor any of its affiliates) have the right or authority to assume, create or incur any liability or any obligation of any kind, expressed or implied, against or in the name or on behalf of the other Party (or any of its affiliates) or the Partnership, unless otherwise expressly permitted by such Party, and except as expressly provided in any of the Definitive Agreements. 7.12 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 7.13 HEADINGS. The headings in this Agreement are inserted for convenience only and are not to be considered in the interpretation or construction of the provisions hereof. 7.14 AMENDMENTS. This Agreement may be amended at any time and from time to time, but any amendment must be in writing and signed by the Parties and by each other person who is then a Partner. 7.15 PUBLICITY. Neither Polaris nor TCFC nor any of their respective affiliates shall make any public announcement or other disclosure to the press or public regarding this Agreement or the Partnership or any matter related hereto or thereto, unless Polaris and TCFC mutually agree to make an announcement in a form that both Parties have approved. Notwithstanding the foregoing, to the extent a Party (or its affiliate) is required by law or the rules of a national securities exchange applicable to such Party (or such affiliate) to make a public announcement regarding this Agreement or the Partnership or any matter related hereto or thereto, then such Party (or such affiliate) may -18- make a public announcement in order for such Party (or such affiliate) to duly comply with such law or rule, provided that such Party (or such affiliate) gives notice to the other Party of such public announcement promptly upon such Party (or such affiliate) becoming aware of its need to comply with such law or rule, but, in any event, not later than the time the public announcement is to be made. 7.16 OTHER BUSINESS. During the continuance of the Partnership, each Party, and each Party's affiliates, may continue to operate its business in the usual course. Each Party, and each Party's affiliates (exclusive of Polaris Acceptance), may, at any time and from time to time, engage in and pursue other business ventures. Without limiting the scope of the foregoing, each of TCFC, TJV, Polaris, Polaris Industries and PAI may pursue other business opportunities (including, without limitation, joint ventures) with no obligation to refer business or offer opportunities to the Partnership or to each other, except as otherwise expressly provided in SECTIONS 1.10 and 7.17 of this Agreement and Section 12.15 of the Partnership Agreement. 7.17 EXCLUSIVITY. Polaris covenants and agrees with TCFC that, during the term of the Partnership (and during the term of the exclusive financing arrangement described in Section 8.14 of the Partnership Agreement, if applicable), it will not, and it will not permit Polaris Industries or any affiliate of Polaris or Polaris Industries to, enter into, consummate, or otherwise arrange for any joint venture, business combination, contractual arrangement, partnership, or other legal or business relationship with any other person or entity for the purpose (whether exclusive, primary or otherwise) of operating, during any period prior to the termination of this Agreement and the dissolution of the Partnership, a domestic inventory finance business to support the business of Polaris Industries or any of its affiliates (other than with respect to Excluded Products) or otherwise providing, during any period prior to the termination of this Agreement and the dissolution of the Partnership, inventory financing (including, without limitation, floor plan financing) to some or all -19- of the domestic dealers and distributors of Polaris Industries or any of its affiliates for Polaris Products (other than Excluded Products). Polaris acknowledges and agrees that its agreement set forth in this SECTION 7.17 is a material inducement for TCFC to enter into, and continue performing under, this Agreement. 7.18 TECHNOLOGY. Any processes, techniques, hardware, software, copyrights, patents, practices or other intellectual property which are owned or used by either Party (or, in the case of Polaris, Polaris Industries or PAI or, in the case of TCFC, TJV), and used by such Party (or Polaris Industries or PAI, or TJV, as appropriate) in the performance of its obligations under this Agreement, the Partnership Agreement or the other Definitive Agreements and which are proprietary to such Party (or Polaris Industries or PAI, or TJV, as appropriate) (collectively, the "TECHNOLOGY"), shall be and at all times shall remain the property of such Party (or Polaris Industries or PAI, or TJV, as appropriate), and the Partnership shall not have any interest in such Technology, EXCEPT to the extent expressly provided to the contrary in one or more of the Definitive Agreements, and EXCEPT that in connection with either (i) the purchase or other assumption by PAI or any of its affiliates of the entire partnership interest of TJV in the Partnership pursuant to the terms of the Partnership Agreement, or (ii) any dissolution of the Partnership other than a dissolution pursuant to Sections 8.2 (with respect to PAI or any of its affiliates) or 8.4 (with respect to PAI or any of its affiliates) or 8.14 of the Partnership Agreement, TJV and TCFC shall be deemed to have automatically granted to the Partnership and PAI a perpetual, royalty-free, non-exclusive license to use all such Technology owned or used by TJV or TCFC (but exclusive of Technology consisting of System Technology) in connection with the conduct of the business of the Partnership, PROVIDED that such license shall extend to Technology owned or used by TJV or TCFC only to the extent that TJV or TCFC is the owner of such Technology or (with respect to all such Technology not owned by TJV or TCFC) has the legal right to grant to the Partnership and PAI such a license. To the extent that -20- TJV or TCFC has the legal right to permit an assignment of such license by the Partnership or PAI, such license shall be assignable by each of the Partnership and PAI to Polaris or any affiliate of Polaris in the sole discretion of the Partnership or PAI, as appropriate. For purposes hereof, "SYSTEM TECHNOLOGY" shall mean the hardware and software (including, without limitation, the operating system software, the source code and the machine code, and including software owned by TCFC and its affiliates and third party licensed software used in connection with the System Technology or the services provided under the TCFC Services Agreement) used by TCFC and its affiliates to provide the services under the TCFC Services Agreement (which software may be identified by TCFC as being confidential or subject to a copyright pursuant to a notice to such effect disclosed when accessing TCFC's computer system), together with all written manuals and other documentation for system use (which are internally written or produced by TCFC or an affiliate or licensed to TCFC or an affiliate), diagnostic processes, security procedures, file arrays, database systems, processing procedures, program logic, data manipulation formats and data manipulation and processing routines (including, but not limited to, (a) internal programming processing logic, (b) software logic, software formatting and software sequencing for (i) invoice purchasing, (ii) cash application, (iii) invoice purchase approval, (iv) the development and use of rates and terms, (v) credit underwriting, (vi) portfolio control, and (vii) floorcheck collateral verifications, and (c) third-party licensed products, but excluding system generated reports, forms of billing statements, forms of transaction statements and any information not subject to copyright (provided such information is not otherwise proprietary to TCFC or its affiliates) or which is not otherwise proprietary to TCFC or its affiliates) related to such hardware and software, as such may be modified, expanded or superseded from time to time. Except as expressly described in this SECTION 7.18, under no circumstances shall a Party or any of its affiliates have any interest in the Technology of the other -21- Party and its affiliates by virtue of this Agreement or as a result of the formation and operation of the Partnership. Any Technology developed in connection with the operation of the Partnership, which relates to services provided by TCFC or PAI, respectively, shall be deemed to be the property of TCFC or PAI, respectively, and such Technology shall not be deemed property of the Partnership; PROVIDED, HOWEVER, that if such Technology is developed for use with the Partnership at the request of the Partnership, or if substantially all of the cost of developing such Technology is paid by the Partnership, then (subject to the last sentence of this SECTION 7.18) TCFC or PAI, as appropriate, shall permit the Partnership to replicate for its own use such Technology, and such replicated Technology shall be deemed to be property of the Partnership, and the Partnership shall have an independent, perpetual, non-exclusive right to use such replicated Technology. Notwithstanding the foregoing, the Partnership shall be permitted to replicate the Technology only to the extent that TCFC or PAI, as appropriate, is the owner of such Technology or (with respect to all such Technology not owned by TCFC or PAI, as appropriate), has the legal right to permit the Partnership to replicate such Technology. 7.19 TRADENAMES. Subject to the terms of the License Agreement, neither Party shall obtain any rights in any tradename of the other Party or any of its affiliates by virtue of this Agreement or as a result of the formation and operation of the Partnership. Upon dissolution of the Partnership, PAI shall succeed to the name "Polaris Acceptance" and neither TCFC nor TJV shall have any rights thereto, except that TCFC shall continue to be able to use the name "Polaris Acceptance" in connection with the liquidation of the PA Run-off Accounts (as defined in the TCFC Services Agreement), and except that TCFC shall continue to be able to use the name "Polaris Acceptance" to the extent provided in Section 8.14 of the Partnership Agreement. -22- IN WITNESS WHEREOF, this Agreement has been executed and delivered as of, and is effective as of, the date first set forth above. POLARIS INDUSTRIES INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- TRANSAMERICA COMMERCIAL FINANCE CORPORATION By: ------------------------------------ Name: Steve Toeniskoetter Title: Vice-President -23- EX-10.(J) 4 EXHIBIT 10(J) MANUFACTURER'S REPURCHASE AGREEMENT This AGREEMENT is between POLARIS ACCEPTANCE, an Illinois General Partnership, with its principal address at 1701 Golf Road, Rolling Meadows, IL 60006 ("PA") and POLARIS INDUSTRIES PARTNERS L.P. a limited partnership, with its principal address at 225 North Highway 169, Minneapolis, MN 55441 ("Manufacturer"). In consideration of PA advancing against or otherwise acquiring Invoices (as herein defined), and in consideration of the promises herein contained the parties hereby agree as follows: 1. (a) "Inventory" herein shall mean all snowmobiles, all terrain vehicles (ATV's), or personal watercraft vehicles (PWC's) manufactured or sold by Manufacturer. (b) "Distributor" herein shall mean R.L. Ryerson, Inc. (c) "Dealer" herein shall mean any person, firm or corporation which bought or buys inventory at wholesale from Manufacturer and sells inventory at retail or otherwise. (d) "Distributor's Dealer" herein shall mean any person, firm or corporation which bought or buys inventory from Distributor and sells inventory. (e) "Dealer Invoice" shall mean a note, invoice, bill of sale, inventory schedule or other evidence of indebtedness or obligation arising out of and contemporaneously with the sale or delivery of inventory by Manufacturer to Dealer. (f) "Distributor's Dealer Invoice" shall mean a note, invoice, bill of sale, inventory schedule or other evidence of indebtedness or obligation arising out of and contemporaneously with the sale or delivery of inventory by Distributor to Dealer. (g) "Invoice" shall mean both Dealer Invoice and Distributor Invoice. 2. PA, from time to time, may advance against, otherwise acquire or enter into Invoices acceptable to PA, executed by or on behalf of Dealers in accordance with PA's plan or plans of financing in effect from time to time. Such Dealers shall be of acceptable credit and financial responsibility to PA. 3. (a) If PA shall repossess or come into possession of any inventory covered by any Dealer Invoice. Manufacturer will purchase from PA upon demand, such repossessed inventory as may be repossessed, wherever located, and will pay therefor in cash or by credit memo and within thirty (30) days, an amount equal to the unpaid balance of the original Dealer Invoice with respect to such Inventory, if such Inventory is in new and unused condition, or is in new and unused condition but subject to wear and tear incident to display or demonstration. In addition, Manufacturer shall pay PA all reasonable costs and expenses, including reasonable attorneys' fees, incurred by PA with respect thereto. Manufacturer will not assert any interest in or title to such repossessed inventory until the said purchase price therefor has been paid in full, in cash or by credit memo. (b) If PA shall repossess or come into possession of any inventory covered by any Distributor's Dealer Invoice, and if Distributor within ten days after demand made upon Distributor by PA to purchase such inventory fails to so purchase, then Manufacturer will purchase from PA upon demand, such repossessed inventory as may be repossessed, wherever located, and will pay therefor in cash and within (30) days, an amount equal to the unpaid balance of the original Distributor's Dealer Invoice with respect to such Inventory, if such Inventory is in new and unused condition, or is in new and unused condition, but subject to wear and tear incident to display or demonstration. In addition, Manufacturer shall pay PA all reasonable costs and expenses, including reasonable attorneys' fees, incurred by PA with respect thereto. Manufacturer shall not assert any interest in or title to such repossessed inventory until the said purchase price has been paid in full, in cash. (c) Notwithstanding the terms in paragraphs 3(a) and 3(b) above, Manufacturer's purchase obligation under this Agreement shall not exceed fifteen percent (15%) of the average month-end balance of total outstanding for Inventory financed by PA the prior calendar year. The calendar year in which PA tenders the Inventory to Manufacturer for purchase shall be the calendar year in which Manufacturer incurs the purchase obligation. However, Manufacturer's purchase limit relates only to Inventory PA repossesses or comes into possession of because a Dealer is in default to PA under the terms of its financing arrangement or because Dealer is experiencing some type of financial difficulty. 4. Manufacturer warrants: that all Dealer Invoices issued by Manufacturer represent valid obligations of Dealer, are legally enforceable according to their terms and relate to bonafide, original acquisition sales of Inventory by Manufacturer to Dealer without any claim, offset or defense to payment by Dealer, that all Inventory is in new and unused condition and is of the kind, quality and condition represented or warranted to Dealer, and that Dealer requested that the acquisition of Inventory be financed by PA; that Manufacturer's title to all Inventory is free and clear of all liens and encumbrances when transferred to Dealer; that all Inventory subject to this Agreement meets or exceeds any and all applicable federal and state safety standards and that Manufacturer transfers to Dealer all its right, title and interest in and to the Inventory. In the event of breach of any of the above warranties, Manufacturer will, upon written request, purchase from PA the Invoice covering the Inventory with respect to which the warranty has been breached, and will pay therefor in cash or by credit memo, an amount equal to the original amount of the Invoice or related Invoice, together with all reasonable costs and expenses including reasonable attorneys fees, incurred by PA in connection with such breach. 5. Manufacturer covenants as follows: all Inventory by PA shall be subject to applicable product warranties of Manufacturer, and Manufacturer agrees to perform, or cause to be performed, all repairs, modifications and/or other acts required by Manufacturer pursuant to said product warranties. All expenses of performance under this section shall be paid by Manufacturer. 6. Manufacturer waives: notice of non-payment; protest and dishonor and notice of protest and dishonor of any Invoice purchased, otherwise acquired or entered into by PA; notice of PA's acceptance of this Agreement; and all other notices to which Manufacturer might otherwise be entitled by law. PA may, at any time or times without notice to or further consent of Manufacturer, renew and extend the time of payment of Invoices or Inventory covered thereby and waive or modify performance of such terms and conditions of its financing arrangements with the Distributor or Dealers, as PA may determine to be reasonable, and no such renewal, extension, compromise, adjustment, waiver or modification shall affect the liability of Manufacturer hereunder. 7. The terms and conditions of this Agreement and the obligations of Manufacturer under this Agreement shall apply to (i) all Invoices which relate to the accounts receivable transferred by Transamerica Commercial Finance Corporation ("TCFC") to PA pursuant to that certain Contribution Agreement between TCFC and PA dated February 7, 1996; and (ii) to all Inventory held by TCFC as collateral relating to such Invoices and transferred to PA pursuant to the Contribution Agreement. 8. This Agreement is not intended to supersede any agreements between TCFC and Manufacturer, TCFC Canada and Manufacturer, PA and R.L. Ryerson or between TCFC and R.L. Ryerson. 9. This Agreement shall be binding upon and inure to the benefit of the successors or assigns of the parties hereto. PA may assign this Agreement, in whole or in part, to any of its subsidiary or affiliated companies or other assignee and, upon such assignment, any such assignee shall be subject to the obligations and be entitled to the benefit of all of the covenants and obligations of the Manufacturer herein set forth. Manufacturer may not assign this Agreement without PA's written consent. 10. Either party hereto may cancel this Agreement at any time, upon thirty (30) days notice in writing of its intention to cancel. Notwithstanding the foregoing, either party may elect to terminate the Agreement immediately upon notice to the other party if such other party is in default under the terms of the Agreement, is insolvent, in receivership or is not paying its debts when due. The termination of this Agreement shall in no manner affect, limit or modify the obligations of Manufacturer as to Invoices purchased, otherwise acquired or entered into by PA prior to the effective date of termination, or other obligation incurred prior to such date. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed this 7th day of February, 1996. POLARIS INDUSTRIES PARTNERS L.P. ("Manufacturer") By: Polaris Industries Inc. Its General Partner By: ------------------------------------ Title: Executive Vice President & Chief Financial Officer --------------------------------- POLARIS ACCEPTANCE ("PA") By: Polaris Acceptance Inc. Its General Partner By: ----------------------------------- Title: -------------------------------- By: Transamerica Joint Ventures, Inc. Its General Partner By: ----------------------------------- Title: Vice President -------------------------------- EX-11 5 EXHIBIT 11 EXHIBIT 11 POLARIS INDUSTRIES INC. COMPUTATION OF NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
FOURTH QUARTER TWELVE MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, ------------------ ------------------ 1995 1994 1995 1994 ---- ---- ---- ---- (pro forma) (pro forma) Net Income for the Period $16,757 $19,600 $60,776 $54,703 ------- ------- ------- ------- Weighted Average Number of Outstanding: Common shares 27,324 27,166 27,297 27,166 Rights 472 469 494 469 Deferred Compensation Plan for Directors 2 -- 1 -- Stock Option Plan 3 -- -- -- ------ ------ ------ ------ Total common and common equivalent shares 27,801 27,635 27,792 27,635 ------ ------ ------ ------ ------ ------ ------ ------ Net Income Per Share $0.60 $0.71 $2.19 $1.98 ------ ------ ------ ------ ------ ------ ------ ------
EX-13 6 EXHIBIT 13 POLARIS INDUSTRIES INC. SELECTED 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 cunjunction with, the Consolidated Finanicial 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."
Years Ended December 31, 1995 1994 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Sales data Total dollars $1,113,852 $826,286 $528,011 $383,818 $297,677 $296,147 $242,618 $171,497 % change from prior year 35% 56% 38% 29% 1% 22% 41% 24% Sales mix by product (%) Snowmobiles 40% 44% 50% 54% 60% 67% 67% 70% ATVs 33% 29% 26% 25% 25% 19% 19% 16% PWC 16% 14% 9% 7% -- -- -- -- Parts, garments and accessories 11% 13% 15% 14% 15% 14% 14% 14% Sales mix by customer (%) Dealer-direct 87% 88% 87% 86% 84% 84% 76% 64% Distributor 13% 12% 13% 14% 16% 16% 24% 36% Gross profit data Total dollars $ 228,122 $183,283 $130,287 $104,926 $ 88,440 $ 89,349 $ 77,320 $ 52,247 % of sales 20% 22% 25% 27% 30% 30% 32% 30% Operating expense data Amortization of intangibles and First Rights compensation $ 5,616 $ 14,321 $ 13,466 $ 11,997 $ 13,108 $ 12,116 $ 15,717 $ 8,645 Conversion costs -- 12,315 -- -- -- -- -- -- Other operating expenses 120,848 80,985 63,594 52,238 43,614 46,421 35,302 25,139 % of sales 11% 10% 12% 14% 15% 16% 15% 15% Net income data* Total net income 60,776 $128,950 $ 45,813 $ 34,701 $ 31,462 $ 31,363 $ 26,190 $ 17,605 Net income per unit $ 1.50 $ 1.15 $ 1.10 $ 1.10 $ 1.10 $ 0.82 Net income per share $ 2.19 $ 4.67 Pro forma data* Pro forma operating income $ 87,977 $ 53,227 $ 40,691 $ 31,718 $ 30,812 $ 26,301 $ 18,463 % of sales 11% 10% 11% 11% 10% 11% 11% Pro forma net income $ 54,703 $ 33,027 $ 24,602 $ 20,727 $ 20,465 $ 16,657 $ 11,538 Pro forma net income per share $ 1.98 $ 1.21 $ 0.91 $ 0.81 $ 0.79 $ 0.65 $ 0.47 CASH FLOW DATA Cash flow from operating activities $ 76,446 $111,669 $ 79,323 $ 55,316 $ 46,642 $ 54,782 $ 44,447 $ 37,542 Cash purchases of property and equipment 46,651 32,529 18,126 12,295 15,988 7,158 7,065 2,724 Cash distributions declared to partners -- 50,942 47,217 44,507 42,581 42,582 32,514 17,722 Cash distributions declared per unit -- $ 1.68 $ 1.67 $ 1.67 $ 1.67 $ 1.67 $ 1.51 $ 0.80 Cash dividends to shareholders 116,639 -- -- -- -- -- -- -- Cash dividends per share $ 4.27 -- -- -- -- -- -- -- BALANCE SHEET DATA (AT END OF YEAR) Cash and cash equivalents $ 3,501 $ 62,881 $ 33,798 $ 19,094 $ 20,098 $ 32,025 $ 27,886 $ 15,599 Current assets 175,828 206,489 109,748 74,999 59,200 66,893 60,344 36,377 Total assets 314,436 331,166 180,548 146,681 135,509 138,704 137,628 118,070 Current liabilities 195,922 161,457 98,055 69,054 52,646 46,602 38,875 20,665 Shareholders' equity/Partners' capital 118,514 169,709 82,493 77,627 82,863 92,102 98,753 97,405
* 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 (see Notes 1 and 3 of Notes to the Financial Statements). 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 (see Note 1 of Notes to the Financial Statements). 10 POLARIS INDUSTRIES INC. 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, 1995, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein. RESULTS OF OPERATIONS 1995 VS. 1994 Sales for 1995 were $1.1 billion, an increase of 35 percent over 1994 sales of $826.3 million. Total finished goods unit shipments for 1995 increased 31 percent over 1994. Management believes such increase is attributable to product superiority, aggressive consumer promotional programs and a strong dealer network. All three product lines recorded significant sales increases during 1995 resulting in further diversification of the Company's sales mix. Snowmobile unit sales volume increased 18 percent during 1995 as a result of the introduction of new models and the continued success of other popular models, many of which featured Polaris' innovative XTRA suspension system. The average per unit sales price for snowmobiles increased by six percent for snowmobiles in 1995 primarily as a result of the introduction of new, high-performance models with additional features that have a higher selling price. Sales of snowmobiles comprised 40 percent of total Company sales in 1995 compared to 44 percent in 1994. All-terrain vehicle (ATV) unit sales volume increased 42 percent during 1995 as retail ATV sales rose to the highest level in Polaris' history. Management believes Polaris ATV sales have been favorably influenced by targeting the all-purpose segment of the ATV market with new and improved model offerings. Polaris introduced several new models in 1995, including the Sportsman 500, Sport, and Magnum 6 x 6. The average per unit sales price increased five percent for ATVs in 1995 as the sales mix continues to move to new, higher performance models. Sales of ATVs comprised 33 percent of total Company sales in 1995 compared to 29 percent in 1994. Personal watercraft (PWC) unit sales volume increased 51 percent during 1995 as a result of continued rapid growth in the PWC market and the continued expansion of Polaris' product offerings. The Company introduced several new PWC models in 1995 including the popular SLX. Sales of PWC comprised 16 percent of total Company sales in 1995 compared to 14 percent in 1994. Sales of related parts, garments and accessories increased 16 percent as a result of the increased sales volume of all three product lines, representing 11 percent of total Company sales in 1995 compared to 13 percent in 1994. Gross profit increased to $228.1 million in 1995, a 24 percent increase over gross profit of $183.3 million in 1994. Gross profit as a percent of sales decreased to 20.5 percent in 1995 compared to 22.2 percent in 1994. This decrease in gross-margin percentage is primarily a result of: (a) continued increases in raw material purchase prices for engines and certain other components because of the weakening of the U.S. dollar in relation to the Japanese yen; (b) strengthening of the U.S. dollar in relation to the Canadian dollar which results in lower gross margins from the Company's Canadian subsidiary operation; and (c) an aggressive pricing strategy in response to increased competition. The Company has continued to invest in new product development, particularly in the areas of innovation and product diversification. New product research and development costs are recorded as cost of sales in the consolidated statements of operations. Research and development expenses were $19.9 million (1.8 percent of sales) in 1995, and $15.0 million (1.8 percent of sales) in 1994. In addition, the Company incurred tooling expenditures for new products of $17.6 million in 1995 and $12.6 million in 1994. In 1995, more than 75 percent of sales came from products introduced in the past three years. Operating expenses increased $31.2 million (33 percent) in 1995 over 1994 (exclusive of $12.3 million of costs of conversion to a corporation) as a result of the sales volume increase. Operating expenses as a percent of sales decreased to 11.4 percent in 1995 from 11.5 percent in 1994. Nonoperating expense increased $3.1 million in 1995 compared to 1994 as a result of higher interest expense and lower investment income in 1995 attributable to the payment in 1995 of special cash distributions aggregating $104.9 million. Income tax expense increased $26.1 million in 1995 compared to 1994 (exclusive of the income tax adjustment for the change in tax status). In 1994, prior to the conversion of the Company to a corporation effective December 22, 1994, the Company was not separately taxable for U.S. income tax purposes (see Note 3 of Notes to the Consolidated Financial Statements). Pro forma information is presented in the consolidated statements of operations to assist in comparing the continuing results of operations of the Company exclusive of the conversion cost and as if the Company was a taxable corporation for each period presented. Net income increased 11 percent to $60.8 million in 1995 from pro forma net income of $54.7 million in 1994. Net income as a percent of sales was 5.5 percent in 1995 and 6.6 percent in 1994 on a pro forma basis. Net income per share increased 11 percent to $2.19 in 1995 from pro forma net income per share of $1.98 in 1994. 1994 VS. 1993 Sales increased to $826.3 million in 1994, representing a 56 percent increase over $528.0 million of sales in 1993. Total finished goods unit shipments for 1994 increased 52 percent over 1993. The increase in sales was primarily attributable to the broadening of the Company's three product lines and the continued popularity of all Polaris products. Additional factors included the growth of the worldwide market for all three product lines, the continuing favorable U.S. economy and a competitive pricing strategy. Snowmobile unit sales volume increased 34 percent during 11 POLARIS INDUSTRIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations 1994, primarily because of the introduction of new models, including the XLT Special and RXL with Polaris' new XTRA suspension system. ATV unit sales volume increased 55 percent during 1994, primarily because of the continued growth in the utility and sports-enthusiasts' markets and the improvement in product availability at the dealer level as a result of the dedicated ATV production line. The average per unit sales price increased by 11 percent for ATVs in 1994, principally through the sale of new, more high-performance models that have a higher selling price than economy models. The Company introduced several new models in 1994, including the Magnum, Xplorer and Scrambler. PWC unit sales volume increased 146 percent during 1994, primarily because of the fast growth in the PWC market and the introduction of models aimed at both the family and sports rider market segments. Sales of related parts, garments and accessories increased 36 percent in 1994 as a result of the increased sales volume of all three product lines. Gross profit increased to $183.3 million in 1994, representing a 41 percent increase over 1993 gross profit of $130.3 million. The gross profit margin percentage decreased to 22.2 percent for 1994, from 24.7 percent for 1993. This decrease in gross margin percentage is primarily a result of: (a) the change in product mix towards a greater percentage of sales from ATVs and PWC which generate lower gross margins than snowmobiles; (b) continued increases in raw material purchase prices for engines and certain other component parts because of the weakening of the U.S. dollar in relation to the Japanese yen; (c) strengthening of the U.S. dollar in relation to the Canadian dollar which results in lower gross margins from the Company's Canadian subsidiary operation; and (d) increase in warranty expenses as a result of the emphasis on technological innovation and introduction of new high-performance models. Operating expenses (exclusive of $12.3 million of costs of conversion to a corporation) increased $18.2 million (24 percent) in 1994 as a result of the sales volume increases, but as a percentage of sales, decreased to 11.5 percent for 1994, from 14.6 percent in 1993. The percentage decrease is due primarily to the Company supporting an increasing level of sales without a corresponding increase in selling and administrative expenses. Income tax expense (exclusive of the income tax adjustment for the change in tax status) increased $4.5 million in 1994 compared to 1993. This increase is attributable primarily to additional reserves established relating to certain open tax years in the United States and Canada, some of which are under audit by Revenue Canada (see Note 5 of Notes to the Consolidated Financial Statements). Pro forma information is presented in the Consolidated Statements of Operations 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 with the Conversion having occurred at the beginning of each respective year. The pro forma provision for income taxes was calculated at an effective tax rate of 38 percent. Pro forma net income increased 66 percent to $54.7 million in 1994 from $33.0 million 1993. Pro forma net income as a percent of sales was 6.6 percent and 6.3 percent in 1994 and 1993, respectively. Pro forma net income per share increased 64 percent to $1.98 in 1994 from $1.21 in 1993. LIQUIDITY AND CAPITAL RESOURCES Polaris' primary sources of funds have been cash provided by operating activities, a $125 million bank line of credit and a dealer financing program provided by third parties. Polaris' primary uses of funds have been for cash dividends and distributions to shareholders and partners, capital investments and for new product development. During 1995, the Company generated net cash from operating activities of $76.4 million, which, combined with the line of credit borrowings, was utilized to fund regular cash dividends and special cash distributions to shareholders of $116.6 million, a final cash distribution to partners of $12.7 million, and capital expenditures of $46.7 million. During 1994, Polaris, operating as a partnership and therefore not paying corporate income taxes, generated net cash from operating activities of $111.7 million, which was utilized to fund cash distributions to partners of $50.1 million and capital expenditures of $32.5 million. At December 31, 1995, cash and cash equivalents totaled $3.5 million and borrowings on the line of credit totaled $40.2 million, compared to cash and cash equivalents of $62.9 million and no borrowings at December 31, 1994. The significant reduction in cash balances is primarily a result of the payment of the special cash distributions in 1995 as well as the payment of corporate federal and state income taxes for 1995 which were not payable by Polaris as a limited partnership prior to its conversion to a taxable corporation in December, 1994. During 1995, the Company declared and paid cash distributions and dividends totaling $116.6 million, or $4.27 per share. This total was comprised of four regular quarterly cash dividends totaling $11.7 million (or $.43 per share) and three special cash distributions totaling $104.9 million (or $3.84 per share). The seasonality of production and shipments causes working capital requirements to fluctuate during the year. The Company has a $125 million unsecured bank line of credit arrangement expiring March 31, 1998 to provide borrowing for working capital needs and to fund the special cash distributions paid in 1995. Borrowings under the line of credit bear interest based on LIBOR or "prime" rates, weighted at December 31, 1995 at 6.44%. At December 31, 1995, the Company had total borrowings under the line of credit of $40.2 million. In addition, at December 31, 1995, the Company had letters of credit outstanding of $9.8 million related to purchase obligations for raw materials. 12 POLARIS INDUSTRIES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations The Company has arrangements with unrelated finance companies to provide floor plan financing for its distributors and dealers. These arrangements provide liquidity by financing distributor and dealer purchases of snowmobiles, ATVs and PWC without the use of the Company's working capital. Substantially all of the sales of snowmobiles, ATVs and PWC (but not parts, garments and accessories) are financed under these arrangements whereby the Company receives payment within a few days of shipment of the product. The amount financed by distributors and dealers under these arrangements at December 31, 1995 and 1994, was approximately $237.0 million and $108.0 million, respectively. The Company participates in the cost of dealer and distributor financing up to certain limits. The Company 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. The Company's 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 the Company to repurchase financed units. Subsequent to year-end, in February, 1996, the Company entered into a partnership agreement with Transamerica Commercial Finance Corporation to form Polaris Acceptance. Polaris Acceptance will provide floor plan financing and other financial services to dealer and distributor customers of Polaris. Under the joint venture agreement the Company will initially invest approximately $7.5 million for a 25 percent equity interest in Polaris Acceptance. The Company has an option to increase its equity interest to 50 percent effective January 1, 1997. The Company has made significant capital investments to increase production capacity, quality, and efficiency, and for new product development. Improvements in manufacturing capacity include: (a) $15.1 million since August 1994, to purchase land, buildings, manufacturing and assembly equipment and paint systems at Polaris' 223,250 square foot Spirit Lake, Iowa facility; (b) the purchase of a 90,000 square foot building adjacent to Polaris' Osceola, Wisconsin facility in 1995 to house the manufacturing of Polaris designed and built domestic engines; and (c) the addition of an assembly line dedicated to year-round production of ATVs at the Roseau, Minnesota facility in 1993. The Company anticipates that capital expenditures, including tooling for 1996 will approximate $60 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, and capital expenditure requirements for 1996. At this time, management is not aware of any factors that would have a materially adverse impact on cash flow beyond 1996. INFLATION AND EXCHANGE RATES The Company 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. Over the past several years, weakening of the U.S. dollar in relation to the Japanese yen has resulted in higher raw material purchase prices. During 1995, purchases totaling 27 percent of the Company's cost of sales were from Japanese suppliers. Management believes that such cost increases also affect its principal competitors in ATVs, and, to varying degrees, some of its snowmobile and PWC competitors. The Company operates in Canada through a wholly-owned subsidiary. Sales of the Canadian subsidiary comprised 15 percent of total Company sales in 1995. Strengthening of the U.S. dollar in relation to the Canadian dollar has caused unfavorable foreign currency fluctuations from prior periods resulting in lower gross margin levels. In the past, the Company 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, 1995, the Company had open Japanese yen foreign exchange hedging contracts which mature throughout 1996 with notional amounts totaling $147.3 million. In October, 1995, the Company announced it will begin manufacturing its own engines for selected 1996 models of personal watercraft at its Osceola, Wisconsin facility. In addition, earlier in 1995, the Company entered into an agreement with Fuji Heavy Industries Ltd. to form Robin Manufacturing U.S.A., Inc. ("Robin"). Under the terms of the agreement, the Company has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Potential advantages to the Company 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. Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainty. 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; 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. 13 POLARIS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS in thousands, except per share data
December 31, 1995 1994 - ------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,501 $ 62,881 Trade receivables 40,402 29,700 Inventories 104,633 88,714 Prepaid expenses and other 7,292 5,194 Deferred tax assets 20,000 20,000 - ------------------------------------------------------------------ Total current assets 175,828 206,489 - ------------------------------------------------------------------ DEFERRED TAX ASSETS 35,000 45,000 - ------------------------------------------------------------------ PROPERTY AND EQUIPMENT Land, buildings and improvements 21,932 14,913 Equipment and tooling 104,390 77,116 - ------------------------------------------------------------------ 126,322 92,029 Less-accumulated depreciation 47,867 38,368 - ------------------------------------------------------------------ 78,455 53,661 - ------------------------------------------------------------------ INTANGIBLE ASSETS, NET 25,153 26,016 - ------------------------------------------------------------------ $314,436 $331,166 - ------------------------------------------------------------------ - ------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance sheets. 14 POLARIS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS in thousands, except per share data
December 31, 1995 1994 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 57,388 $ 58,932 Borrowings under credit agreement 40,200 -- Distributions payable -- 12,736 Accrued expenses: Compensation 33,835 33,349 Warranties 23,058 23,838 Other 28,855 17,447 Income taxes payable 12,586 15,155 - ------------------------------------------------------------------------------- Total current liabilities 195,922 161,457 - ------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 1, 2, 4 AND 5) 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, 27,324 shares issued and outstanding, at December 31, 1995 and 27,166 at December 31, 1994 273 181 Additional paid - in capital 109,344 103,935 Compensation payable in common stock 11,418 12,251 Retained earnings (accumulated deficit) (2,521) 53,342 - ------------------------------------------------------------------------------- 118,514 169,709 - ------------------------------------------------------------------------------- $314,436 $331,166 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance sheets. 15 POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS in thousands, except per share data
For the Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Sales $1,113,852 $826,286 $528,011 Cost of Sales 885,730 643,003 397,724 - ------------------------------------------------------------------------------------------------------------------ Gross profit 228,122 183,283 130,287 - ------------------------------------------------------------------------------------------------------------------ Gross profit percent 20.5% 22.2% 24.7% - ------------------------------------------------------------------------------------------------------------------ Operating Expenses Selling and marketing 99,483 63,504 49,765 General and administrative 26,981 31,802 27,295 Conversion costs (Note 1) -- 12,315 -- - ------------------------------------------------------------------------------------------------------------------ Total operating expenses 126,464 107,621 77,060 - ------------------------------------------------------------------------------------------------------------------ Operating income 101,658 75,662 53,227 Nonoperating Expense (Income), net 2,845 (254) (43) - ------------------------------------------------------------------------------------------------------------------ Income before income taxes 98,813 75,916 53,270 Provision for Income Taxes 38,037 11,966 7,457 - ------------------------------------------------------------------------------------------------------------------ 60,776 63,950 45,813 Income Tax Adjustment for Change in Tax Status (Note 3) -- (65,000) -- - ------------------------------------------------------------------------------------------------------------------ Net income $ 60,776 $128,950 $ 45,813 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Net Income Per Share $ 2.19 - ------------------------------------------------------------------------------------------------------------------ Weighted Average Number of Common and Common Equivalent Shares Outstanding 27,792 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ PRO FORMA INFORMATION (NOTE 1) Income before income taxes $ 88,231 $ 53,270 Provision for income taxes 33,528 20,243 - ------------------------------------------------------------------------------------------------------------------ Net income $ 54,703 $ 33,027 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Net income per share $ 1.98 $ 1.21 - ------------------------------------------------------------------------------------------------------------------ Weighted Average Number of Common and Common Equivalent Shares Outstanding 27,635 27,323 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 16 POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND PARTNERS CAPITAL in thousands
SHAREHOLDERS' EQUITY --------------------------------------------- COMPEN- SATION RETAINED ADDITIONAL PAYABLE IN EARNINGS COMMON PAID-IN COMMON (ACCUMULATED STOCK CAPITAL STOCK DEFICIT) - ----------------------------------------------------------------------------- Balance, December 31, 1992 $ -- $ -- $ -- $ -- First Rights conversion to BACs -- -- -- -- First Rights grants and amortization -- -- -- -- Cash distributions declared -- -- -- -- Net income for the year -- -- -- -- - ----------------------------------------------------------------------------- Balance, December 31, 1993 -- -- -- -- First Rights conversion to BACs -- -- -- -- First Rights grants -- -- -- -- Cash distributions declared -- -- -- -- Net income for the year -- -- -- 53,342 Conversion (Note 1) 181 103,935 12,251 -- - ----------------------------------------------------------------------------- Balance, December 31, 1994 181 103,935 12,251 53,342 First Rights conversion to stock 1 5,520 (5,586) -- First Rights grants -- -- 4,753 -- Dividends and distributions -- -- -- (116,639) Stock split 91 (111) -- -- Net income for the year -- -- -- 60,776 - ----------------------------------------------------------------------------- Balance, December 31, 1995 $273 $109,344 $11,418 $ (2,521) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- PARTNERS' CAPITAL ----------------------------------------------------------------- LIMITED PARTNERS' INTEREST ----------------------------------------- FIRST RIGHTS ------------------- TOTAL GENERAL ASSIGNED DEFERRED LIMITED PARTNERS' CAPITAL COMPEN- PARTNERS' INTEREST BACS VALUE SATION INTEREST TOTAL - -------------------------------------------------------------------------------------------------- Balance, December 31, 1992 $ (7,105) $ 76,139 $ 9,102 $(509) $ 84,732 $ 77,627 First Rights conversion to BACs -- 6,042 (6,072) -- (30) (30) First Rights grants and amortization -- -- 5,791 509 6,300 6,300 Cash distributions declared (9,821) (37,396) -- -- (37,396) (47,217) Net income for the year 9,529 36,284 -- -- 36,284 45,813 - -------------------------------------------------------------------------------------------------- Balance, December 31, 1993 (7,397) 81,069 8,821 -- 89,890 82,493 First Rights conversion to BACs -- 5,778 (5,838) -- (60) (60) First Rights grants -- -- 9,268 -- 9,268 9,268 Cash distributions declared (10,596) (40,346) -- -- (40,346) (50,942) Net income for the year 15,726 59,882 -- -- 59,882 128,950 Conversion (Note 1) 2,267 (106,383) (12,251) -- (118,634) -- - -------------------------------------------------------------------------------------------------- Balance, December 31, 1994 -- -- -- -- -- $ 169,709 First Rights conversion to stock -- -- -- -- -- (65) First Rights grants -- -- -- -- -- 4,753 Dividends and distributions -- -- -- -- -- (116,639) Stock split -- -- -- -- -- (20) Net income for the year -- -- -- -- -- 60,776 - -------------------------------------------------------------------------------------------------- Balance, December 31, 1995 -- -- -- -- -- $ 118,514 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 17 POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS in thousands
For the Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 60,776 $128,950 $ 45,813 Adjustments to reconcile net income to cash flow from operating activities Depreciation 21,857 18,599 12,446 Amortization 863 5,053 7,166 First Rights compensation 4,753 9,268 6,300 Deferred income taxes 10,000 (65,000) -- Changes in current operating items Trade receivables (10,702) (8,360) (4,465) Inventories (15,919) (36,657) (14,481) Accounts payable (1,544) 22,810 11,176 Accrued expenses 11,114 32,306 12,977 Income taxes payable (2,569) 7,401 4,124 Other (2,183) (2,701) (1,733) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 76,446 111,669 79,323 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (46,651) (32,529) (18,126) CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit agreement, net 40,200 -- -- Cash dividends to shareholders (116,639) -- -- Cash distributions to partners (12,736) (50,057) (46,493) - -------------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (89,175) (50,057) (46,493) - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (59,380) 29,083 14,704 CASH AND CASH EQUIVALENTS Beginning 62,881 33,798 19,094 - -------------------------------------------------------------------------------------------------------------------- Ending $ 3,501 $ 62,881 $ 33,798 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- SUPPLEMENTARY INFORMATION Interest paid during the year $ 24,341 $ 11,718 $ 8,236 - -------------------------------------------------------------------------------------------------------------------- Income taxes paid during the year $ 31,183 $ 4,119 $ 3,227 - --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 18 POLARIS INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Polaris Industries Inc. (the Corporation) was formed for the purpose of effecting the conversion of Polaris Industries Partners L.P., a Delaware limited partnership (the Partnership), from a publicly traded limited partnership to a publicly traded corporation on December 22, 1994 (the Conversion). The Corporation issued 24,015,661 shares of $0.01 par value stock to the Partnership's limited partners in exchange for their limited partner interests ("BACs"), 3,150,365 shares of common stock to EIP Associates L.P. (the General Partner) and affiliates in exchange for the entire general partnership interest and rights and ultimately 468,750 shares of common stock to the holders of 468,750 First Rights. As a result of the Conversion, the Corporation owns directly or indirectly all of the general and limited partnership interests in the Partnership. The activities of the Partnership and the Corporation are referred to herein as activities of the Company. The Conversion has been accounted for as a reorganization of affiliated entities, with the assets and liabilities of the Partnership recorded at their historical cost basis, except that deferred taxes relating to the temporary differences between the financial reporting and the income tax bases of certain assets and liabilities at the date of the Conversion were recorded by the Corporation (Note 3). The statements of operations, shareholders' equity and cash flows for 1993 and for 1994 through the date of the Conversion reflect the operations of the Partnership. The costs of the Conversion were recorded as an expense of the Corporation in the statement of operations at the time of the Conversion. Pro forma information is presented to assist in comparing the continuing results of operations of the Company for 1994 and 1993 exclusive of the Conversion costs and as if the Company was a taxable corporation with the Conversion having occurred at the beginning of each respective year. The pro forma provision for income taxes has been calculated at a rate of 38 percent, which reflects a combined federal and state statutory rate, net of related research and development credit and foreign sales corporation benefits. The weighted average number of BACs and BAC equivalents has been retroactively adjusted to reflect the issuance of an equal number of shares of common stock to the Partnership's limited partners in exchange for the number of BACs outstanding and the issuance of 3,150,365 shares of common stock to the affiliates of the General Partner in exchange for the general partnership interests. The Company is engaged in a single industry segment consisting of the design, engineering and manufacture of recreational and utility vehicles and markets them together with related parts, garments and accessories through a network of dealers, distributors and its Canadian subsidiary. FOREIGN OPERATIONS: United States operations include export sales (excluding sales in Canada) of $51,385,000, $36,049,000 and $27,179,000 for 1995, 1994 and 1993, respectively. The following data relates to Canadian operations (in thousands of United States dollars): For the Years Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------- Sales $172,459 $129,689 $106,664 Operating income 6,224 9,062 6,887 Identifiable assets 29,580 19,620 15,248 BASIS OF PRESENTATION: The consolidated financial statements of the Company include the accounts of the Corporation, the Partnership and its Canadian subsidiary. 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. CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Such investments have consisted principally of commercial paper and money market mutual funds. 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): December 31, 1995 1994 - ------------------------------------------------------------- Raw materials and purchased components $ 26,526 $32,717 Service parts 39,952 29,067 Finished goods 38,155 26,930 - ------------------------------------------------------------- $104,633 $88,714 - ------------------------------------------------------------- 19 POLARIS INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS 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 $9,006,000 at December 31, 1995 and $8,143,000 at December 31, 1994 and consist principally of cost in excess of net assets of 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. The Company 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: The Company provides for estimated normal and extended 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: The Company's 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. The Company enters into foreign exchange contracts to hedge certain of its purchase commitments denominated in foreign currencies and transfers of funds from its Canadian subsidiary; market value gains and losses are recognized at the time of purchase or transfer of funds, respectively. The purpose of the Company's foreign exchange contracts is to protect it from the risk that the eventual dollar cash flows resulting from the purchase commitments and transfers of funds from its Canadian subsidiary will be adversely affected by changes in exchange rates. At December 31, 1995, the Company had open Japanese yen foreign exchange contracts which mature throughout 1996 with notional amounts totaling $147,300,000 United States dollars. REVENUE RECOGNITION: Revenues are recognized at the time of delivery to the dealer or distributor. Product returns, whether in the normal course of business or resulting from repossession under its customer financing program (see Note 2), have not been material. The Company provides for estimated sales promotion expenses at the time of sale to the dealer or distributor customer. RESEARCH AND DEVELOPMENT COSTS: Research and development costs are charged to operations as incurred and totaled $19,871,000, $15,018,000, and $12,283,000 for 1995, 1994, and 1993 respectively. These costs are included as a component of cost of sales on the accompanying statements of operations. MAJOR SUPPLIER: During 1995, 1994 and 1993, purchases of engines and related components totaling 26 percent of the Company's cost of sales were from a single Japanese supplier. The Company has agreed with the supplier to share the impact of fluctuations in the exchange rate between the United States dollar and the Japanese yen. STOCK SPLIT: During 1995, the Board of Directors of the Company declared a three-for-two stock split to be effected in the form of a stock dividend. This stock split has been retroactively reflected in the accompanying financial statements. NET INCOME PER SHARE: Net income per share during 1995 was calculated based on the weighted average number of common and common equivalent shares outstanding. CASH DISTRIBUTIONS AND DIVIDENDS: During 1995, the Company declared and paid cash distributions and dividends totaling $116,639,000 or $4.27 per share. This total is comprised of four regular quarterly cash dividends totaling $11,732,000, or $.43 per share and three special cash distributions totaling $104,907,000, or $3.84 per share. Prior to the Conversion, cash distributions from operations were determined at the discretion of the General Partner and were allocated 79.2 percent to the limited partners and 20.8 percent to the General Partner. 20 POLARIS INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS NOTE 2 FINANCING BANK FINANCING: Effective May 8, 1995, the Company entered into an unsecured bank line of credit arrangement with maximum available borrowings of $125,000,000. Interest is charged at rates based on LIBOR or "prime" (6.44% at December 31, 1995), and the agreement expires on March 31, 1998. As of December 31, 1995, total borrowings under this credit agreement were $40,200,000. Average and maximum outstanding borrowings during 1995 were $25,467,000 and $85,900,000, respectively. LETTERS OF CREDIT: At December 31, 1995, the Company had open letters of credit totaling approximately $9,752,000. The amounts outstanding are reduced as inventory purchases pertaining to the contracts are received. CUSTOMER FINANCING PROGRAM: Unrelated finance companies provide floor plan financing to distributors and dealers on the purchase of the Company's products. The amount financed by distributors and dealers under these arrangements at December 31, 1995, was approximately $237,000,000. The Company 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. The Company's 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, the Company participates in the cost of dealer and distributor financing up to certain limits. Such expenditures are included with selling and marketing expenses on the accompanying statements of operations. NOTE 3 INCOME TAX MATTERS AND CHANGE IN TAX STATUS Prior to the conversion, the Partnership was not a taxpaying entity for United States federal and state income tax purposes and its taxable income was passed through to the partners. Income taxes prior to the Conversion relate to the Company's Canadian subsidiary which is subject to Canadian federal and provincial income taxes. As a result of the Conversion, the Corporation, as a taxable entity, recorded a net deferred tax asset on the date of the Conversion of $65,000,000 with a corresponding credit to income tax expense, for temporary differences between financial reporting and income tax bases. The net deferred tax asset consists of the following (in thousands): 1995 1994 - ----------------------------------------------------------------- CURRENT ASSETS Inventories $ 2,400 $ 5,100 Accrued expenses 15,400 13,300 Compensation payable in common stock 2,200 1,600 - ----------------------------------------------------------------- Total current 20,000 20,000 - ----------------------------------------------------------------- NONCURRENT ASSETS Cost in excess of net assets of business acquired 32,200 39,500 Property and equipment 100 1,700 Compensation payable in common stock 2,700 3,800 - ----------------------------------------------------------------- Total noncurrent 35,000 45,000 - ----------------------------------------------------------------- Less valuation allowance -- -- - ----------------------------------------------------------------- Total $55,000 $65,000 - ----------------------------------------------------------------- Components of the Company's provision for income taxes for the year ended December 31, 1995 are as follows (in thousands): - ----------------------------------------------------------------- CURRENT Federal $23,113 State 1,665 Foreign 3,259 Deferred 10,000 - ----------------------------------------------------------------- Total $38,037 - ----------------------------------------------------------------- 21 POLARIS INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate for the year ended December 31, 1995:
- ------------------------------------------------------------------------------- Federal statutory rate 35.0% State income taxes, net of federal benefit 2.6 FSC benefit and other permanent differences (1.0) Difference between foreign and federal rates .4 Other, net 1.5 - ------------------------------------------------------------------------------- Effective income tax rate 38.5% - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NOTE 4 EMPLOYEE BENEFIT PLANS The Company has various benefit plans for management and employees. A summary of these plans follows: BONUS AND PROFIT SHARING PLANS: A bonus and profit sharing plan has been established with amounts determined annually based upon a predetermined formula. In addition, the Company has an employee retirement savings plan and an unfunded supplemental retirement/savings plan for eligible employees. DEFERRED COMPENSATION PLAN FOR DIRECTORS: The Company has a nonqualified deferred compensation plan under which directors who are not officers or employees of Polaris (Outside Directors) can elect to receive Common Stock Equivalents in lieu of director's fees. The Common Stock Equivalents will be converted to common shares when an Outside Director's board service ends. A maximum of 75,000 shares of common stock will be available for issuance under the deferred compensation plan. As of December 31, 1995, 2,948 shares have been earned under the plan. STOCK OPTION PLAN: The Company has a stock option plan which provides for the issuance of stock option awards as an incentive for employees. The maximum number of shares of common stock allocated to the stock option plan is 1,350,000 shares. The exercise price for a stock option must be at least equal to the fair market value of the common stock at the time of awarding of the stock option. During 1995, the Company granted options to various employees to purchase 254,550 shares of common stock for $29.00 per share, its market value at the date of grant. Such options are exercisable on or after May 10, 1998. COMPENSATION PAYABLE IN COMMON STOCK: The Company has an employee benefit plan which provides for the issuance of rights which convert to shares of common stock as an incentive for management and employees. The rights require no cash payments by the recipients. Of such rights, 1,350,000 have been reserved for issuance to nonmanagement employees (the Employee Plan) and 2,250,000 have been reserved for issuance to middle management and senior management (the Management Plan). At December 31, 1995, 171,005 rights remain available to be granted under the Employee Plan and no rights are available to be granted under the Management Plan. Rights under the Employee Plan are vested when granted. Rights under the Management Plan contain vesting provisions up to three years and terminate if employment ceases prior to the issuance of the related common stock. As of December 31, 1995, 317,250 rights under the Management Plan and 153,000 rights under the Employee Plan, respectively, are outstanding as summarized below:
Outstanding at Granted Converted Forfeited End of Year - ------------------------------------------------------------------------------- 1993 257,391 650,034 -- 477,390 1994 330,895 339,535 -- 468,750 1995 162,000 160,500 -- 470,250
The Company records the rights at fair market value on the date of grant and accrues the related compensation expense throughout the year. Cash and noncash compensation expense recorded under these employee benefit plans was $35,624,000, $39,299,000, and $24,164,000 for 1995, 1994 and 1993, respectively. Accrued compensation includes approximately $27,867,000 and $28,292,000 for certain of these plans at December 31, 1995 and 1994, respectively. NOTE 5 COMMITMENTS AND CONTINGENCIES CANADIAN INCOME TAX EXAMINATION: In 1990, the Canadian income tax authorities proposed certain adjustments, principally relating to the original purchase price allocation to the Canadian subsidiary and transfer pricing matters, for additional income taxes payable by the Company's Canadian subsidiary for 1987 and 1988. The Canadian income tax authorities have since initiated an audit of the tax years 1989 through 1991. Management continues to vigorously contest certain of the proposed adjustments. Management does not believe that the outcome of this matter will have a material adverse effect on the Company's financial position or results of operations. 22 POLARIS INDUSTRIES INC. NOTES TO FINANCIAL STATEMENTS PRODUCT LIABILITY: The Company is subject to product liability claims in the normal course of business and has elected not to insure for product liability losses. 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: The Company is a defendant in lawsuits and subject to claims arising in the normal course of business. In the opinion of management, no legal proceedings pending against or involving the Company will have a material adverse effect on the Company's financial position or results of operations. LEASES: The Company leases warehouse and office space from a partnership controlled by certain directors under an operating lease agreement expiring in 1997. The lease requires payments of $472,000 annually plus other costs. In addition, the Company leases other buildings and equipment from unrelated parties under noncancelable operating leases. Total rent expense under all lease agreements was $2,212,000, $1,570,000, and $1,364,000 for 1995, 1994 and 1993, respectively. Future minimum payments, exclusive of other costs, required under noncancelable operating leases at December 31, 1995, total $1,655,000 cumulatively through 1998. NOTE 6 SUBSEQUENT EVENT Subsequent to year end, the Company entered into a partnership agreement with Transamerica Commercial Finance Corporation to form Polaris Acceptance. Polaris Acceptance will provide floor plan financing and other financial services to dealer and distributor customers of the Company. Under the joint venture agreement, the Company will initially invest approximately $7,500,000 for a 25 percent equity interest in Polaris Acceptance. The Company has an option to increase its equity interest to 50 percent effective January 1, 1997. NOTE 7 QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share data)
Pro Forma ------------------------- Net Income Gross Net Net Income Net Income Per Share 1995: Sales Profit Income Per Share (Note 1) (Note 1) - ---------------------------------------------------------------------------------- First Quarter $ 254,793 $ 46,715 $ 12,940 $ .47 Second Quarter 285,357 58,034 12,535 .45 Third Quarter 291,431 63,205 18,544 .67 Fourth Quarter 282,271 60,168 16,757 .60 - ---------------------------------------------------------------------- Totals $1,113,852 $228,122 $ 60,776 $2.19 - ---------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------- 1994: - --------------------------------------------------------------------------------------------------------------- First Quarter $ 145,471 $ 27,858 $ 8,566 $ 6,144 $ .22 Second Quarter 180,884 34,252 10,542 7,348 .27 Third Quarter 258,370 63,673 31,503 21,611 .78 Fourth Quarter 241,561 57,500 78,339 19,600 .71 - --------------------------------------------------------------------------------------------------------------- Totals $ 826,286 $183,283 $128,950 $54,703 $1.98 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- 1993: - --------------------------------------------------------------------------------------------------------------- First Quarter $ 107,115 $ 23,264 $ 6,138 $ 4,703 $ .17 Second Quarter 111,235 26,996 6,542 4,702 .17 Third Quarter 166,803 43,044 18,762 12,907 .47 Fourth Quarter 142,858 36,983 14,371 10,715 .39 - --------------------------------------------------------------------------------------------------------------- Totals $ 528,011 $130,287 $ 45,813 $33,027 $1.21 - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
23 POLARIS INDUSTRIES INC. INDEPENDENT AUDITOR'S REPORT TO POLARIS INDUSTRIES INC. We have audited the accompanying consolidated balance sheet of Polaris Industries Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Polaris Industries Inc. and Subsidiaries as of December 31, 1994 and the years ended December 31, 1994 and 1993, were audited by other auditors whose report dated February 2, 1995, expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides 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, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota January 31, 1996 24
BOARD OF DIRECTORS CORPORATE OFFICERS Andris A. Baltins (A, C) W. Hall Wendel, Jr. Member of the law firm of Chairman and Chief Executive Officer Kaplan, Strangis & Kaplan, P.A. Kenneth D. Larson Beverly F. Dolan (C*) President and Chief Operating Officer Retired Chairman and Chief Executive Officer of Textron Inc. John H. (Jack) Grunewald Executive Vice President, Kenneth D. Larson (E) Chief Financial Officer and Secretary President and Chief Operating Officer of Polaris Industries Inc. Charles A. Baxter Vice President-Engineering Robert S. Moe (C, E) and Product Safety Retired Executive Vice President and Treasurer of Polaris Industries Inc. Jeffrey A. Bjorkman Vice President-Manufacturing Gregory R. Palen (A) Chief Executive Officer of Michael W. Malone Spectro Alloys and Palen/Kimball Company Vice President and Treasurer Stephen G. Shank (A*) Ed Skomoroh President and Chief Executive Officer of Vice President-Sales and Marketing Learning Ventures, Inc. Former Chairman and Chief Executive Officer of Tonka Corporation W. Hall Wendel, Jr. (E) Chairman and Chief Executive Officer of Polaris Industries Inc. (A) Audit Committee Member (C) Compensation Committee Member (E) Executive Committee Member * Committee Chairman
INVESTOR INFORMATION SUMMARY OF TRADING Year Ended December 31 ----------------------- 1995 1994 --------- --------- Quarter High Low High Low - ----------------------------------- First 33.25 29.17 24.92 19.42 Second 33.00 25.33 23.92 20.08 Third 31.25 25.08 26.00 21.42 Fourth 30.75 26.88 34.83 25.08 Through December 21, 1994, units of Beneficial Assignment of Class A Limited Partnership Interests of Polaris Industries Partners L.P. traded on the American Stock Exchange (AMEX) and the Pacific Stock Exchange (PSE) under the symbol SNO. Shares of common stock of Polaris Industries Inc. commenced trading on the AMEX and the PSE on December 22, 1994 under the symbol SNO. On February 24, 1995, shares of common stock of Polaris Industries Inc. began trading on the New York Stock Exchange (in lieu of the AMEX) and on the PSE under the symbol PII. CASH DISTRIBUTIONS AND DIVIDENDS DECLARED 1995 ----------------------- Quarter Regular Special Total 1994 - ------------------------------------------ First $.10 $1.28 $1.38 $ .42 Second .10 1.28 1.38 .42 Third .10 1.28 1.38 .42 Fourth .13 -- .13 .42 - ------------------------------------------ Total $.43 $3.84 $4.27 $1.68 - ------------------------------------------ STOCK EXCHANGES New York Stock Exchange (PII) Pacific Stock Exchange (PII) Shareholders of record of the Company's common stock on March 1, 1996 5,900. Share price on March 1, 1996 $30.375. EX-21 7 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Shares % of Company Organization Outstanding Ownership ------- ------------ ----------- --------- EIP Capital Delaware 70 100% Corporation Corporation ----------- ----------- ----------- ---------- EIP Associates Delaware Limited N/A 100%(1) L.P. Partnership -------------- ---------------- ----------- ---------- Polaris Industries Delaware Limited N/A 100%(2) Partners L.P. Partnership -------------- ---------------- ----------- ---------- Polaris Real Delaware 1,000 100%(3) Estate Corporation Corporation of Iowa, Inc. -------------- ---------------- ----------- ---------- Polaris Real Delaware 1,000 100%(4) Estate Corporation Corporation -------------- ---------------- ----------- ---------- Polaris Acceptance Minnesota 1 100% Inc. Corporation -------------- ---------------- ----------- ---------- Polaris Industries Barbados 1,000 100% Export Ltd. Corporation -------------- ---------------- ----------- ---------- Polaris Industries Manitoba 101 100%(6) Inc. (5) Corporation -------------- ---------------- ----------- ----------
(1) The Company and EIP Capital Corporation are the only partners in EIP Associates L.P. (2) The Company, EIP Capital Corporation and EIP Associates L.P. are the only partners in Polaris Industries Partners L.P. (3), (4), and (6) Owned 100% by Polaris Industries Partners L.P. (5) Articles of Amendment are being prepared to effect a name change. EX-23.(A) 8 EXHIBIT 23(A) EXHIBIT 23(a) 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 Statement File Nos. 33-57053 and 33-60157. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Minneapolis, Minnesota March 21, 1996 EX-23.(B) 9 EXHIBIT 23(B) EXHIBIT 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Form S-8 No. 33-60157 and No. 33-57053 of our report, dated February 2, 1995, with respect to the financial statements and the financial statement schedules of Polaris Industries Inc. (formerly Polaris Industries Partners L.P.) for the years ended December 31, 1994 and 1993 incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1995. /s/ McGLADREY & PULLEN, LLP McGLADREY & PULLEN, LLP Minneapolis, Minnesota March 21, 1996 EX-24 10 EXHIBIT 24 EXHIBIT 24 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 John H. Grunewald and each of them (with full power to each of them to act alone) its/his/her true and lawful attorney-in-fact and agent, for it/him/her and on its/his/her behalf and in its/his/her name, place and stead, in any and all capacities to sign, execute, affix its/his/her seal thereto and file the Annual Report on Form 10-K for the year ended December 31, 1995 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/she or itself/himself/herself 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 25th day of January 1996. POLARIS INDUSTRIES INC. By /s/ W. HALL WENDEL, JR. ----------------------------------- W. Hall Wendel, Jr. Chief Executive Officer The undersigned, directors of POLARIS INDUSTRIES INC., have hereunto set their hands as of the 25th day of January 1996. /s/ W. HALL WENDEL, JR. /s/ STEPHEN G. SHANK - ------------------------------------- --------------------------------------- W. Hall Wendel, Jr. Stephen G. Shank /s/ BEVERLY F. DOLAN /s/ GREGORY R. PALEN - ------------------------------------- --------------------------------------- Beverly F. Dolan Gregory R. Palen /s/ ROBERT S. MOE /s/ ANDRIS A. BALTINS - ------------------------------------- --------------------------------------- Robert S. Moe Andris A. Baltins /s/ KENNETH D. LARSON - ------------------------------------- Kenneth D. Larson DIRECTORS 2 EX-27 11 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Balance Sheet of Polaris Industries Inc. as of December 31, 1995, and the related Statements of Operations, Shareholders' Equity and Cash Flows for the year ended December 31, 1995, and is qualified in its entirety by reference to such financial statements. 1000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 3,501 0 40,402 0 104,633 175,828 126,322 47,867 314,436 195,922 0 0 0 273 118,241 314,436 1,113,852 1,113,852 885,730 885,730 129,309 0 0 98,813 38,037 60,776 0 0 0 60,776 2.19 2.19
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