-----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, HMuL+XnRxw6BlFVRSwNqvWPJ3dk85JTODHTCQIP3zbvyqSrriyfGSNiCgl/gfdHA vQhn6T/PJ8zX/5GTQ9pAaw== 0000912057-97-009336.txt : 19970320 0000912057-97-009336.hdr.sgml : 19970320 ACCESSION NUMBER: 0000912057-97-009336 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS INDUSTRIES INC/MN CENTRAL INDEX KEY: 0000931015 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] 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: 97559007 BUSINESS ADDRESS: STREET 1: 1225 HIGHWAY 169 N CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6125420500 MAIL ADDRESS: STREET 1: 1225 HIGHWAY 169 N STREET 2: 425 LEXINGTON AVE CITY: MINNESOTA STATE: MN ZIP: 55441 10-K 1 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, 1996 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 3, 1997 (based upon the closing reported sale price of the Common Stock at that date on the New York Stock Exchange) held by non-affiliates (23,961,506 shares) was approximately $620,003,968. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 3, 1997, 26,853,417 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, 1996 furnished to the Securities and Exchange Commission (the "1996 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 22, 1997 filed with the Securities and Exchange Commission (the "1997 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. On December 31, 1996, the Partnership was merged with and into Polaris Industries Inc., a Delaware corporation (the "Operating Subsidiary"). The Company owns 100% of the Operating Subsidiary. The term "Polaris" as used herein refers to the business and operations of the Operating Subsidiary and its predecessors, Polaris Industries Partners L.P. and Polaris Industries L.P. Polaris designs, engineers and manufactures snowmobiles, all terrain 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 AND DECEMBER 31 SNOWMOBILES ATVS PWC PARTS - ---------------------------------------------------- ----------------- ----- ----- --------------- 1996................................................ 37% 37% 15% 11% 1995................................................ 40% 33% 16% 11% 1994................................................ 44% 29% 14% 13%
INDUSTRY BACKGROUND SNOWMOBILES. In the early 1950s, a predecessor to Polaris produced a "gas powered sled" which became the forerunner of the Polaris snowmobile. Snowmobiles have been manufactured under the Polaris name since 1954. Originally conceived as a utility vehicle for northern, rural environments, the snowmobile gained popularity as a recreational vehicle. From the mid-1950s through the late 1960s, over 100 producers entered the snowmobile market and snowmobile sales reached a peak of approximately 495,000 units in 1971. The Polaris product survived the industry decline in which snowmobile sales fell to a low point of approximately 87,000 units in 1983 and the number of snowmobile manufacturers serving the North American market declined to four: Yamaha, Bombardier, Arctic Cat and Polaris. Polaris estimates that industry sales of snowmobiles on a worldwide basis were approximately 250,000 units for the season ended March 31, 1996. ALL TERRAIN VEHICLES. ATVs are four-wheel vehicles with balloon style tires designed for off road use and traversing rough terrain, swamps and marshland. ATVs are used for recreation, in such sports as fishing and hunting, as well as for utility purposes on farms, ranches and construction sites. ATVs were introduced to the North American market in 1971 by Honda. Other Japanese motorcycle manufacturers, Yamaha, Kawasaki and Suzuki, entered the North American market in the late 1970s and early 1980s. By 1980, the number of ATV units sold in the North American market annually had increased to approximately 140,000 units. Polaris entered the ATV market in 1985 and Arctic Cat 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 has experienced modest growth with approximately 400,000 ATVs sold worldwide during the calendar year 1996. 1 PERSONAL WATERCRAFT. PWC are sit-down versions of water scooter vehicles, and designed for use on lakes, rivers, oceans and bays. PWC are used primarily for recreational purposes and are designed for one, two or three passengers. Polaris entered the PWC market in 1992. Polaris estimates that worldwide sales for PWC was approximately 230,000 units during the calendar year 1996. Other major PWC manufacturers are Bombardier, Yamaha, Kawasaki and Arctic Cat. PRODUCTS SNOWMOBILES. Polaris produces a full line of snowmobiles, consisting of forty-one models, ranging from utility and economy models to performance and competition models, with 1997 model suggested retail prices ranging from approximately $3,100 to $8,800. 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, 1996, snowmobiles accounted for approximately 37% 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 ATV and six-wheel off-road vehicle products, which provide more stability for the rider than the earlier three-wheel versions. Polaris' line of ATVs consisting of sixteen models, includes general purpose, sport and four-and six-wheel drive utility models, with 1996 suggested retail prices ranging from approximately $3,200 to $6,900. 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' ATVs include both two cycle and four cycle engines and both shaft and chain drive. 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, 1996 ATVs accounted for approximately 37% of Polaris' sales. PERSONAL WATERCRAFT. In 1992, Polaris introduced the SL650 personal watercraft, Polaris' first entry into this product category. Since that time, Polaris has 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 1996 suggested retail prices for Polaris' PWC range from approximately $5,300 to $7,500. For the year ended December 31, 1996, PWC accounted for approximately 15% 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 2 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, 1996, clothing, accessories and parts accounted for approximately 11% of Polaris' sales. 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. 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 had been the exclusive manufacturer of the Polaris two-cycle snowmobile engines since 1968. Fuji has manufactured engines for Polaris' ATV products since their introduction in the spring of 1985 and also supplies engines for Polaris' PWC products. 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. Since October, 1995, Polaris has been designing and producing its own engines for selected models of PWC and snowmobiles, 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. 3 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 had the ability to manufacture ATVs year round. Generally, Polaris commences ATV production in late autumn and continues through early autumn of the following year. SALES AND MARKETING With the exception of Illinois, upper Michigan and eastern Wisconsin, where Polaris sells its snowmobiles through an independent distributor, Polaris sells its snowmobiles directly to dealers in the snowbelt regions of the United States and Canada. 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 Consolidated 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. Since the beginning of 1986, Polaris has established approximately 550 dealerships in the southern United States where snowmobiles are not regularly sold. Unlike its primary competitors, which market their ATV products principally through their affiliated motorcycle dealers, Polaris also sells its ATVs and PWC through lawn and garden, boat and marine, and farm implement dealers. Dealers and distributors sell Polaris' products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products, required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. Polaris believes that a sufficient number of qualified dealers and distributors exists in all areas to permit orderly transition whenever necessary. In February, 1996, Polaris entered into a partnership agreement with Transamerica Commercial Finance Corporation ("TCFC") to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris' dealers and distributors and may in the future provide other financial services to dealers, distributors and retail customers. Under the partnership agreement, Polaris had a 25% equity interest in Polaris Acceptance throughout 1996. Additionally, Polaris had guaranteed 25% of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TCFC. At December 31, 1996, Polaris' contingent liability with respect to the guarantee was approximately $56.0 million. In January, 1997, Polaris exercised its option to increase its equity interest in Polaris Acceptance to 50% for an additional investment of approximately $10.4 million, and now guarantees 50% of the outstanding indebtedness of Polaris Acceptance. Polaris has arrangements with Polaris Acceptance, Transamerica Commercial Finance Corporation, 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 Consolidated Financial Statements. 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. 4 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. ENGINEERING, RESEARCH AND DEVELOPMENT, AND NEW PRODUCT INTRODUCTION Polaris employs approximately 260 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 $28.3 million for 1996, $19.9 million for 1995, and $15.0 million for 1994, which amounts were included as a component of the cost of sales in the period incurred. In February, 1997 Polaris announced that it is adding motorcycles to its line of businesses with the introduction of a made-in-the-USA cruiser under the brand name "Victory", which is expected to be available in limited quantities in the spring of 1998. The company expects that the engines for the motorcycles will be built at Polaris' engine plant in Osceola, Wisconsin and the motorcycles will be manufactured at the company's Spirit Lake, Iowa plant. 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. 5 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. 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 ATVs and six-wheel off-road vehicle products. Polaris has always placed warning labels on its ATVs stating that they are designed for use only by persons 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 approved safety helmets and that riders should complete proper training prior to operating an ATV. On December 30, 1987, Polaris reached an agreement with the CPSC regarding ATV safety. 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. 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 or not renewed nine 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 6 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. California has recently enacted legislation setting maximum emission standards for ATVs and the federal government has proposed legislation setting maximum emission standards for a number of vehicles including ATVs and snowmobiles. Currently Polaris' two-cycle engines do not meet the California emission requirements or those proposed under the federal legislation without technical enhancement, which is under development. However, Polaris has developed and sells ATVs with four-cycle engines that meet the California emission standards. The federal government has also enacted legislation mandating maximum emission standards for PWC beginning in 1999 with annual reductions in permitted maximums through 2006. Currently, Polaris' two-cycle engines for PWC would not meet the new emission requirements without technical enhancement, which is under development. Polaris is unable to predict the ultimate impact of the enacted or proposed legislation on Polaris and its operations. Finally, some states may pass legislation and 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. PRODUCT LIABILITY Polaris' product liability insurance limits and coverages have been adversely affected by the general decline in the availability of liability insurance. As a result of the high cost of premiums, and in view of the historically small amount of claims paid by Polaris, Polaris was self-insured from June 1985 to June, 1996. In June, 1996 Polaris purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceed a self-insured retention. Product liability claims are made against Polaris from time to time. Since its inception in 1981 through December 31, 1996, Polaris has paid an aggregate of less than $2.6 million in product liability claims and had accrued $7.2 million at December 31, 1996, 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 6 of Notes to Consolidated Financial Statements. WARRANTY 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, 1996. Approximately 750 of its employees are salaried. Polaris considers its relations with its personnel to be excellent. 7 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. 8 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 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. 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 2002. 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. Polaris is in the process of constructing a 259,000 square foot parts, garments and accessories distribution center on 50 acres in Vermillion, South Dakota. When completed in mid-1997, Polaris will reduce its warehouse space currently leased in Minneapolis, Minnesota. 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. 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. 8 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names of the executive officers of the Company as of March 3, 1997, 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. 54 Chairman and Chief Executive Officer Kenneth D. Larson 56 President and Chief Operating Officer Michael W. Malone 38 Vice President--Finance, Chief Financial Officer and Secretary Charles A. Baxter 49 Vice President--Engineering Ed Skomoroh 59 Vice President--Sales and Marketing Jeffrey A. Bjorkman 37 Vice President--Manufacturing
Executive officers of the Company are elected at the discretion of the Board of Directors with no fixed term. There are no family relationships between or among any of the executive officers or directors of the Company. Mr. Wendel has served as Chairman and Chief Executive Officer since the Company's formation in 1994. Mr. Wendel was the Chief Executive Officer of Polaris Industries Capital Corporation ("PICC"), which was the managing general partner of Polaris Industries Associates L.P., which was the operating general partner of Polaris Industries L.P. from 1987 to December 1994. From 1981 to 1987, Mr. Wendel was Chief Executive Officer of a predecessor of Polaris, which was formed to purchase the snowmobile assets of the Polaris E-Z-GO Division of Textron Inc. Before that time, Mr. Wendel was President of the Polaris E-Z-GO Division for two years and prior thereto, held marketing positions as Vice President of Sales and Marketing and National Sales Manager since 1974. Mr. 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. Malone has been Vice President--Finance, Chief Financial Officer and Secretary of the Company since January 1997. Mr. Malone was Vice President and Treasurer of the Company from December 1994 to January 1997 and was Chief Financial Officer and Treasurer of PICC from January 1993 to December 1994. Prior thereto and since 1986, he was Assistant Treasurer of PICC or its predecessor. Mr. Malone joined Polaris in 1984 after four years with Arthur Andersen LLP. Mr. Baxter has been Vice President--Engineering of the Company since December 1994 and held that position with PICC or its predecessor since 1981. Prior thereto, since 1970, Mr. Baxter was employed as Director of Engineering of the Polaris E-Z-GO Division of Textron. Mr. 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. 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 1996 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 1996 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 1996 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 1996 Annual Report, are incorporated herein by reference: Consolidated Balance Sheets--December 31, 1996 and 1995 Consolidated Statements of Operations--Years Ended December 31, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity and Partners' Capital--Years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. The financial statements of the Company and its predecessor, the Partnership, for the year ended December 31, 1994 were audited by McGladrey & Pullen, LLP. The separate report of McGladrey & Pullen, LLP for such period has been omitted from the Company's 1996 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 statements of operations, shareholders' equity, and partners' capital and cash flows of Polaris Industries Inc. for the year ended December 31, 1994. 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. 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 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 results of its operations and cash flows of Polaris Industries Inc. for the year ended December 31, 1994, 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 Not applicable. 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 1997 Proxy Statement is incorporated herein by reference. (b) Executive Officers of the Registrant Information concerning Executive Officers of the Company is included in this Report after Item 4, under "Executive Officers of the Registrant." (c) Compliance with Section 16(a) of the Exchange Act The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1997 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 1997 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 1997 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 1997 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 1996 Annual Report are incorporated by reference to this Report under Item 8 "Financial Statements and Supplementary Data". (2) Financial Statement Schedules All supplemental financial statement schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. (3) Exhibits The Exhibits to this Report are listed in the Exhibit Index on page E-1. 12 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 26, 1997, 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, 1996. (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 18, 1997. 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 18, 1997 W. Hall Wendel, Jr. Executive Officer) Vice President--Finance, /s/ MICHAEL W. MALONE Chief Financial Officer - ------------------------------------ and Secretary (Principal March 18, 1997 Michael W. Malone Financial and Accounting Officer) * - ------------------------------------ Director March 18, 1997 Beverly F. Dolan * - ------------------------------------ Director March 18, 1997 Robert S. Moe * - ------------------------------------ Director March 18, 1997 Kenneth D. Larson * - ------------------------------------ Director March 18, 1997 Stephen G. Shank * - ------------------------------------ Director March 18, 1997 Gregory R. Palen * - ------------------------------------ Director March 18, 1997 Andris A. Baltins * - ------------------------------------ Director March 18, 1997 Raymond J. Biggs *By: /s/ W. HALL WENDEL, JR. March 18, 1997 ------------------------------ (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, 1996
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 ("the Executive Office Lease"). (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. (o) Amended and Restated Polaris Industries Inc. 1996 Restricted Stock Plan, incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 7, 1996 (No. 333-05463).
15
EXHIBIT NUMBER DESCRIPTION - ------------ ---------------------------------------------------------------------- (p) Polaris Industries Inc. Employee Stock Purchase Plan, incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 3, 1997 (No. 333-21007). (q) Form of Change of Control Agreement entered into with executive officers of Company. (r) Amendment to Executive Office Lease dated November 22, 1996. 11. Statement re:Computation of per share earnings. 13. Portions of the Annual Report to Security Holders for the Year Ended December 31, 1996 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.
16 EX-10.(Q) 2 CHANGE IN CONTROL AGREEMENT CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, made and entered into as of __________, 1996 between POLARIS INDUSTRIES INC., a Minnesota corporation (the "Company"), and ______ (the "Employee"). R E C I T A L S: WHEREAS, Employee has been and currently is employed by the Company; WHEREAS, the Board of Directors of the Company (the "Board") believes it is imperative to diminish the inevitable distraction of Employee by virtue of the personal uncertainties and risks created by any pending or threatened Change in Control (as defined below) of the Company; and WHEREAS, as an inducement to continue employment and to enhance the loyalty and performance of Employee with the Company, the Company desires to provide the Employee with certain compensation and benefits in the event a Change in Control of the Company occurs, NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein, the parties hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, these terms shall have the following meanings: (a) CHANGE IN CONTROL. A "Change in Control" shall be deemed to have occurred if, prior to the Termination Date (as defined below): (i) Any election has occurred of persons to the Board that causes at least one-half of the Board to consist of persons other than (x) persons who were members of the Board on January 1, 1996 and (y) persons who were nominated for election by the Board as members of the Board at a time when more than one-half of the members of the Board consisted of persons who were members of the Board on January 1, 1996; provided, however, that any person nominated for election by the Board at a time when at least one-half of the members of the Board were persons described in clauses (x) and/or (y) 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 (x) (persons described or deemed described in clauses (x) and/or (y) are referred to herein as ("Incumbent Directors")); or (ii) 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 Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of a number of Company Voting Securities equal to or greater than 35% of the Company 1 Voting Securities unless such acquisition has been designated by the Incumbent Directors as an acquisition not constituting a Change of Control for purposes hereof; or (iii) A liquidation or dissolution of the Company; or a reorganization, merger or consolidation of the Company unless, following such reorganization, merger or consolidation, the Company is the surviving entity resulting from such reorganization, merger or consolidation or at least one-half of the Board of Directors of the entity resulting from such reorganization, merger or consolidation consists of Incumbent Directors; or a sale or other disposition of all or substantially all of the assets of the Company unless, following such sale or disposition, at least one-half of the Board of Directors of the transferee consists of Incumbent Directors. As used herein,"Company Voting Securities" means the combined voting power of all outstanding voting securities of the Company entitled to vote generally in the election of the Board. (b) CAUSE. For purposes of this Agreement only, "Cause" means (i) repeated violations of the Employee's employment obligations (other than as a result of incapacity due to physical or mental illness), which are demonstrably willful and deliberate on Employee's part and which are not remedied in a reasonable period after written notice from the Company specifying such violations; or (ii) conviction for (or plea of nolo contendere to) a felony involving moral turpitude, or dishonesty with respect to the Company. (c) GOOD REASON. "Good Reason" means (i) the assignment to Employee of any duties inconsistent in any material respect with Employee's position or any material reduction in the scope of the Employee's authority and responsibility (other than isolated, insubstantial action not taken in bad faith and which is remedied by the Company upon notice from Employee, or as temporarily required due to Employee's illness or injury); (ii) there is a reduction in Employee's base compensation; (iii) the Company requires the Employee's principal place of employment to be anywhere other than the Company's principal executive offices, or there is a relocation of the Company's principal executive offices outside of the Minneapolis, Minnesota metropolitan area; or (iv) the Company otherwise fails to perform any of its material obligations to Employee. (b) TERMINATION DATE. "Termination Date" means the date on which the Employee's employment with the Company is terminated. 2. TERMINATION UPON CHANGE IN CONTROL. If a Change in Control occurs and upon or within twenty-four (24) months after such Change in Control, the Employee terminates his employment for Good Reason or the Employee's employment is terminated by the Company for any reason other than for Cause (a "Change of Control Termination"), then the Employee shall be entitled to the following severance benefits: 2 (a) TERMINATION PAYMENT. The Company shall pay the Employee a lump sum cash payment, no later than thirty (30) days after the Termination Date, in an amount equal to [ONE] [TWO] times Employee's average annual cash compensation (including base salary and cash bonuses, but excluding the award or exercise of stock options or stock grants) for the three fiscal years (or lesser number of fiscal years if the Employee's employment has been of shorter duration) of the Company immediately preceding the Change of Control Termination. (b) ANNUAL BONUS. If the Termination Date occurs before a cash bonus for any preceding fiscal year has been paid, the Company shall pay to the Employee the amount of the Employee's cash bonus for such preceding fiscal year as soon as it is determinable and such amount shall be included in the determination of the payment to be made pursuant to Paragraph 2(a). Notwithstanding the foregoing, no cash bonus shall be paid for any part of the fiscal year in which the Termination Date occurs. 3. BENEFITS IN LIEU OF SEVERANCE PAY. The severance benefits provided for in paragraph 2 are in lieu of any benefits that would otherwise be provided to the Employee under the Company's severance pay policy or practice and the Employee shall not be entitled to any benefits under the Company's severance pay policy or practice in the event that severance benefits are payable hereunder. 4. RIGHTS IN THE EVENT OF DISPUTE. If there is a claim or dispute arising out of or relating to this Agreement or any breach thereof, regardless of the party by whom such claim or dispute is initiated, the Company shall, in connection with settlement in the Employee's favor of any such matter or upon payment of any judgment entered in the Employee's favor, upon presentation of appropriate vouchers, pay all legal expenses, including reasonable attorneys' fees, court costs, and ordinary and necessary out-of-pocket cost of attorneys, billed to and payable by the Employee or by anyone claiming under or through the Employee. 5. OTHER BENEFITS. The benefits provided under this Agreement shall, except to the extent otherwise specifically provided herein be in addition to, and not in derogation or diminution of, any benefits that Employee or his beneficiary may be entitled to receive under any other contract, plan or program now or hereafter maintained by the Company, or its subsidiaries. 6. EFFECT ON EMPLOYMENT. Neither this Agreement nor anything contained herein shall be construed as conferring upon Employee the right to continue in the employment of the Company or any of its affiliates, or as interfering with or limiting the right of the Company to terminate the Employee's employment with or without cause at any time. 7. LIMITATION IN ACTION. Prior to the occurrence of a Change in Control, Employee shall have no rights under this Agreement and the Board shall have the power and the right, within its sole discretion to rescind, modify or amend this Agreement without the consent of Employee. In all other cases, and notwithstanding the authority granted to the Board to exercise any discretion to rescind, modify or amend this Agreement contained herein, the Board will not, 3 following a Change in Control, have the power or right to exercise such authority or otherwise take any action that is inconsistent with the provisions of this Agreement. 8. SUCCESSORS. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, to expressly assume and agree to perform its obligations under this Agreement in the same manner and to the same extent that the Company would be required to perform them if no succession had taken place unless, in the opinion of legal counsel mutually acceptable to the Company and the Employee, such obligations have been assumed by the successor as a matter of law. The Employee's rights under this Agreement shall inure to the benefit of, and shall be enforceable by, the Employee's legal representative or other successors in interest, but shall not otherwise be assignable or transferable. 9. SEVERABILITY. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. 10. SURVIVAL. The rights and obligations of the parties pursuant to this Agreement shall survive the termination of the Employee's employment with the Company to the extent that any performance is required hereunder after such termination. 11. GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of Minnesota, without giving effect to the conflicts of law provisions thereof. 12. NOTICES. All notices under this Agreement shall be in writing and shall be deemed effective when delivered in person (in the Company's case, to its Secretary) or 48 hours after deposit thereof in the U.S. mails, postage prepaid, addressed, in the case of the Employee, to his last known address as carried on the personnel records of the Company and, in the case of the Company, to the corporate headquarters, attention of the Secretary, or to such other address as the party to be notified may specify by written notice to the other party. 13. AMENDMENTS AND CONSTRUCTION. Except as set forth in Paragraph 7, this Agreement may only be amended in a writing signed by the parties hereto. Paragraph headings are for convenience only and shall not be considered a part of the terms and provisions of the Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first written above. POLARIS INDUSTRIES INC. 4 By --------------------------- ----------------------- EMPLOYEE Its ----------------------- 5 EX-10.(R) 3 AMENDMENT AMENDMENT Amendment to that certain Building Lease dated May 4, 1983 (the "Lease"), by and between 1225 NORTH COUNTY ROAD 18 LIMITED PARTNERSHIP, a Minnesota limited partnership (the "Landlord"), and POLARIS INDUSTRIES PARTNERS L.P., a Delaware limited partnership (the "Tenant") as successor to Polaris Industries Inc. the original tenant under the Lease. W I T N E S S E T H : WHEREAS, the Lease provides for a term of ten (10) years commencing on May 4, 1983 and ending on May 3, 1993; and WHEREAS, the Lease was extended on April 12, 1990 to a term ending on April 30, 1997. WHEREAS, Landlord and Tenant desire to extend the term of the Lease. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree that the term of the Lease shall be and hereby is extended for an additional period ending on April 30, 2002 subject to all the terms and conditions of the Lease including, but not limited to, the provisions of Article I with respect to annual adjustment of base rental. This Amendment is entered into for the purpose of correcting that certain Amendment relating to the Lease dated March 1, 1996, to properly reflect the identity of the Tenant. Dated: November 22, 1996 1225 NORTH COUNTY ROAD 18 LIMITED PARTNERSHIP, a Minnesota limited partnership By: 1225 GP, LLC, its General Partner By: /s/ Keith A. Libbey ---------------------------------- Keith A. Libbey, a Managing Member POLARIS INDUSTRIES PARTNERS L.P. By: Polaris Industries Inc., its Managing General Partner By: /s/ Michael Malone --------------------------------- EX-11 4 COMPUTATION OF NET INCOME PER SHARE 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, ------------------ ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Net Income for the Period $16,837 $16,757 $62,293 $60,776 ------- ------- ------- ------- Weighted Average Number of Outstanding: Common shares 27,067 27,324 27,338 27,297 First Rights and Restricted Stock 493 472 504 494 Deferred Compensation Plan for Directors 7 2 5 1 Stock Option Plan -- 3 14 -- ------- ------- ------- ------- Total common and common equivalent shares 27,567 27,801 27,861 27,792 ------- ------- ------- ------- ------- ------- ------- ------- Net Income Per Share $0.61 $0.60 $2.24 $2.19 ------- ------- ------- ------- ------- ------- ------- -------
EX-13.1 5 ANNUAL REPORT Polaris Industries Inc. designs, manufactures and markets innovative, high- quality, high-performance motorized products for recreation and utility use, including snowmobiles, all-terrain vehicles (ATVs) and personal watercraft (PWC). - Headquartered in Minneapolis, Polaris operates engineering and manufacturing facilities in Roseau, Minn.; Osceola, Wisc.; and Spirit Lake, Iowa; has a wholly owned subsidiary in Winnipeg, Manitoba; and, together with Fuji Heavy Industries Ltd., manufactures engines in Hudson, Wisc. Polaris products are sold through a network of more than 2,000 dealers in North America and 60 distributors in 118 countries. - Polaris common stock trades on the New York Stock Exchange and Pacific Stock Exchange under the symbol PII. Financial Highlights (in thousands, except per share data)
1996 1995 % Change - ----------------------------------------------------------------------------------------------- Operating Data Sales $1,191,901 $1,113,852 7% Operating income 97,417 101,658 (4%) Net income 62,293 60,776 2% Net income per share 2.24 2.19 2% Balance Sheet Data Current assets $193,405 $175,271 Property and equipment 93,513 78,455 Total assets 351,717 314,436 Borrowings under credit agreement 35,000 40,200 Shareholders' equity 155,330 118,514
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 conjunction with, the Consolidated Financial Statements and Notes thereto and other financial and statistical information referenced elsewhere herein, including the information referenced under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Years Ended December 31, 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Sales data Total dollars $1,191,901 $ 1,113,852 $ 826,286 $ 528,011 $ 383,818 % change from prior year 7% 35% 56% 38% 29% Sales mix by product (%) Snowmobiles 37% 40% 44% 50% 54% ATVs 37% 33% 29% 26% 25% PWC 15% 16% 14% 9% 7% Parts, garments and accessories 11% 11% 13% 15% 14% Gross profit data Total dollars $ 235,546 $ 228,122 $ 183,283 $ 130,287 $ 104,926 % of sales 20% 20% 22% 25% 27% Operating expense data Amortization of intangibles and noncash compensation $ 5,325 $ 5,616 $ 14,321 $ 13,466 $ 11,997 Conversion costs - - 12,315 - - Other operating expenses 132,804 120,848 80,985 63,594 52,238 % of sales 11% 11% 10% 12% 14% Actual and pro forma data* Net income $ 62,293 $ 60,776 $ 54,703 $ 33,027 $ 24,602 Net income per share $ 2.24 $ 2.19 $ 1.98 $ 1.21 $ 0.91 CASH FLOW DATA Cash flow from operating activities $ 89,134 $ 77,246 $ 111,669 $ 79,323 $ 55,316 Cash purchases of property and equipment 44,889 46,651 32,529 18,126 12,295 Cash distributions declared to partners - - 50,942 47,217 44,507 Cash distributions declared per unit - - $ 1.68 $ 1.67 $ 1.67 Cash dividends to shareholders 16,390 116,639 - - - Cash dividends per share $ 0.60 $ 4.27 - - - BALANCE SHEET DATA (AT END OF YEAR) Cash and cash equivalents $ 5,812 $ 3,501 $ 62,881 $ 33,798 $ 19,094 Current assets 193,405 175,271 206,489 109,748 74,999 Total assets 351,717 314,436 331,166 180,548 146,681 Current liabilities 161,387 155,722 161,457 98,055 69,054 Borrowings under credit agreement 35,000 40,200 - - - Shareholders' equity/Partners' capital 155,330 118,514 169,709 82,493 77,627 1991 1990 1989 1988 - ---------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Sales data Total dollars $ 297,677 $ 296,147 $ 242,618 $ 171,497 % change from prior year 1% 22% 41% 24% Sales mix by product (%) Snowmobiles 60% 67% 67% 70% ATVs 25% 19% 19% 16% PWC - - - - Parts, garments and accessories 15% 14% 14% 14% Gross profit data Total dollars $ 88,440 $ 89,349 $ 77,320 $ 52,247 % of sales 30% 30% 32% 30% Operating expense data Amortization of intangibles and noncash compensation $ 13,108 $ 12,116 $ 15,717 $ 8,645 Conversion costs - - - - Other operating expenses 43,614 46,421 35,302 25,139 % of sales 15% 16% 15% 15% Actual and pro forma data* Net income $ 20,727 $ 20,465 $ 16,657 $ 11,538 Net income per share $ 0.81 $ 0.79 $ 0.65 $ 0.47 CASH FLOW DATA Cash flow from operating activities $ 46,642 $ 54,782 $ 44,447 $ 37,542 Cash purchases of property and equipment 15,988 7,158 7,065 2,724 Cash distributions declared to partners 42,581 42,582 32,514 17,722 Cash distributions declared per unit $ 1.67 $ 1.67 $ 1.51 $ 0.80 Cash dividends to shareholders - - - - Cash dividends per share - - - - BALANCE SHEET DATA (AT END OF YEAR) Cash and cash equivalents $ 20,098 $ 32,025 $ 27,886 $ 15,599 Current assets 59,200 66,893 60,344 36,377 Total assets 135,509 138,704 137,628 118,070 Current liabilities 52,646 46,602 38,875 20,665 Borrowings under credit agreement - - - - Shareholders' equity/Partners' capital 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 4 and 8 of Notes to Consolidated 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 8 of Notes to Consolidated Financial Statements). 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, 1996, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein. RESULTS OF OPERATIONS 1996 VS. 1995 Sales increased to $1.192 billion in 1996, representing a seven percent increase over $1.114 billion of sales in 1995. Total finished goods unit shipments for 1996 increased three percent over 1995. The increase in sales was primarily attributable to the continuing popularity and broadening of the Company's all- terrain vehicle (ATV) product line. Snowmobile unit sales volume declined five percent during 1996 from the prior year as the market absorbed an extraordinary growth rate over the prior two years. New model introductions during 1996 were highlighted by the award- winning 700 RMK. Sales of snowmobiles comprised 37 percent of total Company sales in 1996 compared to 40 percent in 1995. ATV unit sales volume increased 13 percent during 1996 from the prior year, primarily because of the continued growth in the utility and sports-enthusiasts markets. Retail ATV sales rose to the highest level in Polaris' history and management believes that the Company is now second in U.S. ATV market share. The average per unit sales price increased by six percent in 1996, principally through the sale of new, higher-performance models that have a higher selling price than economy models. The Company introduced several new models in 1996, including the Xplorer 500 and Scrambler 500. Sales of ATVs comprised 37 percent of total Company sales in 1996 compared to 33 percent in 1995. Personal watercraft (PWC) unit sales volume was approximately the same in 1996 as during 1995 as a result of leveling of PWC consumer market demand after several years of unusually high growth in PWC demand. Sales of PWC comprised 15 percent of total Company sales in 1996 compared to 16 percent in 1995. Sales of related parts, garments and accessories increased for each product line during 1996 and resulted in an overall increase of 14 percent over 1995. Sales of parts, garments and accessories comprised 11 percent of total Company sales in both 1996 and 1995. Gross profit increased to $235.5 million in 1996, representing a three percent increase over 1995 gross profit of $228.1 million. The gross profit margin percentage decreased to 19.8 percent in 1996, from 20.5 percent in 1995. This decrease in gross margin percentage is primarily a result of: (a) an increase in warranty expense, principally for snowmobiles, as a result of rapid technological innovation and introduction of new high performance models; and (b) an increase in research and development costs reflecting the Company's continued emphasis on innovative new product development; partially offset by (c) decreases in raw material purchase prices for engines and certain other component parts because of the strengthening of the U.S. dollar in relation to the Japanese yen when compared to the 1995 period. The Company has continued to invest in new product development, innovation and product diversification. New product research and development costs are recorded as a component of cost of sales in the consolidated statements of operations. Research and development expenses were $28.3 million (2.4 percent of sales) in 1996 and $19.9 million (1.8 percent of sales) in 1995. In addition, the Company incurred tooling expenditures for new products of $18.0 million in 1996 and $17.6 million in 1995. In 1996, more than 70 percent of sales came from products introduced in the past three years. Operating expenses increased $11.7 million (nine percent) in 1996 over 1995 and operating expenses as a percent of sales increased to 11.6 percent in 1996 from 11.4 percent in 1995. These increases are due primarily to an increased level of promotional and advertising costs targeted to assist dealers in retailing PWC units late in the 1996 selling season. Nonoperating expense decreased $2.8 million in 1996 compared to 1995 as a result of (a) income recorded in 1996 from the Company's investment in Polaris Acceptance, offset by (b) interest expense incurred in 1996 from borrowings under the bank line of credit arrangement used to fund the payment of special cash distributions totaling $104.9 million during 1995. The provision for income taxes in 1996 has been recorded at a rate of 36.0 percent of pretax income compared to 38.5 percent for 1995. This change reflects the settlement reached with the Canadian income tax authorities regarding a claim for additional income taxes payable by the Company's Canadian subsidiary for tax years 1987 through 1991. Net income increased two percent to $62.3 million in 1996 from $60.8 million in 1995. Net income as a percent of sales was 5.2 percent in 1996 compared to 5.5 percent in 1995. Net income per share increased two percent to $2.24 in 1996 from $2.19 in 1995. 1995 VS. 1994 Sales for 1995 were $1.114 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 in 1995 primarily as a result of the introduction of new, high-performance models with additional features that have a higher selling price. ATV unit sales volume increased 42 percent during 1995. Polaris Industries Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations 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 400L, and Magnum 6 x 6. The average per unit sales price increased five percent for ATVs in 1995 as the sales mix continued to move to new, higher performance models. 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 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) 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. 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 (Note 4 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. 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 floor plan financing program. Polaris' primary uses of funds have been for cash dividends and distributions to shareholders and partners, capital investments and new product development. During 1996, the Company generated net cash from operating activities of $89.1 million, which was utilized to fund capital expenditures of $44.9 million, investments in affiliates of $6.8 million, regular cash dividends of $16.4 million and the repurchase of common stock of $13.6 million. During 1995, the Company generated net cash from operating activities of $77.2 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, operating as a partnership and therefore not paying corporate income taxes, Polaris 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. 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, 6.04 percent at December 31, 1996. At December 31, 1996, the Company had total borrowings under the line of credit of $35.0 million compared to $40.2 million at December 31, 1995. In addition, at December 31, 1996, the Company had letters of credit outstanding of $15.4 million related to purchase obligations for raw materials. During 1996, the Board of Directors of the Company authorized the repurchase of up to 1.0 million shares of the Company's common stock. During 1996, the Company paid $13.6 million to repurchase and retire 521,000 shares. On January 23, 1997, the Board of Directors of the Company expanded the share repurchase program, authorizing the cumulative repurchase of up to 3.0 million shares of the Company's common stock. In February 1996, a wholly-owned subsidiary of the Company entered into a partnership agreement with Transamerica Commercial Finance Corporation (TCFC) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to the Company's dealers and distributors and may in the future provide other financial services to dealers, distributors and retail customers of the Company. Under the partnership agreement, the Company's subsidiary had a 25 percent equity interest in Polaris Acceptance throughout 1996. Additionally, the Company had guaranteed 25 percent of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TCFC. At December 31, 1996, the Polaris Industries Inc. MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations Company's contingent liability with respect to the guarantee was approximately $56.0 million. In January 1997, the Company exercised its option to increase its equity interest in Polaris Acceptance to 50 percent for an additional investment of approximately $10.4 million, and now guarantees 50 percent of the outstanding indebtedness of Polaris Acceptance. The Company has arrangements with certain finance companies, including Polaris Acceptance, to provide floor plan financing for its distributors and dealers. These arrangements provide liquidity by financing distributor and dealer purchases of 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, 1996 and 1995, was approximately $327.0 million and $237.0 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. The Company has made significant capital investments to increase production capacity, quality, and efficiency, and for new product development and diversification. Improvements in manufacturing and distribution capacity include: (a) an investment of $7.0 million during 1996 for the construction of a 250,000 square foot state-of-the-art parts, garments and accessories distribution center in Vermillion, South Dakota which should be operational by mid-1997; (b) $21.3 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; and (c) 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. The Company anticipates that capital expenditures, including tooling, for 1997 will approximate $55.0 million. Management believes that existing cash balances, cash flows to be generated from operating activities and available borrowing capacity under the line of credit arrangement will be sufficient to fund operations, regular dividends, share repurchases, and capital expenditure requirements for 1997. At this time, management is not aware of any factors that would have a materially adverse impact on cash flow beyond 1997. 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 on financial results 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 1996, purchases totaling 22 percent of the Company's cost of sales were from yen-dominated 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 strengthening of the U.S. dollar in relation to the yen during 1996 has reversed this trend. The Company's cost of sales in 1996 were positively impacted by the yen exchange rate fluctuation when compared to 1995. In view of the foreign exchange hedging contracts currently in place, the Company anticipates that the yen-dollar exchange rate will continue to have a positive impact on cost of sales during 1997 when compared to the same periods in 1996. The Company operates in Canada through a wholly-owned subsidiary. Sales of the Canadian subsidiary comprised 14 percent of total Company sales in 1996. Over the past several years, strengthening of the U.S. dollar in relation to the Canadian dollar has resulted in lower gross margin levels on a comparable basis. However, the fluctuation of the Canadian dollar exchange rate did not have a significant impact on the gross margin achieved in 1996 when compared to 1995. 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, 1996, the Company had open Japanese yen foreign exchange hedging contracts with notional amounts totaling $90.3 million U.S. dollars, and open Canadian dollar foreign exchange contracts with notional amounts totaling $57.7 million U.S. dollars which mature throughout 1997. Since October 1995, the Company has been manufacturing its own engines for selected models of personal watercraft and snowmobiles 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; warranty expenses; foreign currency exchange rate fluctuations; environmental and product safety regulatory activity; effects of weather; uninsured product liability claims; and overall economic conditions, including inflation and consumer confidence and spending. Polaris Industries Inc. CONSOLIDATED BALANCE SHEETS in thousands, except per share data December 31, 1996 1995 - ---------------------------------------------------------------------------- Assets CURRENT ASSETS Cash and cash equivalents $ 5,812 $ 3,501 Trade receivables 36,158 40,402 Inventories 122,911 104,633 Prepaid expenses and other 3,524 6,735 Deferred tax assets 25,000 20,000 - --------------------------------------------------------------------------- Total current assets 193,405 175,271 - --------------------------------------------------------------------------- DEFERRED TAX ASSETS 30,000 35,000 - --------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Land, buildings and improvements 23,973 21,932 Equipment and tooling 147,238 104,390 - --------------------------------------------------------------------------- 171,211 126,322 Less-accumulated depreciation 77,698 47,867 - --------------------------------------------------------------------------- 93,513 78,455 - --------------------------------------------------------------------------- INVESTMENTS IN AFFILIATES 10,421 557 INTANGIBLE ASSETS, NET 24,378 25,153 - --------------------------------------------------------------------------- $351,717 $314,436 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated balance sheets. Polaris Industries Inc. CONSOLIDATED BALANCE SHEETS in thousands, except per share data
December 31, 1996 1995 - ----------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 50,514 $ 57,388 Accrued expenses: Compensation 38,685 33,835 Warranties 32,919 23,058 Other 30,712 28,855 Income taxes payable 8,557 12,586 - ----------------------------------------------------------------------------------------------- Total current liabilities 161,387 155,722 - ----------------------------------------------------------------------------------------------- BORROWINGS UNDER CREDIT AGREEMENT 35,000 40,200 - ----------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 1, 2, 5, 6 AND 7) 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, 27,011 and 27,324 shares issued and outstanding 270 273 Additional paid-in capital 102,946 109,344 Deferred compensation (978) - Compensation payable in common stock 9,710 11,418 Retained earnings (accumulated deficit) 43,382 (2,521) - ----------------------------------------------------------------------------------------------- Total shareholders' equity 155,330 118,514 - ----------------------------------------------------------------------------------------------- $351,717 $314,436 - ----------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance sheets. Polaris Industries Inc. CONSOLIDATED STATEMENTS OF OPERATIONS in thousands, except per share data
For the Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------- Sales $1,191,901 $1,113,852 $826,286 Cost of Sales 956,355 885,730 643,003 - -------------------------------------------------------------------------------------------- Gross profit 235,546 228,122 183,283 - -------------------------------------------------------------------------------------------- Gross profit percent 19.8% 20.5% 22.2% - -------------------------------------------------------------------------------------------- Operating Expenses Selling and marketing 112,146 99,483 63,504 General and administrative 25,983 26,981 31,802 Conversion costs (Note 8) - - 12,315 - -------------------------------------------------------------------------------------------- Total operating expenses 138,129 126,464 107,621 - -------------------------------------------------------------------------------------------- Operating income 97,417 101,658 75,662 Nonoperating Expense (Income) Interest expense 4,339 1,708 - Equity in (income) loss of affiliates (3,107) 243 - Other expense (income), net (1,148) 894 (254) - -------------------------------------------------------------------------------------------- Income before income taxes 97,333 98,813 75,916 Provision for Income Taxes 35,040 38,037 11,966 - -------------------------------------------------------------------------------------------- 62,293 60,776 63,950 Income Tax Adjustment for Change in Tax Status (Note 4) - - (65,000) - -------------------------------------------------------------------------------------------- Net income $ 62,293 $ 60,776 $128,950 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Net Income Per Share $ 2.24 $ 2.19 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Weighted Average Number of Common and Common Equivalent Shares Outstanding 27,861 27,792 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- PRO FORMA INFORMATION (NOTE 8) Income before income taxes $ 88,231 Provision for income taxes 33,528 - -------------------------------------------------------------------------------------------- Net income $ 54,703 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Net income per share $ 1.98 - -------------------------------------------------------------------------------------------- Weighted Average Number of Common and Common Equivalent Shares Outstanding 27,635 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. Polaris Industries Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND PARTNERS' CAPITAL IN THOUSANDS
SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------ COMPEN- SATION RETAINED ADDITIONAL DEFERRED PAYABLE IN EARNINGS PREFERRED COMMON PAID-IN COMPEN- COMMON (ACCUMULATED STOCK STOCK CAPITAL SATION STOCK DEFICIT) - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 $ - $ - $ - $ - $ - $ - First Rights conversion to BACs - - - - - - First Rights grants - - - - - - Cash distributions declared - - - - - - Net income - - - - - 53,342 Conversion (Note 8) - 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 - - - - - 60,776 - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 - 273 109,344 - 11,418 (2,521) First Rights conversion to stock - 2 5,717 - (5,769) - First Rights grants - - - - 4,061 - Restricted stock grants - 1 1,466 (978) - - Dividends declared - - - - - (16,390) Repurchase and retirement of common shares - (6) (13,581) - - - Net income - - - - - 62,293 - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ - $ 270 $102,946 ($978) $ 9,710 $ 43,382 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- PARTNERS' CAPITAL ---------------------------------------- LIMITED PARTNERS' INTEREST ------------------------- FIRST RIGHTS GENERAL ASSIGNED PARTNERS' CAPITAL INTEREST BACS VALUE TOTAL - ------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1993 $ (7,397) $ 81,069 $ 8,821 $ 82,493 First Rights conversion to BACs - 5,778 (5,838) (60) First Rights grants - - 9,268 9,268 Cash distributions declared (10,596) (40,346) - (50,942) Net income 15,726 59,882 - 128,950 Conversion (Note 8) 2,267 (106,383) (12,251) - - ------------------------------------------------------------------------------------------------------------------ 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 - - - 60,776 - ------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 - - - 118,514 First Rights conversion to stock - - - (50) First Rights grants - - - 4,061 Restricted stock grants - - - 489 Dividends declared - - - (16,390) Repurchase and retirement of common shares - - - (13,587) Net income - - - 62,293 - ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ - $ - $ - $ 155,330 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. Polaris Industries Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS in thousands
For the Years Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 62,293 $ 60,776 $128,950 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 30,606 22,720 23,652 Noncash compensation 4,550 4,753 9,268 Equity in (income) loss of affiliates (3,107) 243 - Deferred income taxes - 10,000 (65,000) Changes in current operating items Trade receivables 4,244 (10,702) (8,360) Inventories (18,278) (15,919) (36,657) Accounts payable (6,874) (1,544) 22,810 Accrued expenses 16,568 11,114 32,306 Income taxes payable (4,029) (2,569) 7,401 Other 3,161 (1,626) (2,701) - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 89,134 77,246 111,669 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (44,889) (46,651) (32,529) Investments in affiliates, net (6,757) (800) - - -------------------------------------------------------------------------------------------- Net cash used for investing activities (51,646) (47,451) (32,529) - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit agreement 276,900 249,700 - Repayments under credit agreement (282,100) (209,500) - Repurchase and retirement of common shares (13,587) - - Cash dividends to shareholders (16,390) (116,639) - Cash distributions to partners - (12,736) (50,057) - -------------------------------------------------------------------------------------------- Net cash used for financing activities (35,177) (89,175) (50,057) - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 2,311 (59,380) 29,083 CASH AND CASH EQUIVALENTS Beginning 3,501 62,881 33,798 - -------------------------------------------------------------------------------------------- Ending $ 5,812 $ 3,501 $ 62,881 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the year $ 31,673 $ 24,341 $ 11,718 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Income taxes paid during the year $ 39,069 $ 31,183 $ 4,119 - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. Polaris Industries Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Polaris Industries Inc. is engaged in a single industry segment consisting of the design, engineering, manufacturing and marketing of innovative, high- quality, high-performance motorized products for recreation and utility use, including snowmobiles, all-terrain vehicles and personal watercraft. Polaris products, together with related parts, garments and accessories are sold worldwide through a network of dealers, distributors and its Canadian subsidiary. Polaris Industries Inc. and its predecessor organizations (Note 8) are referred to herein as the Company or Polaris. BASIS OF PRESENTATION: All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts previously reported in the 1995 and 1994 consolidated financial statements have been reclassified to conform to the 1996 presentation. These reclassifications had no effect on previously reported net income or shareholders' equity. 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. FOREIGN OPERATIONS: The following data relates to the Company's foreign operations (in thousands of United States dollars): For the Years Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------- CANADIAN SUBSIDIARY: Sales $166,471 $172,459 $129,689 Operating income 6,024 6,224 9,062 Identifiable assets 21,703 29,580 19,620 - ------------------------------------------------------------------- OTHER EXPORT SALES $ 49,134 $ 51,385 $ 36,049 CASH EQUIVALENTS: The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Such investments have consisted principally of commercial paper and money market mutual funds. FAIR VALUE OF FINANCIAL INSTRUMENTS: Except as noted, the carrying value of all financial instruments approximates their fair value. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. The major components of inventories are as follows (in thousands): December 31, 1996 1995 - -------------------------------------------------------- Raw materials and purchased components $ 24,469 $ 26,526 Service parts, garments and accessories 45,809 39,952 Finished goods 52,633 38,155 - -------------------------------------------------------- $122,911 $104,633 - --------------------------------------------------------- - --------------------------------------------------------- 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 $9,781,000 at December 31, 1996 and $9,006,000 at December 31, 1995, 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 Polaris Industries Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and transfers of funds from its Canadian subsidiary will be adversely affected by changes in exchange rates. At December 31, 1996, the Company had open Japanese yen foreign exchange contracts with notional amounts totaling $90,330,000 United States dollars, and open Canadian dollar foreign exchange contracts with notional amounts totaling $57,705,000 United States dollars which mature throughout 1997. 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 (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 $28,270,000, $19,871,000 and $15,018,000 for 1996, 1995, and 1994 respectively. These costs are included as a component of cost of sales on the accompanying statements of operations. MAJOR SUPPLIER: During 1996, 1995 and 1994, purchases of engines and related components totaling 21, 26 and 26 percent respectively 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. NET INCOME PER SHARE: Net income per share during 1996 and 1995 was calculated based on the weighted average number of common and common equivalent shares outstanding. NOTE 2 FINANCING BANK FINANCING: The Company has 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" and the agreement expires on March 31, 1998, at which time the outstanding balance is due. The following summarizes activity under the Company's credit arrangement (in thousands): 1996 1995 - --------------------------------------------------------------------------- Total borrowings at December 31 $ 35,000 $ 40,200 Average outstanding borrowings during year $ 72,760 $ 25,467 Maximum outstanding borrowings during year $ 112,000 $ 85,900 Interest rate at December 31 6.04% 6.44% LETTERS OF CREDIT: At December 31, 1996, the Company had open letters of credit totaling approximately $15,356,000. The amounts outstanding are reduced as inventory purchases pertaining to the contracts are received. CUSTOMER FINANCING PROGRAM: Certain finance companies, including Polaris Acceptance, an affiliate (Note 7), provide floor plan financing to distributors and dealers on the purchase of the Company's products. The amount financed by distributors and dealers under these arrangements at December 31, 1996, was approximately $327,000,000. 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 contributes to the cost of dealer and distributor financing up to certain limits and subject to certain conditions. Such expenditures are included with selling and marketing expenses on the accompanying statements of operations. NOTE 3 SHAREHOLDERS' EQUITY 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. STOCK REPURCHASE PROGRAM: During 1996, the Board of Directors of the Company authorized the repurchase of up to 1,000,000 shares of the Company's common stock. During 1996, the Company paid $13,587,000 to repurchase and retire 521,000 shares. On January 23, 1997, the Board of Directors of the Company expanded the share repurchase program, authorizing the cumulative repurchase of up to 3,000,000 shares of the Company's common stock. CASH DIVIDENDS AND DISTRIBUTIONS: During 1996, the Company declared and paid cash dividends totaling $16,390,000 or $.60 per share. 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 (Note 8), 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. Polaris Industries Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 INCOME TAX MATTERS AND CHANGE IN TAX STATUS Prior to the Conversion (Note 8), Polaris 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): December 31, 1996 1995 - ------------------------------------------------------------------------------- CURRENT DEFERRED TAX ASSETS: Inventories $ 3,000 $ 2,400 Accrued expenses 19,300 15,400 Compensation payable in common stock 2,700 2,200 - ------------------------------------------------------------------------------ Total current 25,000 20,000 - ------------------------------------------------------------------------------ NONCURRENT DEFERRED TAX ASSETS: Cost in excess of net assets of business acquired 30,000 32,200 Property and equipment (1,000) 100 Compensation payable in common stock 1,000 2,700 - ------------------------------------------------------------------------------ Total noncurrent 30,000 35,000 - ------------------------------------------------------------------------------ Total $55,000 $55,000 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Components of the Company's provision for income taxes are as follows (in thousands): For the Years Ended December 31, CURRENT 1996 1995 - ------------------------------------------------------------------------------ Federal $30,063 $23,113 State 2,233 1,665 Foreign 2,744 3,259 Deferred - 10,000 - ------------------------------------------------------------------------------ Total $35,040 $38,037 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Reconciliations of the Federal statutory income tax rate to the effective tax rate are as follows: For the Years Ended December 31, 1996 1995 - ------------------------------------------------------------------------------ Federal statutory rate 35.0% 35.0% State income taxes, net of federal benefit 2.6 2.6 Other permanent differences (1.6) .9 - ------------------------------------------------------------------------------ Effective income tax rate 36.0% 38.5% - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ NOTE 5 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. STOCK AWARD PLANS: The Company maintains a stock option plan (Option Plan) under which incentive and nonqualified stock options for a maximum of 1,350,000 shares of common stock may be issued to certain employees. The exercise price for shares awarded under this plan is equal to the market price of the Company's common stock at the date of the award. Options vest three years from the award date and expire after ten years. The Company also maintains a plan in which rights to receive shares of common stock (First Rights) are issued to management (Management Plan) and other employees (Employee Plan). The Management Plan provides for vesting up to three years from the award date and has a maximum of 2,225,000 shares reserved, while First Rights awarded under the Employee Plan vest immediately with a maximum of 1,350,000 shares reserved. First Rights are converted to common stock with no cash payments required from the recipient. At December 31, 1996, no additional First Rights are available to be granted under the Management Plan or the Employee Plan. In 1996, the Company adopted a restricted stock plan (Restricted Plan) under which a maximum of 500,000 shares of common stock may be awarded as an incentive to certain employees with no cash payments required from the recipient. The restrictions lapse over a three to four year period if certain performance measures are achieved by the Company. The following summarizes share activity in the above plans, and the weighted average exercise price for the Option Plan:
Restricted Manage- Employee Option Plan Plan ment Plan Plan - -------------------------------------------------------------------------------------------------------- Weighted Average Exercise Shares Price Shares Shares Shares - ------------------------------------------------------------------------------------------------------- OUTSTANDING AS OF DECEMBER 31, 1993 - - - 202,590 274,800 Granted - - - 195,750 139,646 Converted - - - (70,590) (268,946) Forfeited - - - (4,500) - - ------------------------------------------------------------------------------------------------------- OUTSTANDING AS OF DECEMBER 31, 1994 - - - 323,250 145,500 Granted 254,550 $29.00 - 34,500 153,000 Converted - - - (15,000) (145,500) Forfeited - - - (25,500) - - ------------------------------------------------------------------------------------------------------- OUTSTANDING AS OF DECEMBER 31, 1995 254,550 $29.00 - 317,250 153,000 Granted 136,830 $33.75 61,795 - 171,005 Converted - - - (57,000) (153,000) Forfeited - - - - - - ------------------------------------------------------------------------------------------------------- OUTSTANDING AS OF DECEMBER 31, 1996 391,380 $30.66 61,795 260,250 171,005 - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ EXERCISABLE/VESTED AS OF DECEMBER 31, 1996 - - - - 171,005 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
Polaris Industries Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Shares outstanding under the Option Plan have exercise prices ranging from $29.00 to $33.75 and a weighted average remaining contractual life of 1.7 years. In 1995, the Company approved a nonqualified deferred compensation plan under which directors who are not officers or employees of the Company (Outside Directors) can elect to receive common stock equivalents in lieu of director's fees, which will be converted into common stock when an Outside Director's board service ends. A maximum of 75,000 shares of common stock have been authorized under this plan and 8,333 have been earned as of December 31, 1996. The Company accounts for all stock based compensation plans under APB Opinion No. 25, under which compensation costs of $4,550,000, $4,753,000 and $9,268,000 were recorded in 1996, 1995 and 1994, respectively. Had compensation cost for these plans been recorded at fair value consistent with the methodology prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 1996 1995 - --------------------------------------------------------------- NET INCOME (IN THOUSANDS) As Reported $62,293 $60,776 Pro Forma 61,475 60,404 - --------------------------------------------------------------- EARNINGS PER SHARE As Reported $ 2.24 $ 2.19 Pro Forma 2.21 2.17 - --------------------------------------------------------------- - --------------------------------------------------------------- The fair value of each award under the Option Plan is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to estimate the fair value of options: 1996 1995 - ---------------------------------------------------------------- Risk free interest rate 6.8% 6.5% Expected life 7 years 7 years Expected volatility 27% 32% Expected dividend yield 1.8% 2.1% The weighted average fair values at the grant dates of First Rights and shares awarded under the above plans are as follows: Option Restricted Management Employee Plan Plan Plan Plan - -------------------------------------------------------------------- 1994 - - $23.33 $34.42 1995 $10.69 - $29.21 $29.38 1996 $12.16 $33.75 - $23.75 NOTE 6 COMMITMENTS AND CONTINGENCIES PRODUCT LIABILITY: The Company is subject to product liability claims in the normal course of business and in the past elected not to purchase insurance for product liability losses. Effective June 1996, the Company purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceed a self insured retention. The estimated costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. LITIGATION: The Company is a defendant in lawsuits and subject to claims arising in the normal course of business. In the opinion of management, it is not a probability that any 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 Polaris directors under an operating lease agreement expiring in 2002. The lease requires payments of $486,000 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 $2,889,000, $2,212,000 and $1,570,000, for 1996, 1995 and 1994, respectively. Future minimum payments, exclusive of other costs, required under noncancelable operating leases at December 31, 1996, total $3,011,000 cumulatively through 2002. NOTE 7 INVESTMENTS IN AFFILIATES In February 1996, a wholly-owned subsidiary of the Company entered into a partnership agreement with Transamerica Commercial Finance Corporation (TCFC) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to the Company's dealers and distributors and may in the future provide other financial services to dealers, distributors and retail customers of the Company. Under the partnership agreement the Company's subsidiary had a 25 percent equity interest in Polaris Acceptance throughout 1996. Additionally, the Company had guaranteed 25 percent of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TCFC. At December 31, 1996, the Company's contingent liability with respect to the guarantee was approximately $56,000,000. In January 1997, the Company exercised its option to increase its equity interest in Polaris Acceptance to 50 percent for an additional investment of approximately $10,445,000, and now guarantees 50 percent of the outstanding indebtedness of Polaris Acceptance. In February 1995, the Company entered into an agreement with Fuji Heavy Industries Ltd. to form Robin Manufacturing, U.S.A. (Robin). Under the agreement, Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. The Company's investments in joint ventures are accounted for under the equity method. The Company's allocable share of the income of Polaris Acceptance and Robin has been included as a component of nonoperating expense (income) in the accompanying statements of operations. Polaris Industries Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 CONVERSION TRANSACTION 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 common 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 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 4). The statements of operation, shareholders' equity and cash flows 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 exclusive of the Conversion costs and as if the Company was a taxable corporation with the Conversion having occurred at the beginning of the 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. NOTE 9 QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share data)
GROSS NET NET INCOME 1996: SALES PROFIT INCOME PER SHARE - ------------------------------------------------------------------------------------- First Quarter $ 278,041 $ 50,658 $ 13,298 $ .48 Second Quarter 317,053 63,194 16,286 .58 Third Quarter 299,135 60,632 15,872 .57 Fourth Quarter 297,672 61,062 16,837 .61 - ---------------------------------------------------------------------- Totals $1,191,901 $235,546 $ 62,293 $2.24 - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- 1995: - ------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
Polaris Industries Inc. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO POLARIS INDUSTRIES INC.: We have audited the accompanying consolidated balance sheets of Polaris Industries Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the years 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 audits. The financial statements of Polaris Industries Inc. and Subsidiaries as of December 31, 1994, and for the year then ended, were audited by other auditors whose report dated February 2, 1995, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Polaris Industries Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota January 31, 1997 BOARD OF DIRECTORS Andris A. Baltins (A, C) Member of the law firm of Kaplan, Strangis & Kaplan, P.A. Raymond J. Biggs (S) Chairman Emeritus Huntington Bancshares of Michigan Beverly F. Dolan (C*, S*) Retired Chairman and Chief Executive Officer of Textron Inc. Kenneth D. Larson (E) President and Chief Operating Officer of Polaris Industries Inc. Robert S. Moe (C, E) Retired Executive Vice President and Treasurer of Polaris Industries Inc. Gregory R. Palen (A) Chief Executive Officer of Spectro Alloys and Palen/Kimball Company Stephen G. Shank (A*) President and Chief Executive Officer of 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 (S) Stock Award Compensation Committee Member * Committee Chairman CORPORATE OFFICERS W. Hall Wendel, Jr. Chairman and Chief Executive Officer Kenneth D. Larson President and Chief Operating Officer Michael W. Malone Vice President Finance, Chief Financial Officer and Secretary Charles A. Baxter Vice President-Engineering Jeffrey A. Bjorkman Vice President-Manufacturing Ed Skomoroh Vice President-Sales and Marketing INVESTOR INFORMATION INDEPENDENT AUDITORS Arthur Andersen LLP Minneapolis, MN DIVIDENDS Communications concerning transfer requirements, address changes, dividends and lost certificates, as well as requests for Dividend Reinvestment Plan enrollment information should be addressed to: Norwest Bank Minnesota, N.A. 161 North Concord Exchange South St. Paul, MN 55075-0738 1-800-468-9716 Shareowner@aol.com FORM 10-K The form 10-K annual report to the Securities Exchange Commission is available without charge to shareholders upon written request to: Investor Relations Polaris Industries Inc. 1225 Highway 169 North Minneapolis, MN 55441-5078 ANNUAL SHAREHOLDERS' MEETING The meeting will be held at 10:00 a.m., Thursday, May 22, 1997 at the Radisson Hotel and Conference Center, 3131 Campus Drive, Plymouth, MN. A proxy statement will be mailed about April 2, 1997 to each shareholder of record on March 26, 1997. PRODUCT BROCHURES For product brochures and dealer locations write or call: Polaris Industries Inc. 1225 Highway 169 North Minneapolis, MN 55441-5078 1-800-Polaris (765-2747) INTERNET ACCESS To view products and specifications, quarterly financial data, press releases, and dealer locations: http://www.polarisindustries.com SUMMARY OF TRADING Year Ended December 31 --------------------------------- 1996 1995 - -------------------------------------------------- Quarter High Low High Low First 31.50 28.88 33.25 29.17 Second 35.75 31.00 33.00 25.33 Third 33.50 22.63 31.25 25.08 Fourth 23.88 19.13 30.75 26.88 Shares of common stock of Polaris Industries Inc. trade on the New York Stock Exchange and on the Pacific Stock Exchange under the symbol PII. CASH DISTRIBUTIONS AND DIVIDENDS DECLARED 1995 --------------------------- Quarter 1996 Regular Special Total - -------------------------------------------------- First $.15 $.10 $1.28 $1.38 Second .15 .10 1.28 1.38 Third .15 .10 1.28 1.38 Fourth .15 .13 - .13 - -------------------------------------------------- Total $.60 $.43 $3.84 $4.27 - -------------------------------------------------- - -------------------------------------------------- STOCK EXCHANGES New York Stock Exchange (PII) Pacific Stock Exchange (PII) Shareholders of record of the Company's common stock on March 3, 1997 4,055. Share price on March 3, 1997 $25.875. EX-21 6 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Company Organization Shares % of Outstanding Ownership - -------------------------------------------------------------------------------- Polaris Industries Delaware 100 100% Inc. Corporation - -------------------------------------------------------------------------------- Polaris Real Delaware 1,000 100%(1) Estate Corporation Corporation of Iowa, Inc. - -------------------------------------------------------------------------------- Polaris Real Delaware 1,000 100% (2) Estate Corporation Corporation - -------------------------------------------------------------------------------- Polaris Acceptance Minnesota 1 100% Inc. Corporation - -------------------------------------------------------------------------------- Polaris Industries Barbados 1,000 100% Export Ltd. Corporation - -------------------------------------------------------------------------------- Polaris Industries Manitoba 101 100% (3) Ltd. Corporation - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1), (2), and (3) Owned 100% by Polaris Industries Inc., a Delaware Corporation EX-23.(A) 7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-60157, 333-05463, 333- 21007 and 33-57053. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 18, 1997 ---- EX-23.(B) 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Form S-8 No. 33-21007, No. 33-05463, No. 33-60157 and No. 33-57063, of our report, dated February 2, 1995, with respect to the financial statements of Polaris Industries Inc. (formerly Polaris Industries Partners L.P.) for the year ended December 31, 1994 which report is included in this Annual Report on Form 10-K for the year ended December 31, 1996. /s/ McGladrey & Pullen, LLP McGLADREY & PULLEN, LLP Minneapolis, Minnesota March 14, 1997 EX-24 9 POWER OF ATTORNEY POWER OF ATTORNEY (FORM 10-K) KNOW ALL MEN BY THESE PRESENTS, that POLARIS INDUSTRIES INC., a Minnesota corporation (the "Company"), and each of the undersigned directors of the Company, hereby constitutes and appoints W. Hall Wendel, Jr. and Michael W. Malone and each of them (with full power to each of them to act alone) its/his/her true and lawful attorney-in-fact and agent, for it/him/her and on its/his/her behalf and in it/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, 1996 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 22nd day of January 1997. 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 22nd day of January 1997. /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 /s/ Raymond J. Biggs - ------------------------------------ -------------------------------------- Kenneth D. Larson Raymond J. Biggs D I R E C T O R S 2 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF POLARIS INDUSTRIES INC. AS OF DECEMBER 31, 1996, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDER'S EQUITY AND CASH FLOWS FOR THE QUARTER ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 5,812 0 36,158 0 122,911 191,405 171,211 77,698 351,717 161,387 35,000 0 0 0 155,330 351,717 1,191,901 1,191,901 956,355 956,355 133,874 0 4,339 97,333 35,040 62,293 0 0 0 62,293 2.24 2.24
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