Annual Report

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.

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. o

The aggregate market value of Common Stock of the registrant as of March 1, 2002 (based upon the closing reported sale price of the Common Stock at that date on the New York Stock Exchange) held by non-affiliates (20,909,020 shares) was approximately $1,163,796,053.

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 1, 2002, 23,031,574 shares of Common Stock of the registrant were outstanding.


1.	Portions of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2001 furnished to the Securities and Exchange Commission (the “2001 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 2, 2002 filed with the Securities and Exchange Commission (the “2002 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

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 all terrain vehicles (“ATVs”), snowmobiles, motorcycles and personal watercraft (“PWC”) and markets them, together with related replacement parts, garments and accessories (“PG&A”) through dealers and distributors principally located in the United States, Canada and Europe. Sales of ATVs, snowmobiles, motorcycles, PWC and PG&A accounted for the following approximate percentages of Polaris’ sales for the periods indicated.

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. Polaris entered the ATV market in 1985, Arctic Cat entered in 1995 and Bombardier entered in 1998. In 1985, the number of three- and four-wheel ATVs sold in North America peaked at approximately 650,000 units per year, then dropped dramatically to a low of 148,000 in 1989. Since that time, the industry has grown consistently. Polaris estimates that the industry grew 11% with approximately 860,000 ATVs sold worldwide during the calendar year 2001.

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 an industry decline in which snowmobile sales fell to a low 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 industry sales of snowmobiles on a worldwide basis were approximately 209,000 units for the season ended March 31, 2001.

Motorcycles. Heavyweight motorcycles are over the road vehicles utilized as a mode of transportation as well as for recreational purposes. There are four motorcycle market segments: cruisers, touring, sport bikes, and standards.

Polaris entered the worldwide motorcycle market in 1998 with an initial entry product in the cruiser segment. U.S. retail cruiser sales more than doubled from 1993 to 2000. Polaris estimates the cruiser market grew 19% in 2001 with approximately 260,000 cruiser motorcycles sold in the U.S. market. Other major cruiser motorcycle manufacturers include Harley Davidson, Honda, Yamaha, Kawasaki and Suzuki.

Personal Watercraft. PWC are sit-down versions of water scooter vehicles, and designed for use on lakes, rivers, oceans and bays. PWC are used primarily for recreational purposes and are designed for one, two, three or four passengers. Polaris entered the PWC market in 1992. After many years of rapid growth, the number of PWC sold peaked at approximately 225,000 units in 1996. Polaris estimates worldwide industry retail sales for PWC were approximately 117,000 units for the season ended September 30, 2001. Other major PWC manufacturers are Bombardier, Yamaha, and Kawasaki.

All Terrain Vehicles. Polaris entered the ATV market in the spring of 1985. Polaris currently produces four-wheel ATVs, which provide more stability for the rider than earlier three-wheel versions. Polaris’ line of ATVs, consisting of eighteen models, includes general purpose, sport and four-wheel drive utility models, with 2002 model year suggested United States retail prices ranging from approximately $1,900 to $7,600. In 2000, Polaris introduced its first youth ATV models. In addition, Polaris has a six-wheel off-road utility vehicle and the Polaris RANGER, an off-road side by side utility and recreational vehicle. In 2001, Polaris expanded its utility line called the Polaris Professional Series with an outsourced all surface loader product as well as a utility task vehicle (UTV) and a 4X4 and 6X6 ATV (ATV Pro), each of which are modifications of existing products but are of a different line make.

Most of Polaris’ ATVs feature the totally automatic Polaris variable transmission, which requires no manual shifting, and a MacPherson strut front suspension, which enhances control and stability. Polaris’ ATVs include two cycle and four cycle engines and both shaft and concentric chain drive. In 1999, Polaris introduced its first manual transmission ATV models.

Prior to 1989, the ATV industry experienced some reduced demand arising from publicity surrounding safety-related and environmental concerns. However, management believes this market has stabilized since 1989 and has sustained consistent growth.

For the year ended December 31, 2001, sales of ATVs accounted for approximately 56% of Polaris’ sales.

Snowmobiles. Polaris produces a full line of snowmobiles, consisting of twenty-eight models, ranging from youth to utility and economy models to performance and competition models. The 2002 model year suggested United States retail prices range from approximately $1,950 to $9,100. Polaris snowmobiles are sold principally in the United States, Canada and Europe. Polaris believes it is the worldwide market share leader.

Polaris believes its snowmobiles have 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. In 2001, Polaris introduced a new, more environmentally-friendly snowmobile featuring a four-stroke engine designed specifically for snowmobiles.

For the year ended December 31, 2001, sales of snowmobiles accounted for approximately 25% of Polaris’ sales.

Motorcycles. In 1998, Polaris began manufacturing a V-twin cruiser motorcycle, the “Victory V92C.” Design and assembly of the engine is performed in Polaris’ Osceola, Wisconsin facility and final assembly is completed at Polaris’ Spirit Lake, Iowa facility. The two facilities provide sufficient capacity to handle the production of Victory motorcycles. In 1999, Polaris introduced its second model, a sport cruiser, the Victory V92SC and in 2000, introduced its third model, the Victory Deluxe. In 2001, Polaris introduced an additional touring cruiser model, the V92TC Deluxe motorcycle. Suggested United States retail prices for the 2002 model year Victory motorcycle range from approximately $13,700 to $16,200.

For the year ended December 31, 2001, sales of Victory motorcycles accounted for approximately 1% of Polaris’ sales.

Personal Watercraft. Polaris entered the personal watercraft market in 1992. Polaris’ 2002 line of PWC consists of eight models across the touring, performance and racing segments. Management believes that its models had the industry’s first three-cylinder engines developed specifically for PWC and that its models were the first to comply with EPA 2006 requirements. The 2002 model year suggested United States retail prices for Polaris’ PWC range from approximately $6,300 to $9,000.

For the year ended December 31, 2001, sales of PWC accounted for approximately 4% of Polaris’ sales.

Parts, Garments and Accessories (PG&A). Polaris produces or supplies a variety of replacement parts and accessories for its snowmobiles, ATVs, motorcycles and PWC. ATV accessories include products such as winches, mowers, blades, cargo racks, utility trailers, sprayers, seeders, tires, oils, and lubricants. Snowmobile accessories include products such as luggage, covers, tow hitches, hand warmers, specialized instrumentation, reverse gear, electric start, special traction products, cargo racks, oils, and lubricants.

Polaris also markets a full line of recreational clothing, which includes suits, helmets, gloves, boots, hats, sweaters and jackets for its snowmobile, ATV, motorcycle and PWC lines. The clothing is designed to Polaris’ specifications, purchased from independent vendors and sold by Polaris through its dealers and distributors under the Polaris brand name.

For the year ended December 31, 2001, sales of PG&A accounted for approximately 14% of Polaris’ sales.

Polaris’ products are assembled at its original manufacturing facility in Roseau, Minnesota and at its facility in Spirit Lake, Iowa. Since snowmobiles, ATVs, motorcycles and PWC incorporate similar technology, substantially the same equipment and personnel are employed in their production. Polaris is vertically integrated in several key components of its manufacturing process, including machining, stamping, welding, clutch assembly and balancing, painting, cutting and sewing, and manufacture of foam seats. Fuel tanks, hulls, tracks, tires and instruments, and certain other component parts are purchased from third party vendors. Polaris manufactures a number of other components for its snowmobiles, ATVs, motorcycles, and PWC. Raw materials or standard parts are readily available from multiple sources for the components manufactured by Polaris. Polaris’ work force is familiar with the use, operation and maintenance of the product, since many employees own snowmobiles, ATVs, motorcycles and PWC. In 1991, Polaris acquired a manufacturing facility in Osceola, Wisconsin to manufacture component parts previously produced by third party suppliers. In 1998, Victory motorcycle production began at Polaris’ Spirit Lake, Iowa facility. The production includes welding, finish painting, and final assembly. Certain Victory operations, including engine assembly, seat manufacturing, and the bending of frame tubes are conducted at the Osceola, Wisconsin facility. In 2001, all seat manufacturing was moved to a leased facility in St. Croix Falls, Wisconsin. In early 2002, Polaris completed the expansion and renovation of its Roseau manufacturing facility, which is expected to enhance future growth through increased capacity and production flexibility.

In 1998, Polaris completed construction of a plastic injection molding facility adjacent to the Roseau, Minnesota facility. This was a vertical integration project for Polaris in the manufacture of snowmobile hoods and certain large plastic molded parts on ATVs.

Pursuant to informal agreements between Polaris and Fuji Heavy Industries Ltd. (“Fuji”), Fuji, until 1995, had been the exclusive manufacturer of Polaris’ two-cycle snowmobile engines since 1968. Fuji has manufactured engines for Polaris’ ATV products since their introduction in the spring of 1985. Fuji develops such engines to the specific requirements of Polaris. Polaris believes its relationship with Fuji to be excellent. If, however, Fuji terminated its relationship, interruption in the supply of engines would adversely affect Polaris’ production pending the continued development of substitute supply arrangements.

Since 1995, Polaris has been designing and producing its own engines for selected models of PWC, snowmobiles and all Victory motorcycles. In 2001, Polaris began producing its own engines for select ATV models. Polaris purchased a building adjacent to the Osceola facility to house the manufacturing of these Polaris designed and built domestic engines.

In addition, in 1995, Polaris entered into an agreement with Fuji to form Robin Manufacturing, U.S.A. (“Robin”). Under the agreement, Polaris made an investment for a 40% ownership position in Robin, which builds engines in the United States for recreational and industrial products. Potential advantages to Polaris of these additional sources of engines include reduced foreign exchange risk, lower shipping costs and less dependence in the future on a single supplier for engines. See Note 7 of notes to Consolidated Financial Statements for a discussion of this agreement.

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 produced and delivered throughout the year. Orders for ATVs are placed by the dealers often throughout the year. Delivery of snowmobiles to consumers begins in autumn and continues during the winter season. Orders for each year’s production of snowmobiles are placed by the dealers in the spring. Orders for PWC are placed by the dealers in autumn after meetings with dealers and distributors. Orders for Victory motorcycles are placed by the dealers in the summer after meetings with dealers. Units are built to order each year. In addition, non-refundable deposits made by consumers to dealers in the spring for snowmobiles assist in production planning. The budgeted volume of units to be produced each year is substantially sold to dealers and distributors prior to production. Retail sales activity at the dealer level is monitored by Polaris for each of snowmobiles, ATVs, motorcycles and PWC and incorporated into production scheduling.

Manufacture of snowmobiles commences in late winter of the previous season and continues through late autumn or early winter of the current season. Polaris manufactures PWC during the fall, winter and spring months. Since 1993, Polaris has had the ability to manufacture ATVs year round. Victory motorcycle manufacturing began in 1998 and continues year round.

Polaris products are sold through a network of nearly 2,000 dealers in North America and 55 distributors in 121 countries.

Polaris sells its snowmobiles directly to dealers in the snowbelt regions of the United States and Canada. With the exception of France, Australia and New Zealand, snowmobile sales in Europe and other offshore markets are handled through independent distributors. See Note 1 of Notes to Consolidated Financial Statements for a discussion of international operations.

Many dealers and distributors of Polaris snowmobiles also distribute Polaris’ ATVs and PWC. At the end of 2001, approximately 900 dealerships were located in areas of the United States where snowmobiles are not regularly sold. Unlike its primary competitors, which market their ATV products principally through their affiliated motorcycle dealers, Polaris also sells its ATVs and PWC through lawn and garden, boat and marine, and farm implement dealers.

In 1999, Polaris acquired its distributors in Australia and New Zealand and now distributes its products in those countries through these wholly owned subsidiaries. During 2000, Polaris acquired its distributor in France and now distributes its products in France through this wholly owned subsidiary.

Victory motorcycles are distributed directly through authorized Victory dealers. Polaris has a high quality dealer network in North America for its other product lines from which most of the current 340 Victory

dealers were selected. Polaris expects to develop a Victory dealer network of approximately 500 to 600 dealers over the next three to four years.

Dealers and distributors sell Polaris’ products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products, required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. Polaris believes a sufficient number of qualified dealers and distributors exist in all areas to permit orderly transition whenever necessary.

In 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of Transamerica Distribution Finance (“TDF”) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris’ dealers in the United States. From 1999 to October 2001, Polaris Acceptance was a party to an income sharing agreement with Transamerica Retail Financial Services (TRFS), a subsidiary of TDF. TRFS provided other financial services to retail customers through Polaris dealers in the United States such as retail financing and extended service contracts. Under the partnership agreement, Polaris has a 50% equity interest in Polaris Acceptance. Polaris has not guaranteed the outstanding indebtedness of Polaris Acceptance. See Notes 2 and 6 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.

Polaris has arrangements with Polaris Acceptance (United States), TDF (Canada and France) and GE Commercial Corporation (Australia and New Zealand), to provide floor plan financing for its dealers. Substantially all of Polaris’ North American sales of snowmobiles, ATVs, PWC, motorcycles and related PG&A 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 financing and has agreed to repurchase products from the finance companies under certain circumstances and subject to certain limitations. Polaris has not historically recorded any significant sales return allowances because it has not been required to repurchase a significant number of units. However, there can be no assurance that this will continue to be the case. If necessary, Polaris will record a sales return allowance at the time of sale should management anticipate material repurchases of units financed through the finance companies. See Notes 2 and 6 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.

Polaris has historically not directly financed the purchase of its products by consumers. However, in 1999, Polaris made consumer financing available through its Polaris Acceptance joint venture. In October 2001, TDF sold the retail credit portfolio to Household Bank N.A. (“Household”) and Polaris entered into an agreement with Household to provide retail financing for its consumers. In 2001 approximately 12 percent of the products sold to consumers were financed under these arrangements. The agreement with Household provides that all income and losses of the retail credit portfolio are shared equally between Polaris and Household. Either party has the right to terminate the agreement if profitability of the portfolio falls below certain minimum levels. Polaris’ financial exposure under this agreement is limited to its investment ($11.1 million at December 31, 2001) and an aggregate amount of not more than $15.0 million. See Note 6 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.

Polaris desires to create awareness of the Polaris brand among the non-riding public and provide a wide range of products for enthusiasts by licensing the name Polaris. The Company currently licenses the production and sale of a range of items, including die cast toys, video games, and numerous other products. The Company’s licensing activity provides it with a valuable source of advertising.

During 2000, a wholly owned subsidiary of Polaris established an e-commerce site, www.purepolaris.com, to sell clothing and accessories over the internet directly to consumers. The site has been developed with a unique revenue sharing arrangement with the dealers.

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 to its dealers and distributors in order to remain price competitive and accelerate reduction of dealer 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. Each season, Polaris produces a promotional film for each of its products, which is available to dealers for use in the showroom or at special promotions. Polaris also provides product brochures, leaflets, posters, dealer signs, and miscellaneous other promotional items for use by dealers.

Polaris expended for sales and marketing approximately $119.9 million in 2001, $122.0 million in 2000 and $112.1 million in 1999. These amounts were included as a component of operating expenses in the period incurred.

Polaris employs approximately 350 persons who are engaged in the development and testing of existing products and research and development of new products and improved production techniques. Management believes Polaris and its predecessors were the first to develop, for commercial use, independent front suspension for snowmobiles, long travel rear suspension for snowmobiles, direct drive of the snowmobile track, the use of liquid cooling in snowmobile engines and brakes, the use of hydraulic brakes in snowmobiles, the three cylinder engine in snowmobiles and PWC, the adaptation of the MacPherson strut front suspension, “on demand” four-wheel drive systems and the Concentric Drive System for use in ATVs, the application of a forced air cooled variable power transmission system to ATVs, and the diesel fuel powered ATV.

Polaris utilizes internal combustion engine testing facilities to design and optimize engine configurations for its products. Polaris utilizes specialized facilities for matching engine, exhaust system and clutch performance parameters in its products to achieve desired fuel consumption, power output, noise level and other objectives. Polaris’ engineering department is equipped to make small quantities of new product prototypes for testing by Polaris’ testing teams and for the planning of manufacturing procedures. In addition, Polaris maintains numerous test facilities where each of the products is extensively tested under actual use conditions.

Polaris expended for research and development approximately $35.7 million in 2001, $32.4 million in 2000 and $31.3 million in 1999. These amounts were included as a component of operating expenses in the period incurred.

The snowmobile, ATV, motorcycle, PWC and professional utility vehicle markets in the United States and Canada are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors including sales and marketing support programs (such as financing and cooperative advertising). Certain of Polaris’ competitors are more diversified and have financial and marketing resources, which are substantially greater than those of Polaris.

Polaris products are competitively priced and management believes Polaris’ sales and marketing support programs for dealers are comparable to those provided by its competitors. Polaris’ products compete with many other recreational products for the discretionary spending of consumers, and, to a lesser extent, with other vehicles designed for utility applications.

Snowmobiles, ATVs, motorcycles and PWC are motorized machines, which may be operated at high speeds and in a careless or reckless manner. Accidents involving property damage, personal injuries and deaths occur in the use of these products.

Laws and regulations have been promulgated or are under consideration in a number of states relating to the use or manner of use of products such as those manufactured by Polaris. State approved trails and recreational areas for snowmobile and ATV use have been developed in response to environmental and safety concerns. Some states may pass legislation and local ordinances or regulations have been and may from time

to time be considered which restrict the use of PWC to specified hours and locations. Polaris is unable to predict the outcome of such actions or the possible effect on its PWC business. Polaris has supported laws and regulations pertaining to safety and noise abatement. Polaris believes that its products would be no more adversely affected than those of its competitors by the adoption of any pending laws or regulations. Polaris continues to monitor these activities in conjunction with industry associations and supports balanced and appropriate programs that educate the product user on safe use of the product and how to protect the environment.

In September 1986, the Consumer Product Safety Commission (“CPSC”) ATV Task Force issued a report on regulatory options for ATVs with recommendations for ATV marketing activities and warning labels. In February 1987, the CPSC formally requested that the Justice Department initiate an enforcement action against the ATV industry seeking a voluntary recall of all three-wheel ATVs and four-wheel ATVs sold with the intention that they be used by children under 16, as well as a requirement that ATV purchasers receive “hands-on” training.

Except for 1,700 three-wheel models initially produced, Polaris manufactures only four-wheel ATVs and six-wheel off-road vehicle products. Polaris has always placed warning labels on its ATVs stating that they are designed for use only by persons of a specified minimum age, operators should always wear approved safety helmets and riders should complete proper training prior to operating an ATV.

On December 30, 1987, Polaris reached an agreement with the CPSC regarding ATV safety, which was confirmed in a ten-year Consent Decree in April 1988. In April 1998, the Consent Decree with the CPSC expired. Polaris has filed with the CPSC a Voluntary Action Plan under which Polaris undertook to continue various activities including age recommendations, warning labels, point of purchase materials, hands on training and an information education effort. Polaris also agreed to continue dealer monitoring for ascertaining dealer compliance with safety obligations including age recommendations and training requirements. Polaris conditions its ATV warranties described below under “Product Warranties” on completion of the mandatory “hands on” consumer training program. In December 1998, the CPSC issued a resolution commending Polaris and certain other industry members for their ATV Action Plans.

The Company does not believe the Polaris Voluntary Action Plan will have a material adverse effect on Polaris. Nevertheless, there can be no assurance that future recommendations or regulatory actions by the CPSC, the Justice Department or individual states would not have an adverse effect on the Company. Polaris will continue to attempt to assure that its dealers are in compliance with their safety obligations. Polaris has notified its dealers that it will terminate or not renew any dealer it determines has violated such safety obligations. To date, it has terminated or not renewed at least eight dealers for such reasons.

In May 1998, the National Transportation Safety Board (“NTSB”) issued a report regarding PWC safety and made various recommendations. Prior to May 1998, Polaris was working with and continues to work with the Coast Guard to develop standards and to evaluate PWC safety matters, including the NTSB recommendations. Polaris PWC have always complied with industry standards relevant to PWCs.

California has adopted regulations setting maximum emission standards for ATVs and the federal Environmental Protection Agency (“EPA”) has indicated its intent to establish emission standards for non-road engines, including ATVs and snowmobiles. The EPA already has required PWC manufacturers to gradually reduce their emission by 75% between 1999 and 2006. For the State of California, the California Air Resources Board (CARB) has accelerated this scheduled emission reduction by requiring that manufacturers meet the EPA 2006 level in 2001 and that manufacturers meet further emission reductions by 2004 and 2008. Conventional two-stroke cycle engines cannot meet these more restrictive emission requirements.

In 1997, Polaris signed an agreement with Outboard Marine Corporation (“OMC”) licensing the Ficht fuel injection technology. During 1998, Polaris began production of a new Genesis PWC model utilizing the Ficht technology, which complies with the EPA 2006 emission requirements. During 2000, OMC filed for bankruptcy and in early 2001, Bombardier Inc. acquired the Ficht technology. For model year 2002, 3 out of 8 PWC models employ this direct injection technology. Polaris has entered into a license agreement with Bombardier for the Ficht fuel injection technology. This technology may be used in other Polaris vehicles to

meet emission standards in the future, particularly in Polaris vehicles with two-cycle engines. Polaris is unable to predict the ultimate impact of the adopted or proposed regulations on Polaris and its operations.

Victory motorcycles are subject to federal and state emissions, vehicle safety and other standards. Polaris believes that its motorcycles comply fully with all such applicable standards and related regulations.

Polaris’ product liability insurance limits and coverage’s were adversely affected by the general decline in the availability of liability insurance starting in 1985. 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 exceeds its self-insured retention levels.

Product liability claims are made against Polaris from time to time. Since its inception in 1981 through December 31, 2001, Polaris has paid an aggregate of approximately $8.0 million in product liability claims and has accrued $5.9 million at December 31, 2001 for the defense and possible payment of pending claims. Polaris believes such accruals are adequate. Polaris does not believe the outcome of any pending product liability litigation will have a material adverse effect on the operations of Polaris. However, no assurance can be given that its historical claims record, which did not include ATVs prior to 1985, PWC prior to 1992, or motorcycles prior to 1998, will not change or that material product liability claims against Polaris will not be made in the future. Adverse determination of material product liability claims made against Polaris would have a material adverse effect on Polaris’ financial condition. See Note 8 of Notes to Consolidated Financial Statements.

Polaris provides a limited warranty for ATVs for a period of six months and for a period of one year for its snowmobiles, motorcycles and PWC products. Although Polaris employs quality control procedures, a product is sometimes distributed which needs repair or replacement. Polaris’ standard warranties require the Company or its dealers to repair or replace defective products during such warranty period at no cost to the consumer. Historically, product recalls have been administered through Polaris’ dealers and distributors and have not had a material effect on Polaris’ business. See Note 1 of Notes to Consolidated Financial Statements.

Lack of snowfall in any year in any particular region of the United States or Canada may adversely affect snowmobile retail sales in that region. Polaris seeks to minimize this potential effect by stressing pre-season sales (see “Production Scheduling”) and shifting dealer inventories from one location to another. However, there is no assurance that weather conditions would not have a material effect on Polaris’ sales of snowmobiles, ATVs, motorcycles, PWC or PG&A.

Due to the seasonality of the Polaris business and certain changes in production cycles, total employment levels vary throughout the year. Despite such variations in employment levels, employee turnover has not been high. During 2001, Polaris employed an average of approximately 3,550 persons. Approximately 1,250 of its employees are salaried. Polaris considers its relations with its personnel to be excellent. Polaris’ employees have not been represented by a union since July 1982.

The following sets forth the Company’s material facilities as of December 31, 2001.

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. Polaris makes ongoing capital investments in its facilities. These investments have increased production capacity for snowmobiles, ATVs, motorcycles and PWC. The Company believes its manufacturing facilities are adequate in size and suitability for its present manufacturing needs.

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.

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

Set forth below are the names of the executive officers of the Company as of March 8, 2002, their ages, titles, the year first appointed as an executive officer of the Company and employment for the past five years:

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 of the Board since the Company’s formation in 1994 and was Chief Executive Officer of the Company until May 1999. Mr. Wendel was the Chief Executive Officer of Polaris Industries Capital Corporation (“PICC”), which was the managing general partner of Polaris Industries Associates L.P., which was the operating general partner of Polaris Industries L.P. from 1987 to December 1994. From 1981 to 1987, Mr. Wendel was Chief Executive Officer of a predecessor of Polaris, which was formed to purchase the snowmobile assets of the Polaris E-Z-GO Division of Textron Inc. Before that time, Mr. Wendel was President of the Polaris E-Z-GO Division for two years and prior thereto, held marketing positions as Vice President of Sales and Marketing and National Sales Manager since 1974.

Mr. Tiller was named President and Chief Operating Officer of the Company in July 1998. In 1999, Mr. Tiller was promoted to his present position of Chief Executive Officer of the Company. Prior to joining Polaris, Mr. Tiller was employed by General Electric Company in various management positions for fifteen years.

Mr. Bjorkman has been Vice President – Operations of the Company since July 2000. Mr. Bjorkman had been Vice President – Manufacturing since January 1995, and prior thereto held positions of Plant Manager and Manufacturing Engineering Manager since July 1990. Prior to joining Polaris, Mr. Bjorkman was employed by General Motors Corporation in various management positions for nine years.

Mr. Corness has been Vice President — Human Resources of the Company since January 1999. Prior to joining Polaris, Mr. Corness was employed by General Electric Company in various human resource positions for nine years. Before that time, Mr. Corness held various human resource positions with Maple Leaf Foods and Transalta Utilities.

Mr. Malone has been Vice President — Finance, Chief Financial Officer and Secretary of the Company since January 1997. Mr. Malone was Vice President and Treasurer of the Company from December 1994 to January 1997 and was Chief Financial Officer and Treasurer of PICC from January 1993 to December 1994. Prior thereto and since 1986, he was Assistant Treasurer of PICC or its predecessor. Mr. Malone joined Polaris in 1984 after four years with Arthur Andersen LLP.

Mr. Pollick has been Vice President – International of the Company since September 1999. Prior to joining Polaris, Mr. Pollick was employed by The Toro Company in various management positions for nineteen years.

Mr. Ruschhaupt has been Vice President — Sales and Service of the Company since March 1998. Prior to joining Polaris, Mr. Ruschhaupt was employed by Goodyear Tire and Rubber Corporation in various management positions for twenty years.

Mr. Sobaski has been Vice President — Marketing and Business Development of the Company since September 2001. Prior to joining Polaris, Mr. Sobaski was employed by ConAgra Foods, Inc. as President of ConAgra Grocery Brands from 1999 to October 2001 and held various senior sales and marketing management positions at The Pillsbury Company from 1992 to 1998. Before that time, Mr. Sobaski held various management positions at The Drackett Company, a division of Bristol-Meyers Squibb, Kraft Foods and General Mills spanning a thirteen-year period.

The information under the caption “Investor Information” included in the Company’s 2001 Annual Report is incorporated herein by reference.

The information under the caption “11-Year Selected Financial Data” included in the Company’s 2001 Annual Report is incorporated herein by reference.

“Management’s Discussion and Analysis” included in the Company’s 2001 Annual Report is incorporated herein by reference.

The information under the caption “Management’s Discussion and Analysis – Inflation and Exchange Rates” and Note 1 to the financial statements of the Registrant, included in the Company’s 2001 Annual Report, are incorporated herein by reference.

The following financial statements of the Registrant, included in the Company’s 2001 Annual Report, are incorporated herein by reference:

Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000, and 1999.

Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years

Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999.

The disclosure required by Item 304(a) of Regulation S-K has been previously reported on the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 2002. There are no disclosures required by the Company under Item 304(b) of Regulation S-K.

The information under the caption “Election of Directors — Information Concerning Nominees and Directors” in the Company’s 2002 Proxy Statement is incorporated herein by reference.

Information concerning Executive Officers of the Company is included in this Report after Item 4, under “Executive Officers of the Registrant.”

The information under the caption “Corporate Governance — Section 16 Beneficial Ownership Reporting Compliance” in the Company’s 2002 Proxy Statement is incorporated herein by reference.

The information under the caption “Executive Compensation and Stock Option Information” and “Corporate Governance — Director Compensation” in the Company’s 2002 Proxy Statement is incorporated herein by reference.

The information under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Company’s 2002 Proxy Statement is incorporated herein by reference.

The information under the caption “Corporate Governance — Certain Relationships and Related Transactions” in the Company’s 2002 Proxy Statement is incorporated herein by reference.


	Information concerning financial statements of Polaris Industries Inc. included in the Company’s 2001 Annual Report are incorporated by reference to this Report under Item 8 “Financial Statements and Supplementary Data”.


	Schedule II – Valuation and Qualifying Accounts – Years ended December 31, 2001, 2000 and 1999. (see page 14 of this report)

	All other 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.


	The Exhibits to this Report are listed in the Exhibit Index on page E-1.

	A copy of any of these Exhibits will be furnished at a reasonable cost to any person who was a shareholder of the Company as of March 12, 2002, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to Polaris Industries Inc., 2100 Highway 55, Medina, Minnesota 55340, Attention: Investor Relations.

During the quarter ended December 31, 2001, the Company filed one Current Report on Form 8-K on November 28, 2001, to furnish certain presentation materials information pursuant to Regulation FD. Subsequent to the quarter ended December 31, 2001, the Company filed a Current Report on Form 8-K on February 8, 2002, to furnish certain presentation materials under Regulation FD that replaced and superseded all such materials included in any exhibit to a Form 8-K previously filed with the Commission. Also, on March 15, 2002, the Company filed a Current Report on Form 8-K to announce the appointment of Ernst & Young LLP as its independent auditors for the year ending December 31, 2002.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Minneapolis, State of Minnesota on March 22, 2002.

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.


•	Thomas C. Tiller, 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.

We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Polaris Industries Inc. and Subsidiaries included in this Form 10-K and have issued our report thereon dated January 23, 2002. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule appearing elsewhere in this Form 10-K is the responsibility of the company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

17 EX-10.(T) 3 c68167ex10-t.txt REVOLVING PROGRAM AGREEMENT EXHIBIT 10(t) REVOLVING PROGRAM AGREEMENT This Revolving Program Agreement ("Agreement") is entered into as of October 15, 2001 ("Effective Date") by and between Household Bank (SB), N.A., a national banking association, ("Household Bank"), with its principal offices located at 1111 Town Center Drive, Las Vegas, NV 89144 and Polaris Sales Inc., a Minnesota corporation ("Polaris"), with its principal offices at 2100 Highway 55, Medina, MN 55340. In consideration of the mutual promises, covenants, and agreements set forth below and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: Section 1. Definitions. In addition to the words and phrases defined above and elsewhere in this Agreement, the following words and phrases shall have the following meanings: a. "Active Account" means with respect to any Billing Cycle, any Account, which at any time during the Billing Cycle has a credit or debt balance. b. "Account" means a Private Label Credit Card account established by Household Bank for a Cardholder or assigned to Household Bank to be used by the Cardholder to finance the purchase of Goods from Dealers pursuant to the terms of the Cardholder Agreement. In addition, "Account" shall also include those accounts included in the Existing Portfolio. c. "Affiliate" means any entity that is owned by, owns or is under common control with the parties or their ultimate parent. d. "Applicable Law" means collectively or individually any applicable law, rule, regulation or judicial, governmental or administrative order, decree, ruling, opinion or interpretation. e. "Average Account Balances" means, for any period, the sum of the daily Account net balances for the Accounts in the Revolving Program for such period divided by the number of days in such period. f. "Billing Cycle" shall mean the period of calendar days between billing dates, usually between twenty-eight (28) and thirty-one (31) days. g. "Business Day" means any day except Saturday or Sunday or a day on which banks are closed in the State of Nevada. h. "Card" means the Private Label Credit Card issued by Household Bank for the Revolving Program. i. "Cardholder" means (i) the person in whose name an Account is opened, and (ii) any other authorized users of the Account. j. "Cardholder Agreement" means as to any Account, the related application and agreement between the Cardholder and Household Bank, governing the terms and conditions of such Account, as such agreement may be amended from time to time by Household Bank. k. "Card Sale" means any sale of Goods that Dealers make to a Cardholder pursuant to this Agreement and the Cardholder Agreement that is charged to an Account. l. "Credit Promotion" means the promotional plans set forth in the Cardholder Agreements. m. "Credit Promotion Period" means the promotional period for the promotional plans set forth in the Cardholder Agreements. n. "Dealer Participation Expense" means the amortization of Dealer Participation Fees paid to the Dealers in accordance with the Dealer Revolving Agreements for non promotional Card Sales. The Dealer Participation Fees are paid at funding and will be amortized in accordance with Household Bank's standard accounting policies. o. "Dealers" means independent retail dealers authorized by Polaris to sell its Goods. p. "Discount Income" means the amortization of discounts which have been assessed by Household Bank on various promotional credit plans in accordance with Schedule A. These discounts are assessed at funding and will be amortized in accordance with Household Bank's standard accounting policies. q. "Excess Loss Provision" means the Monthly charge or credit necessary to maintain an appropriate bad debt reserve on outstanding Account balances in accordance with Household Bank's standard accounting policies. r. "Existing Portfolio" means the existing portfolio of Private Label Credit Card accounts arising from the program established and maintained by Transamerica Bank, N.A. and Transamerica Retail Financial Services Corporation (collectively "Transamerica") for Polaris, which existing portfolio Household Bank has agreed to purchase pursuant to a Purchase and Sale Agreement dated July 24, 2001, by and between Household Bank and Transamerica. s. "Fee Income" means late fees, NSF fees, net direct check fees, debt cancellation program fees, overlimit fees, and any other fees, except fees related to credit insurance, Finance Charge Income, and Discount Income, assessed and billed to Accounts, net of reversals. t. "Finance Charge Income" represents billed finance charges on Account balances net of reversals. u. "Interest Expense" means an amount equal to the product of: (i) the result of the One Year LIBOR plus 40 basis points divided by twelve, times (ii) 85% of the Average Account Balances for such Month less unamortized Discount Income plus unamortized Dealer Participation Expense. v. "Marketing Expenses" means and includes, but is not limited to, expenses for point of sale materials, direct mail materials, general media advertising and any other marketing materials or Revolving Program related to promoting and marketing the Revolving Program mutually agreed upon by Household Bank and Polaris. Marketing Expenses shall not include discounts associated with Credit Promotions or Participation Fees. w. "Month" means a calendar month unless used in connection with a Credit Promotion Period. x. "Net Chargeoff" means the sum of the principal, interest, fees and other components of an Account balance which is charged off by Household Bank in accordance with Household Bank's standard operating procedures, net of any recoveries received by Household Bank after the charge-off of such Accounts. y. "One Year LIBOR" means the Business Daily average, for the applicable calendar month, of the one (1) year London Interbank Offered Rate as published by Bloomberg Financial Markets. z. "Operating Instructions" means the regulatory guidelines and operating instructions and/or procedures designated by Household Bank from time to time concerning the Revolving Program. -2- aa. "Private Label Credit Card" means a credit card which may be used to purchase the goods and/or services of the entity or an affiliate of the entity whose name, tradename, or logo is on such credit card. bb. "Revolving Program Assets" means Account balances minus bad debt reserve plus unamortized Dealer Participation Expense minus unamortized Discount Income for the Revolving Program. cc. "Revolving Program Income" means Finance Charge Income, plus Discount Income, plus Fee Income, plus any gain on the sale of the Accounts if the portfolio is sold, minus Dealer Participation Expense, minus Interest Expense, minus Net Chargeoff, plus or minus Excess Loss Provision, minus Servicing Expenses, minus Sales Expenses, minus Marketing Expenses, minus other Revolving Program write-offs, minus any loss on the sale of Accounts if the portfolio is sold, all in connection with the Revolving Program. dd. "Sales Expense" means the amount of compensation paid by Household Bank to the respective sales personnel of the Bank and Polaris in connection with the Revolving Program. ee. "Sales Slip" means evidence of a Card Sale in paper or electronic form for Goods purchased from Dealers. ff. "Servicing Expense" represents a Monthly charge for loan origination and servicing which includes the following charges: Origination - $6.65 per application Customer Service - $1.24 per Active Account per Billing Cycle Collection - $17.50 per delinquent Account per Billing Cycle (excluding charged off Accounts) Systems and Other Service Expenses - $3.50 per Active Account per Billing Cycle Section 2. Scope. Polaris is engaged in the sale of snowmobiles, watercraft, all terrain vehicles, motorcycles, and other related products and services ("Goods") through a distribution network of Dealers. Household Bank has been asked by Polaris to provide a Private Label Credit Card program for consumers purchasing Goods from Dealers (the "Revolving Program") under the terms and conditions of agreements with Dealers ("Dealer Revolving Agreements") entered into hereafter between Household Bank and Dealers. Section 3. Revolving Program Participation Fee. On or before the 10th Business Day following the end of each Month, Household Bank shall deliver to Polaris a reasonably detailed operating statement for the Revolving Program and a calculation of Revolving Program Income, both certified to be correct and complete by an officer of Household Bank. In any Month in which the Revolving Program Income is a gain, Household Bank shall make a payment to Polaris of a monthly fee equal to fifty percent (50%) of the Revolving Program Income ("Polaris Participation Fee") within 10 Business Days after said certificate is delivered. In any Month in which the Revolving Program Income is a loss, with respect to all Accounts for such Month, Polaris shall pay Household Bank fifty percent (50%) of the loss ("Polaris Participation Fee Shortfall") within 10 Business Days after said certificate is delivered. The liability of Polaris to pay any amounts due for the Polaris Participation Fee Shortfall shall not exceed fifteen million dollars ($15,000,000) in the aggregate (the "Shortfall Maximum"), except as provided in Section 5.e; provided, however, that if the Revolving Program Assets reach four hundred million dollars ($400,000,000), Household shall have the right to terminate this Agreement upon -3- twenty (20) days prior written notice, unless Polaris shall have agreed to increase the Shortfall Maximum to an amount agreed upon with Household Bank. Section 4. Revolving Program Support by Polaris. a. Polaris agrees to review and recommend Dealers that have met Polaris' Dealer criteria and are in good standing with Polaris for participation in the Revolving Program. Polaris further agrees that it will use commercially reasonable efforts to encourage appropriate Dealers to participate in the Revolving Program. Polaris shall request each Dealer which desires to participate in the Revolving Program to enter into Dealer Agreements which, once executed, shall be forwarded to Household Bank. Household Bank may, at any time and in its sole discretion for any reason, decline to accept a Dealer referred by Polaris by not executing a Dealer Agreement presented to Household Bank. If approved by Household Bank, Household Bank will send a copy of the fully executed Dealer Agreement to the Dealer. b. If Polaris desires to terminate a particular Dealer from the Revolving Program, Polaris shall notify Household Bank in writing of such desire and Household Bank will terminate such Dealer from the Revolving Program in accordance with the terms of the Dealer Agreements. c. Polaris agrees to actively promote the Revolving Program with both Dealers and consumers including, but not limited to, providing such Dealer training and consumer marketing regarding the Revolving Program mutually agreed to by Polaris and Household Bank. d. Polaris shall not issue during the term of this Agreement, arrange to have issued during the term of this Agreement, or accept any Private Label Credit Card other than the Card issued by Household Bank, except with respect to applications declined by Household Bank. e. Polaris shall use commercially reasonable efforts to assist Household Bank in resolving all disputes involving Goods which go unresolved by any Dealer Section 5. Equity Reserve for Revolving Program. a. Upon the execution of this Agreement, Polaris and Household Bank shall establish an equity reserve (the "Equity Reserve") to be held by Household Bank in trust for Polaris for the sole benefit of and use by Household Bank in accordance with the terms of this Agreement. In order to secure the performance of Polaris's obligations hereunder, Polaris hereby grants Household Bank a first priority security interest in and lien upon the Equity Reserve, and agrees to execute such documents and take such other actions as Household Bank reasonably determines are necessary in order to perfect such security interest and lien. b. The Equity Reserve shall be considered fully funded for each Month in which the balance of the Equity Reserve is at least seven and one-half percent (7.5%) of -4- the Revolving Program Assets at the end of such Month (the "Fully Funded Amount"). c. The Equity Reserve shall be funded as follows: (i) Polaris shall, within three (3) Business Days of the Effective Date of this Agreement, deposit in the Equity Reserve an amount equal to seven and one half percent (7.5%) of the Revolving Program Assets; (ii) for any Month in which the amount in the Equity Reserve is less than the Fully Funded Amount, Polaris shall deposit the amount of the shortfall in the Equity Reserve within ten (10) Business Days of the end of such Month; and (iii) for any Month in which the amount in the Equity Reserve is more than the Fully Funded Amount, Household Bank shall deduct the difference from the Equity Reserve and forward that amount to Polaris within ten (10) Business Days of the end of such Month. d. If Polaris has not paid Household Bank any amounts due to Household Bank under Section 3 or 9, Household Bank may deduct such amounts from the Equity Reserve. Household Bank may not use the Equity Reserve for any other reason. e. Any amount remaining in the Equity Reserve upon the termination of this Agreement shall be returned to Polaris upon the earlier of the date (i) the balances on all the Accounts (excluding charged off Accounts) have been reduced to zero, or (ii) the Accounts have been purchased pursuant to Section 10.d, less any deductions for any amounts due Household Bank under Section 3 or 9 after the termination date and less any amount of the Polaris Participation Fee Shortfall in excess of the Shortfall Maximum not paid by Polaris pursuant to Section 3 on account of the Shortfall Maximum having been reached. Section 6. Revolving Program Return. Household Bank will manage the Revolving Program economics in accordance with its ordinary business practices so that the Revolving Program Income will represent a return on Revolving Program Assets between 4.8% and 5.75%. The Revolving Program return will be reviewed on a quarterly basis, and Household Bank may adjust, after discussions with Polaris, the Revolving Program economics, including but not limited to Cardholder APR and fees, Discounts, Dealer Participation Fees, and the Revolving Program Income. Section 7. Service Level Standards and Reporting for Revolving Program. a. Household Bank shall comply with Applicable Law in servicing the Accounts. b. Household Bank shall maintain the following service level standards ("Service Levels") in connection with the Revolving Program: (i) Monthly average speed of answer for Cardholders: 45 seconds (ii) Monthly average speed of answer for Dealers: 20 seconds (iii) Monthly average time to decision applications: 4 minutes (iv) Monthly average percentage of Dealers funded same day for Dealers' whose funding transmissions are timely received by Household Bank: 95% (v) Monthly average percentage of payments correctly

-5- ~~processed if standard payment envelope and remittance coupon are used, and one check is enclosed: 95%~~

c. Upon the conversion of the Existing Portfolio from Transamerica's system to Household Bank's system, which will affect Household Bank's performance of the Service Levels, Household Bank may reduce the Service Levels to levels which are 80% of the Service Levels set forth in Section 7.b., which reduced levels shall govern for a temporary period of sixty (60) days after the conversion of the Existing Portfolio to the Household Bank system, after which time the levels shall revert to those Service Levels set forth herein. d. Notwithstanding any other provision to the contrary, Household Bank shall not be in default under this Agreement or be deemed to have failed to meet a Service Level standard due to a system or network communication failure. In the event of such an occurrence as set forth in this Section, Household Bank shall use its best efforts to meet its obligations as set forth in this Agreement. e. Notwithstanding any other termination provision in this Agreement to the contrary, Polaris may only terminate this Agreement pursuant to this Section 7.e., if Household Bank fails to meet any three of the Service Levels in three (3) out of any six (6) Months or the same Service Level for three (3) consecutive Months. In such a case, (i) Polaris shall give notice to Household Bank that it intends to terminate this Agreement pursuant to this Section 7.e.; (ii) Household Bank shall thereafter have 60 days to cure its failure to meet the particular Service Levels; and (iii) if Household Bank has not cured its failure in the aforementioned time period, Polaris may terminate this Agreement upon written notice, such termination to be effective 180 days after such notice is provided. f. On or before the 10th Business Day of each Month, Household Bank shall provide agreed upon sales and marketing reports. Section 8. Dealer Pricing and Cardholder Account Terms. The pricing terms for volume generated by the Dealers and the Cardholder Account terms under the Revolving Program are set forth in Schedule A attached hereto and incorporated herein. Section 9. Indemnification. a. Indemnification by Polaris. Polaris shall be liable to and shall indemnify and hold harmless Household Bank from any losses, damages, claims or complaints incurred by Household Bank arising out of: (i) Polaris's failure to comply with this Agreement; or (ii) the death or injury to any person or the loss, destruction or damage to any property arising out of the negligent act or omission of Polaris with respect to Goods purchased by customers; or (iii) any claim or complaint of a third party made in good faith in connection with advertisements and promotions prepared by or at the direction of Polaris; or (iv) any illegal conduct of Polaris or its employees or agents in connection with the Revolving Program; or (v) any violation of Applicable Law by Polaris or its employees or agents in connection with the Revolving Program. -6- b. Indemnification by Household Bank. Household Bank shall be liable to and shall indemnify and hold harmless Polaris from any losses, damages, claims or complaints incurred by Polaris arising out of (i) Household Bank's failure to comply with this Agreement; or (ii) any claim, dispute or complaint of any thirty party made in good faith in connection with advertisements and promotions prepared by or at the direction of Household Bank; or (iii) any illegal conduct of Household Bank or its employees or agents in connection with the Revolving Program; or (iv) any violation of Applicable Law by Household Bank or its employees or agents in connection with the Revolving Program. c. Notice of Claim and Survival. In the event that Household Bank or Polaris shall receive any claim or demand or be subject to any suit or proceeding of which a claim may be made against the other under this Section 9, the indemnified party shall give prompt written notice thereof to the indemnifying party and the indemnifying party will be entitled to participate in the settlement or defense thereof with counsel satisfactory to indemnified party at the indemnifying party's expense. In any case, the indemnifying party and the indemnified party shall cooperate (at no cost to the indemnified party) in the settlement or defense of any such claim, demand, suit, or proceeding. The terms of this Section 9 shall survive the termination of this Agreement. Section 10. Term and Termination. a. Term. This Agreement shall be effective as of the Effective Date when executed by authorized officers of each of the parties. It shall remain in effect for five (5) years ("Initial Term"), and shall thereafter be automatically renewed for successive one (1) year terms (the "Renewal Term(s)") unless and until terminated as provided herein. The termination of this Agreement shall not affect the rights and obligations of the parties with respect to transactions and occurrences which take place prior to the effective date of termination, except as otherwise provided herein. b. Termination. This Agreement may be terminated: (i) effective at the end of the Initial Term or any Renewal Term, by Household Bank or Polaris upon not less than one hundred eighty (180) days prior written notice to the other prior to the end of such term; (ii) by Household Bank upon sixty (60) days prior written notice to Polaris if the aggregate amount of Sales Slips or Card Sales subject to Chargeback to the Dealers pursuant to the Revolving Program exceeds 1.5% of the total number of Card Sales in any calendar quarter; (iii) by Household Bank or Polaris upon written notice to the other party if the return on Revolving Program Assets is less than 4.2% for two consecutive calendar quarters; (iv) by Household Bank or Polaris upon written notice to the other party if the Polaris Participation Shortfall paid and unpaid reaches fifteen million dollars ($15,000,000) in the aggregate. (v) by Household Bank or Polaris upon written notice to the other in the event the other party shall elect to wind up or dissolve its operation or is wound up and dissolved; becomes insolvent or repeatedly fails to pay its debts as they become due; makes an assignment for the benefit of creditors; files a -7- voluntary petition in bankruptcy, or for reorganization or is adjudicated as bankrupt or insolvent; or has a liquidator or trustee appointed over its affairs; or (v) upon written notice to the other (a) by either party, if there occurs any material change in ownership of the other party; or (b) by either party, if a material adverse change occurs in the other party's financial condition as reasonably determined by that party in its sole discretion, or if the other party suspends or goes out of business or substantially reduces its business operations or sends a notice of a proposed bulk sale of all or part of its business; or (c) by either party, in the event the other party materially breaches its obligations or any term under this Agreement or in the Operating Instructions; or (d) by either party, if that party has reasonable cause to believe that the other party will not be able to perform its obligations under this Agreement; or (e) by Household Bank, such notice to be provided at least sixty (60) days prior to the effective date of termination, if in the annual dollar volume of Card Sales generated by the Revolving Program is less than $50 million; or (f) by either party, if that party has reasonable cause to believe that the other party, its agents or employees have engaged in any fraudulent activity in connection with any of the transactions contemplated by this Agreement; or (g) by Household Bank, such notice to be provided at least sixty (60) days prior to the effective date of termination, if there is a fifty percent (50%) or more increase in any calendar quarter from the previous calendar quarter of Cardholder inquiries, disputes, or complaints caused by Dealers and Polaris; (h) by Polaris, such notice to be provided at least sixty (60) days prior to the effective date of termination, if there is a fifty percent (50%) or more increase in any calendar quarter form the previous calendar quarter of Cardholder inquires, disputes, or complaints caused by Household Bank; (i) by Polaris upon 180 days prior written notice to Household Bank pursuant to Section 7.e. herein, if Household Bank fails to maintain the Service Levels in accordance with Section 7; (j) by Household Bank, if in Household Bank's reasonable judgment, any Applicable Law requires that this Agreement or either party's rights or obligations hereunder be amended, modified, waived or suspended in any material respect, including, without limitation, the amount of finance charges or fees that may be charged or collected or the consumer rate that may be charged on purchases with the Card and the parties are unable to negotiate any additional amendments or modifications to the Agreement to address such changes in any Applicable Law; or (k) by either party, if the Closed End Program Agreement by and between Polaris Sales Inc. and Household Retail Services, Inc. (the "Closed End Program Agreement) is terminated, with the termination date of this Agreement to be effective on the same date as the termination of the Closed End Program Agreement. c. Duties and Rights Upon Termination. Polaris shall de-install from its operating system any program files provided by Household Bank to Polaris. Upon termination of this Agreement, Household Bank will approve no new applications under any Dealer Agreements, will authorize no additional purchases, and all Dealer Agreements shall also be terminated. Neither party is liable to the other for any direct or consequential damages that either party may suffer as a result -8- of either party's termination of this Agreement. The termination of this Agreement shall not affect the rights and obligations of the parties with respect to transactions and occurrences which take place prior to the effective date of termination, except as otherwise provided herein. In the event this Agreement is terminated for any reason or notice of termination is given by either party, Household Bank may take such other reasonable actions, including, but not limited to, establishing and maintaining a reserve (the "Termination Reserve") from payments otherwise payable to Polaris to protect Household Bank's rights under this Agreement and to cover amounts owing to Household Bank. The Termination Reserve shall be in the amount of 100% of the prior 12 Months Chargebacks, but in no event shall the Termination Reserve exceed two million dollars ($2,000,000). Upon the purchase of the Accounts pursuant to Section 10.d below, any unused amount in the Termination Reserve shall be paid to Polaris within 30 days of the date of sale. If no purchase occurs, the Termination Reserve shall be maintained and used by Household Bank for three (3) years from the termination date or until exhausted, whichever comes first. Any unused amount in the Termination Reserve after said three years shall be paid to Polaris within thirty (30) days of the end of such three year period. d. Purchase Requirements for Revolving Program. Polaris shall have the option to purchase, or arrange the purchase by a third party of, the Accounts from Household Bank upon termination of this Agreement. Said option may be exercised by Polaris by giving written notice to such effect to Household Bank within thirty (30) days after the termination date. The purchase price shall be negotiated, but it shall not be less than one hundred percent (100%) nor more than one hundred five percent (105%) of the full amount of all of the outstanding Account balances, plus accrued interest and fees from the last Billing Cycle through the date of sale, plus unamortized Dealer Participation Expense, minus the full amount of the bad debt reserve and minus the full amount of unamortized Discount Income. The purchase shall occur not later than 90 days after the effective date of termination of this Agreement and to be under such terms and conditions as are reasonable acceptable to Household Bank. Household Bank shall, as a part of the purchase, assign to Polaris or the third party purchaser, all charged off Accounts which it still owns at the time of such purchase at a price to be determined, but in any event, no more than 12% of the charged off Account balances. If the purchase of the Accounts is not completed within ninety (90) days, and unless Household Bank agrees to extend such time period, Polaris shall have no further right to purchase the Accounts. e. Only the terms of Sections 3, 5, 9, 10.c, 10.d, and 14 shall survive termination of this Agreement; provided, however, that the terms of Sections 3 and 5 shall survive until the Accounts are purchased pursuant to Section 10.d. or otherwise. If either party owes the other party any amounts under Section 3 and/or 5 as of the date the Accounts are purchased, that party may pay the other party thereafter in accordance with the time periods set forth in those sections. Section 11. Audit Rights. Polaris and its designated representatives shall have the right, at Polaris' expense, to audit the Revolving Program no more frequently than once a year, during reasonable business hours and upon reasonable notice to Household Bank. -9- Household Bank will reasonably cooperate by making its personnel and pertinent records available, including, but not limited to such records showing the following: (a) Computation of Revolving Program Income (b) Service Level performance (c) Computation of Servicing Expenses Section 12. Privacy and Internet Applications. Except as permitted in Section 15, neither Polaris nor Household Bank shall make any unauthorized disclosure of or use any personal information of individual consumers which it receives from the other party or on the other party's behalf other than to carry out the purposes for which such information is received, and Polaris and Household Bank shall comply, to the extent applicable, with the requirements of the implementing regulations of Title V of the Gramm-Leach Bliley Act of 1999, specifically, 16 Code of Federal Regulations, Chapter I, Subchapter C, Part 313.11. Polaris and Household Bank shall adopt and maintain a comprehensive privacy policy with respect to their handling of the personal information of individual consumers submitted by such consumers to Polaris or Household Bank via the Internet. Polaris and Household Bank's privacy policy shall be available on their Internet websites. Polaris and Household Bank shall comply in all respects with the provisions of their respective privacy policies. With respect to Internet applications, Polaris shall include a link on its website to the Household Bank website, and include language notifying visitors that they may complete an application for a Card via the Internet by clicking on such link. Household Bank shall provide a link back to the Polaris website for such visitors. Section 13. Termination of Dealer Agreement. Household Bank upon notice to Polaris may elect to terminate its relationship with a particular Dealer if such Dealer is associated with excessive chargebacks, high fraudulent activity or other course of business conduct that is injurious to the business relationship between Household Bank and Polaris or for any breach of the Dealer Agreement. Section 14. Additional Products and Services. During and after the term of this Agreement, Household Bank and/or its Affiliates shall have the non-exclusive right to solicit Cardholders for the products set forth in Schedule B, attached hereto. Household Bank may add additional products to Schedule B after the Effective Date of this Agreement, but any additions to the products set forth in Schedule B shall receive Polaris' prior review. Such solicitations shall comply with Applicable Law, including privacy laws. Section 15. Representations/Binding Effect. Household Bank and Polaris represent and warrant that each has full power, capacity, and authority to enter into this Agreement; that all action required to make this Agreement binding and valid upon each party according to its terms has been taken; and that this Agreement is and will be binding, valid and enforceable upon each party and its respective successors and assigns according to its terms, and the benefits of this Agreement shall extend to each party and its successors and assigns. Section 16. Assignments and Modifications. Neither party may assign this Agreement or any of its obligations under this Agreement to any third party without the other party's -10- written consent, provided, however, that either party may, upon prior written notice to the other, assign this Agreement and any of the rights hereunder to any Affiliate of the party, or any purchaser of substantially all of the assets of the party, capable of fulfilling the obligations (including all financial obligations) of the assigning party under this Agreement. In the event of such assignment, the assignee shall have the same rights, remedies, obligations and liabilities as Household Bank or Polaris under this Agreement. Any merger or consolidation by either party with another entity, other than with an Affiliate, shall be deemed to be an assignment expressly prohibited without the prior written consent of the other party, which consent shall not be unreasonably withheld. This Agreement may not be changed, amended or modified orally, and no obligation of either party can be released or waived by either party, except by a writing signed by a duly authorized officer or representative of each party. Section 17. Applicable Law/Severability. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. If any provision of this Agreement is contrary to applicable law, such provision shall be deemed ineffective without invalidating the remaining provisions hereof. Section 18. Notices. All notices required or permitted by this Agreement shall be in writing and shall be sent to the respective parties as follows: if to Household Bank and or HRSI, to the Attention of President, (with a copy to the Attention of General Counsel, Retail Services Law Department, 2700 Sanders Road, Prospect Heights, Illinois 60070); if to Polaris to the Attention of CFO at their respective addresses set forth on page one of this Agreement or such other addresses as each party may designate to the other by notice hereunder. Said notices shall be deemed to be received when sent to the above addresses (i) upon three (3) business days after deposit in the U.S. first class regular mail with postage prepaid or by registered or certified mail, return receipt requested, with postage prepaid, (ii) upon personal delivery, or (iii) upon receipt by telex, facsimile, or overnight/express courier service or mail. Section 19. Information. Polaris shall make available public financial information to Household Bank. If Household Bank requires further financial information, Polaris will make available financial officers of the company to explain or clarify Polaris's financial condition to Household Bank including the review of financial documents by Household Bank at Polaris's corporate office; provided that Household Bank signs a standard non-disclosure agreement. Polaris understands that Household Bank may seek credit and other information concerning Polaris from others and may provide financial and other information regarding the portfolio to its affiliates or others for purposes of its asset securitizations and sales, but in no event shall any non-public information be made public by Household Bank without Polaris' prior written consent. Section 20. Limited License. Polaris hereby authorizes Household Bank solely for purposes of this Agreement to use Polaris's name, logo, registered trademarks and servicemarks (if any) and any other proprietary designations ("Proprietary Materials") on the credit cards, applications, periodic statements, billing statements, collection letters, documents, promotional or advertising materials and otherwise in connection with the Revolving Program, subject to Polaris's periodic reasonable review of such use and to such reasonable specifications of Polaris. Polaris represents and warrants that it has appropriate trademark rights in the Proprietary Materials. Polaris shall indemnify, defend and hold Household Bank harmless from any loss, damage, expense or liability arising -11- from any claims of alleged infringement of the Proprietary Materials (including reasonable attorneys' fees and costs); provided that Household Bank has only used the Proprietary Materials in compliance with this Section 20. Polaris may not use any name or service mark of Household Bank or any of its Affiliates in any manner without the prior written consent of Household Bank. Section 21. Agreements between Polaris and Dealers. Except as specifically provided in this Agreement or in the Dealer Agreements, (i) Household Bank shall not be a party to any agreement between Polaris and individual Dealers, (ii) Household Bank shall not be responsible for the obligations of Polaris and any Dealers one to the other, including without limitation, the payment of any fees agreed to between Polaris and Dealers, and (iii) Household Bank shall not in any way be responsible for the acts, omissions or breaches of any arrangements or contracts between Polaris and Dealer(s). Section 22. Agreements between Household Bank and Dealers. Except as specifically provided in this Agreement, (i) Polaris shall not be a party to any agreement between Household Bank and individual Dealers, (ii) Polaris shall not be responsible for the obligations of Household Bank and any Dealer one to the other, including without limitation, the payment of any amounts owed by one to the other, and (iii) Polaris shall not in any way be responsible for the acts, omissions or breaches of any arrangements or contract between Household Bank and Dealers or for any other obligations of Household Bank or any Dealer. -12- SECTION 23. JURISDICTION. ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT MUST BE BROUGHT SOLELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; POLARIS AND HOUSEHOLD BANK HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND ANY APPELLATE COURTS THEREOF FOR THE PURPOSE OF ANY SUCH SUIT, ACTION, PROCEEDING OR JUDGMENT (IT BEING UNDERSTOOD THAT SUCH CONSENT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS WAIVES ANY RIGHT TO SUBMIT ANY DISPUTES HEREUNDER TO ANY COURTS OTHER THAN THOSE ABOVE). SECTION 24. WAIVER OF JURY TRIAL. HOUSEHOLD BANK AND POLARIS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, ANY RELATED DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR ARISING FROM ANY RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH SUIT, ACTION, PROCEEDING OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY; THIS PROVISION IS A MATERIAL INDUCEMENT FOR HOUSEHOLD BANK AND POLARIS ENTERING INTO THIS AGREEMENT. IN WITNESS HEREOF, Household Bank and Polaris have caused their duly authorized representatives to execute this Agreement as of the date set forth above. HOUSEHOLD BANK (SB), N.A. POLARIS SALES INC. By: /s/Richard Klesse By: /s/Michael W. Malone --------------------------------- ----------------------------------- Print Name: Richard Klesse Print Name: Michael W. Malone ------------------------- --------------------------- Title: Vice President Title: Vice President--Finance, CFO ------------------------------ -------------------------------- -13- EX-13 4 c68167ex13.txt PORTIONS OF THE ANNUAL REPORT TO SECURITY HOLDERS EXHIBIT 13 11-YEAR 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 in this report, including the information referenced under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
For the Years Ended December 31, 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ STATEMENT OF OPERATIONS DATA Sales data: Total sales $1,512,042 $1,425,678 $1,328,620 $1,180,648 - ------------------------------------------------------------------------------------------------------------------------------------ % change from prior year 6% 7% 13% 14% - ------------------------------------------------------------------------------------------------------------------------------------ Sales mix by product: - ------------------------------------------------------------------------------------------------------------------------------------ All-terrain vehicles 56% 59% 57% 56% - ------------------------------------------------------------------------------------------------------------------------------------ Snowmobiles 25% 22% 24% 27% - ------------------------------------------------------------------------------------------------------------------------------------ Personal watercraft 4% 5% 4% 4% - ------------------------------------------------------------------------------------------------------------------------------------ Motorcycles 1% 1% 3% 1% - ------------------------------------------------------------------------------------------------------------------------------------ PG&A 14% 13% 12% 12% - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit data: Total gross profit $ 344,374 $ 328,104 $ 298,050 $ 252,344 - ------------------------------------------------------------------------------------------------------------------------------------ % of sales 23% 23% 22% 21% - ------------------------------------------------------------------------------------------------------------------------------------ Operating expense data: Amortization of intangibles and noncash compensation $ 16,482 $ 12,701 $ 10,472 $ 8,703 - ------------------------------------------------------------------------------------------------------------------------------------ Conversion costs -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Other operating expenses 198,074 193,609 173,932 204,944(1) - ------------------------------------------------------------------------------------------------------------------------------------ % of sales 13% 14% 13% 17%(1) - ------------------------------------------------------------------------------------------------------------------------------------ Actual and pro forma data:(2) Net income $ 91,414 $ 82,809 $ 76,326 $ 31,015(1) - ------------------------------------------------------------------------------------------------------------------------------------ Diluted net income per share $ 3.88 $ 3.50 $ 3.07 $ 1.19(1) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOW DATA Cash flow from operating activities $ 188,581 $ 107,666 $ 124,354 $ 121,385 - ------------------------------------------------------------------------------------------------------------------------------------ Purchase of property and equipment 53,982 63,056 65,063 61,532 - ------------------------------------------------------------------------------------------------------------------------------------ Repurchase and retirement of common stock 49,207 39,622 52,412 37,728 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends to shareholders 22,846 20,648 19,732 18,582 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends per share $ 1.00 $ 0.88 $ 0.80 $ 0.72 - ------------------------------------------------------------------------------------------------------------------------------------ Cash distributions declared to partners -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Cash distributions declared per unit -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA (at end of year) Cash and cash equivalents $ 40,530 $ 2,369 $ 6,184 $ 1,466 - ------------------------------------------------------------------------------------------------------------------------------------ Current assets 305,317 240,912 214,714 183,840 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets 565,163 490,186 442,027 378,697 - ------------------------------------------------------------------------------------------------------------------------------------ Current liabilities 308,337 238,384 233,800 204,964 - ------------------------------------------------------------------------------------------------------------------------------------ Borrowings under credit agreement 18,043 47,068 40,000 20,500 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity/partners' capital 238,783 204,734 168,227 153,233 ====================================================================================================================================
(1) In 1998, Polaris entered into a settlement agreement related to a trade secret infringement claim brought by Injection Research Specialists, Inc. The one-time provision for litigation loss amounted to $61.4 million, or $1.53 per diluted share in 1998. The settlement had no effect on the future operations of the Company. Excluding this charge, other operating expenses, net income and diluted net income per share for 1998 would have been $143.5 million, $70.6 million and $2.72 per share, respectively. (2) The comparability of the information reflected in the Selected Financial data is materially affected by the conversion from a master limited partnership to a corporation on December 22, 1994, which resulted in the Company recording a net deferred tax asset of $65.0 million, conversion expenses of $12.3 million and a corresponding net increase in 1994 net income. Pro forma data is presented to assist in comparing the continuing results of operations of the Company exclusive of the conversion costs and as if the Company was a taxable corporation for each period presented. 12
1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,031,470 $ 1,184,368 $ 1,104,060 $ 816,713 $ 520,197 $ 376,903 $ 291,563 - ------------------------------------------------------------------------------------------------------------------------------------ (13%) 7% 35% 57% 38% 29% 1% - ------------------------------------------------------------------------------------------------------------------------------------ 45% 37% 33% 30% 27% 25% 25% - ----------------------------------------------------------------------------------------------------------------------------------- 35% 36% 40% 43% 49% 54% 59% - ------------------------------------------------------------------------------------------------------------------------------------ 6% 15% 16% 14% 9% 7% -- - ------------------------------------------------------------------------------------------------------------------------------------ -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 14% 12% 11% 13% 15% 14% 16% - ------------------------------------------------------------------------------------------------------------------------------------ $ 222,608 $ 231,020 $ 219,663 $ 175,211 $ 127,045 $ 101,328 $ 85,330 - ------------------------------------------------------------------------------------------------------------------------------------ 22% 20% 20% 21% 24% 27% 29% - ------------------------------------------------------------------------------------------------------------------------------------ $ 5,887 $ 5,325 $ 5,616 $ 14,321 $ 13,466 $ 11,997 $ 13,108 - ------------------------------------------------------------------------------------------------------------------------------------ -- -- -- 12,315 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 123,619 128,278 112,389 72,913 60,352 48,640 40,504 - ------------------------------------------------------------------------------------------------------------------------------------ 12% 11% 10% 9% 12% 13% 14% - ------------------------------------------------------------------------------------------------------------------------------------ $ 65,383 $ 62,293 $ 60,776 $ 54,703 $ 33,027 $ 24,602 $ 20,727 - ------------------------------------------------------------------------------------------------------------------------------------ $ 2.45 $ 2.24 $ 2.19 $ 1.98 $ 1.21 $ 0.91 $ 0.81 - ------------------------------------------------------------------------------------------------------------------------------------ $ 102,308 $ 89,581 $ 77,749 $ 111,542 $ 78,503 $ 55,316 $ 46,642 - ------------------------------------------------------------------------------------------------------------------------------------ 36,798 45,336 47,154 32,656 18,946 12,295 15,988 - ------------------------------------------------------------------------------------------------------------------------------------ 39,903 13,587 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 16,958 16,390 116,639 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ $ 0.64 $ 0.60 $ 4.27 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ -- -- -- 50,942 47,217 44,507 42,581 - ------------------------------------------------------------------------------------------------------------------------------------ -- -- -- $ 1.68 $ 1.67 $ 1.67 $ 1.67 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,233 $ 5,812 $ 3,501 $ 62,881 $ 33,798 $ 19,094 $ 20,098 - ------------------------------------------------------------------------------------------------------------------------------------ 217,458 193,405 175,271 206,489 109,748 74,999 59,200 - ------------------------------------------------------------------------------------------------------------------------------------ 384,746 351,717 314,436 331,166 180,548 146,681 135,509 - ------------------------------------------------------------------------------------------------------------------------------------ 191,111 161,387 155,722 161,457 98,055 69,054 52,646 - ------------------------------------------------------------------------------------------------------------------------------------ 24,400 35,000 40,200 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 169,235 155,330 118,514 169,709 82,493 77,627 82,863 ====================================================================================================================================
POLARIS INDUSTRIES INC. 2001 ANNUAL REPORT 13 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, 2001, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. RESULTS OF OPERATIONS 2001 VS. 2000 Sales increased to $1.512 billion in 2001, representing a six percent increase from $1.426 billion in 2000. The increase in sales was primarily due to higher snowmobile sales, resulting from the success of our new Snow Check Select(TM) program and our product line of high quality snowmobiles, as well as higher parts, garments and accessories (PG&A) sales in 2001. Sales of ATVs of $839.7 million in 2001 were approximately flat compared to $843.5 million in 2000. The flat sales growth was primarily the result of higher than usual dealer and consumer promotional and advertising activity of several of our competitors, which adversely impacted Polaris' sales volume during 2001. The average per unit sales price increased two percent for the year due to a change in the mix of products sold following our successful introduction of the new Sportsman 700 and two new models of RANGERs, each of which commands a higher selling price. Sales of ATVs comprised 56 percent of total company sales in 2001 compared to 59 percent in 2000. Sales of snowmobiles of $379.8 million in 2001 were 22 percent higher than $311.3 million in 2000. The increase can be attributed to more normal snowfall in the 2000-2001 season, the success of the new custom order program, Snow Check Select, and the introduction of several new models. The average per unit sales price increased six percent in 2001 from the prior year due to higher priced features being requested on custom-ordered snowmobiles. Sales of snowmobiles comprised 25 percent of total company sales in 2001 compared to 22 percent in 2000. Sales of personal watercraft (PWC) of $61.9 million in 2001 were nine percent lower than $68.3 million in 2000. The decrease was primarily due to the slowing economy and a decline in the overall industry retail sales in 2001. The average per unit sales price for PWC decreased two percent as more sales promotions were implemented during the 2001 period. Sales of PWC comprised four percent of total company sales in 2001 compared to five percent in 2000. Sales of Victory motorcycles of $19.3 million in 2001 changed little from sales of $19.4 million in 2000. Although unit shipments increased during 2001, the flat sales can be attributed to higher promotional costs in 2001 versus 2000 to assist dealers in selling their inventory of motorcycles in a very competitive industry environment. The average per unit sales price for motorcycles declined 11 percent due to higher promotional activity in the 2001 period. Sales of Victory motorcycles comprised one percent of total company sales for both years 2001 and 2000. Sales of PG&A of $211.3 million in 2001 were 15 percent higher than $183.2 million in 2000. The increase in PG&A sales was due primarily to increases in clothing, accessories and parts for both snowmobiles and ATVs. The company views the PG&A business as a continued opportunity for future growth. PG&A sales comprised 14 percent of total company sales in 2001, compared to 13 percent in 2000. Gross profit increased to $344.4 million in 2001, representing a five percent increase over $328.1 million gross profit in 2000. This increase in gross profit dollars was a result of higher sales volume. Gross profit, as a percentage of sales, decreased slightly to 22.8 percent in 2001 from 23.0 percent in 2000. The decrease was due to increased promotional costs related to the ATV business and a stronger U.S. dollar in relation to the Canadian dollar versus the prior year, partially offset by higher margins in the ATV and snowmobile product lines. Operating expenses in 2001 increased four percent to $214.6 million from $206.3 million in 2000. This increase in operating expenses was a result of higher sales volume, higher research and development costs, and the impact of a rising stock price on stock-based compensation plans during 2001 compared to the prior year. Expressed as a percentage of sales, operating expenses decreased to 14.2 percent in 2001 from 14.5 percent in 2000. The reduction in operating expenses, as a percent of sales, is a direct result of efforts by the company to reduce indirect expenses as the economy softened in 2001. Polaris has continued to invest in new product development, innovation, and product diversification. Research and development expenses were $35.7 million (2.4 percent of sales) in 2001 and $32.4 million (2.3 percent of sales) in 2000. In 2001, more than 66 percent of sales came from products introduced in the past three years. Interest expense declined six percent as a result of lower average interest rates on borrowings under the credit agreements in 2001 compared to 2000. Nonoperating other income increased from 2000 due to the favorable effects of foreign currency hedging transactions related to the Canadian dollar exposure in 2001. The provision for income taxes decreased from a rate of 35.5 percent of pre-tax income in 2000 to 34.5 percent of pre-tax income in 2001 as a result of the impact of tax planning. Net income in 2001 was $91.4 million, an increase of 10 percent from $82.8 million in 2000. Net income as a percent of sales was 6.0 percent in 2001, an increase from 5.8 percent in 2000. Net income per diluted share increased 11 percent to $3.88 in 2001 from $3.50 in 2000. 14 2000 VS. 1999 Sales increased to $1.426 billion in 2000, representing a seven percent increase from $1.329 billion in 1999. The increase in sales was primarily due to higher ATV sales, resulting from the eleventh consecutive year of increased ATV retail sales, and higher PG&A sales. Sales of ATVs of $843.5 million in 2000 were 12 percent higher than $753.2 million in 1999. The increased sales reflect the continued double-digit growth of both Polaris and the industry as consumers find new and expanded uses for the product as well as the introduction of our youth ATVs. The increased sales were partially offset by a product mix driven average per unit sales price decrease. Sales of ATVs comprised 59 percent of total company sales in 2000 compared to 57 percent in 1999. Sales of snowmobiles of $311.3 million in 2000 were three percent lower than $322.4 million in 1999. The decrease was due to lower unit shipments to dealers after three consecutive winters of poor snow conditions. This decrease in sales was partially offset by a product mix driven increase in the average per unit sales price. Sales of snowmobiles comprised 22 percent of total company sales in 2000 compared to 24 percent in 1999. Sales of PWC of $68.3 million in 2000 were 27 percent higher than $53.7 million in 1999. The increase was primarily due to shipment timing as we shipped our 2001 models to our dealers earlier than in prior years. The average per unit sales price for PWC remained flat. Sales of PWC comprised five percent of total company sales in 2000 compared to four percent in 1999. Sales of Victory motorcycles of $19.4 million in 2000 were 53 percent lower than $41.2 million in 1999. The decrease relates to a reduction in Victory shipments to dealers in 2000 in response to lower than expected retail sales. The average per unit sales price for motorcycles remained flat. Sales of Victory motorcycles comprised one percent of total company sales in 2000 compared to three percent in 1999. Sales of PG&A of $183.2 million in 2000 were 16 percent higher than $158.1 million in 1999. The increase in PG&A sales was due primarily to increases in clothing and ATV parts shipments. PG&A sales comprised 13 percent of total Company sales in 2000, compared to 12 percent in 1999. Gross profit increased to $328.1 million in 2000, representing a 10 percent increase over $298.1 million gross profit in 1999. This increase in gross profit dollars was a result of higher sales volume and an increase in gross profit margin percentage to 23.0 percent in 2000 from 22.4 percent in 1999. The increase in gross profit margin percentage was primarily a result of increased margins in the ATV, snowmobile and Victory product lines due to cost reductions and lower snowmobile promotional expenses. These positive factors have been somewhat offset by the negative impact of Japanese yen exchange rates and increased amortization of tooling costs. Operating expenses in 2000 increased 12 percent to $206.3 million from $184.4 million in 1999. Expressed as a percentage of sales, operating expenses increased to 14.5 percent in 2000 from 13.9 percent in 1999. These increases are primarily related to a planned increase in expenses to support the Company's growth and brand recognition initiatives in areas such as information systems, PG&A sales and marketing and international sales. Polaris has continued to invest in new product development, innovation, and product diversification. Research and development expenses were $32.4 million (2.3 percent of sales) in 2000 and $31.3 million (2.4 percent of sales) in 1999. In 2000, more than 79 percent of sales came from products introduced in the past three years. Nonoperating expense (income) increased in 2000 from 1999 due to the positive financial impact of the Company's equity in the income of Polaris Acceptance, which is the primary reason that the income from financial services increased by $4.6 million. This increase was partially offset by higher interest expense of $3.4 million. Net income in 2000 was $82.8 million, an increase of eight percent from $76.3 million in 1999. Net income as a percent of sales was 5.8 percent in 2000, an increase from 5.7 percent in 1999. Net income per diluted share increased 14 percent to $3.50 in 2000 from $3.07 in 1999. CRITICAL ACCOUNTING POLICIES The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluation of the Company's reported financial results include the following: revenue recognition, sales promotions and incentives, product warranties and product liability. REVENUE RECOGNITION: Revenues are recognized at the time of shipment to the dealer or distributor. Historically, product returns, whether in the normal course of business or resulting from repurchases made under the customer financing program have not been material. However, Polaris has agreed to repurchase products repossessed by the finance companies up to certain limits. Polaris' financial exposure 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. Polaris has not historically recorded any significant sales return allowances because it has not been required to repurchase a significant number of units. However, an adverse change in retail sales could cause this situation to change. POLARIS INDUSTRIES INC. 2001 ANNUAL REPORT 15 SALES PROMOTIONS AND INCENTIVES: Polaris generally provides for estimated sales promotion and incentive expenses, which are recognized as a sales reduction, at the time of sale to the dealer or distributor. Examples of sales promotion and incentive programs include dealer and consumer rebates, volume discounts, financing programs and sales associate incentives. Sales promotion and incentive expenses are estimated based on current programs and historical rates for each product line. Actual results may differ from these estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs or if the customer usage rate varies from historical trends. Historically, sales promotion and incentive expenses have been within the Company's expectations and differences have not been material. PRODUCT WARRANTIES: Polaris provides a limited warranty for ATVs for a period of six months and for a period of one year for its snowmobiles, motorcycles and PWC products. Polaris' standard warranties require the Company or its dealers to repair or replace defective product during such warranty period at no cost to the consumer. The warranty reserve is established at the time of sale to the dealer or distributor based on management's best estimate using historical rates and trends. Adjustments to the warranty reserve are made from time to time as actual claims become known in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While management believes that the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. PRODUCT LIABILITY: Polaris is subject to product liability claims in the normal course of business. Polaris carries excess product liability insurance coverage for catastrophic product liability claims for incidents that exceed its self-insured retention level. 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. The Company utilizes historical trends and actuarial analysis tools to assist in determining the appropriate loss reserve levels. At December 31, 2001 the Company has accrued $5.9 million for the defense and possible payment of pending claims, which reserve is included as a component of the other accrued expenses in the accompanying consolidated balance sheets. Historically, losses for product liability claims have been equal to or lower than estimates of possible claims. While management believes the product liability reserve is adequate, adverse determination of material product liability claims made against the Company would have a material adverse effect on Polaris' financial condition. LIQUIDITY AND CAPITAL RESOURCES Polaris' primary sources of funds have been cash provided by operating activities, a bank line of credit arrangement that was increased from $150.0 million to $250.0 million during 2001 and a dealer floor plan financing program. Polaris' primary uses of funds have been for cash dividends to shareholders, repurchase and retirement of common stock, capital investments and new product development. During 2001, Polaris generated net cash from operating activities of $188.6 million, which was utilized to fund capital expenditures of $54.0 million, cash dividends of $22.8 million and the repurchase of common stock of $49.2 million. Net cash generated from operating activities increased 75 percent from 2000 to 2001 due largely to timing of payments to dealers for incentive programs. During 2000, Polaris generated net cash from operating activities of $107.7 million, which was utilized to fund capital expenditures of $63.1 million, cash dividends of $20.6 million, and the repurchase of common stock of $39.6 million. During 1999, Polaris generated net cash from operating activities of $124.4 million, which was utilized to fund capital expenditures of $65.1 million, cash dividends of $19.7 million and the repurchase of common stock of $52.4 million. The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris has an unsecured bank line of credit arrangement with maximum available borrowings of $150.0 million expiring on June 14, 2004. In addition, Polaris has a 364-day unsecured bank line of credit arrangement expiring on June 13, 2002 of $100.0 million, which management plans to extend beyond 2002. These arrangements provide borrowing for working capital needs and the repurchase and retirement of common stock. Borrowings under the lines of credit bear interest based on LIBOR or "prime" rates. At December 31, 2001, Polaris had total borrowings under the lines of credit of $18.0 million compared to $47.1 million at December 31, 2000. Polaris has entered into an interest rate swap agreement to manage exposures to fluctuations in interest rates. At December 31, 2001, the effect of this agreement is to fix the interest rate at 7.21 percent for $18.0 million of borrowings under the credit line until July 2007. In addition, at December 31, 2001, Polaris had letters of credit outstanding of $5.1 million related to purchase obligations for raw materials. The Polaris Board of Directors has authorized the cumulative repurchase of up to 9.5 million shares of the company's common stock. During 2001, Polaris paid $49.2 million to repurchase and retire 1.1 million shares. Polaris had 2.6 million shares available to repurchase under the Board of Directors authorization as of December 31, 2001. A wholly owned subsidiary of Polaris is a partner with a wholly owned subsidary of Transamerica Distribution Finance in Polaris Acceptance which provides floor plan financing to Polaris' dealers and, until October 2001, provided retail credit services to retail customers of Polaris' dealers. Polaris has a 50 percent equity interest in Polaris Acceptance and was responsible for 50 percent of the outstanding indebtedness of Polaris Acceptance. In February 2000, the term of the partnership agreement was extended; in consideration thereof, Polaris is no longer required to guarantee the outstanding indebtedness of Polaris Acceptance. Polaris has arrangements with certain finance companies, including Polaris Acceptance, to provide floor plan financing for its dealers. These arrangements provide liquidity by financing dealer purchases of Polaris products without the use of Polaris' working capital. Substantially all of the North American sales of snowmobiles, ATVs, motorcycles and PWC and related PG&A are financed under these arrangements whereby Polaris receives 16 payment within a few days of shipment of the product. The amount financed by dealers under these arrangements at December 31, 2001 and 2000, was approximately $620.0 million and $549.0 million, respectively. Polaris participates in the cost of dealer financing up to certain limits. Polaris has agreed to repurchase products repossessed by the finance companies to an annual maximum of 15 percent of the average amount outstanding during the prior calendar year. Polaris' financial exposure under these agreements is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. However, an adverse change in retail sales could cause this situation to change and thereby require Polaris to repurchase repossessed units. In October 2001, Polaris entered into an agreement with Household Bank N.A., to provide retail financing for its consumers. This arrangement provides that all income and losses of the retail credit portfolio are shared 50 percent to Polaris and 50 percent to Household. The amount financed by consumers under this arrangement at December 31, 2001 was approximately $160.0 million. Either party has the right to terminate the agreement if profitability of the portfolio falls below certain minimum levels. Polaris' financial exposure under this agreement is limited to its deposit ($11.1 million at December 31, 2001) plus an aggregate amount of not more than $15.0 million. Polaris has made significant capital investments to increase production capacity, quality, and efficiency, and for new product development and diversification. Improvements in manufacturing and distribution capacity include: (a) expenditures for the redesign of our Roseau manufacturing facility of $10.1 million during 2001 which replaced three assembly lines, (b) tooling expenditures for new product development across all product lines of $19.5 million during 2001, and (c) continued investments in returnable crates, which not only reduce costs but also are environmentally friendly. Polaris anticipates that capital expenditures, including tooling, for 2002 will range from $65.0 million to $75.0 million. Management believes that existing cash balances, cash flows to be generated from operating activities and available borrowing capacity under the line of credit arrangements will be sufficient to fund operations, regular dividends, share repurchases, and capital expenditure requirements for 2002. At this time, management is not aware of any factors that would have a material adverse impact on cash flow beyond 2002. INFLATION AND EXCHANGE RATES Polaris does not believe that inflation has had a material impact on the results of its operations. However, the changing relationships of the U.S. dollar to the Canadian dollar and Japanese yen have had a material impact from time-to-time. During 2001, purchases totaling 12 percent of Polaris cost of sales were from Japanese yen denominated suppliers. The strengthening of the U.S. dollar in relation to the Japanese yen since late 2000 has resulted in lower raw material purchase prices. Polaris' cost of sales in 2001 was positively impacted by the Japanese yen exchange rate fluctuation when compared to the prior year. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the yen-dollar exchange rate will again have a positive impact on cost of sales during 2002 when compared to 2001. Polaris operates in Canada through a wholly owned subsidiary. Sales of the Canadian subsidiary comprised 12 percent of total Polaris sales in 2001. From time to time, Polaris utilizes foreign exchange hedging contracts to manage its exposure to the Canadian dollar. The U.S. dollar strengthened in relation to the Canadian dollar in 2001 which resulted in a negative financial impact on Polaris gross margins when compared to the same periods in 2000. In view of the continuing strengthening of the U.S. dollar in relation to the Canadian dollar, at this point in time Polaris anticipates a negative impact on net income during 2002 when compared to 2001. In the past, Polaris has been a party to, and in the future may enter into, foreign exchange hedging contracts for the Japanese yen, Euro, Taiwan dollar and the Canadian dollar to minimize the impact of exchange rate fluctuations within each year. At December 31, 2001, Polaris had open Japanese yen foreign exchange hedging contracts with notional amounts totaling $76.2 million U.S. dollars which mature throughout 2002. Since 1995, Polaris has been manufacturing its own engines for selected models of PWC, motorcycles, ATVs and snowmobiles at its Osceola, Wisconsin facility. Also, in 1995, Polaris entered into an agreement with Fuji Heavy Industries Ltd. to form Robin Manufacturing U.S.A., Inc. ("Robin"). Under the terms of the agreement, Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Potential advantages to Polaris of having 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 Certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These "forward-looking statements" can generally be identified as such because the context of the statement will include words such as the Company or management "believes," "anticipates," "expects," "estimates" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking. Shareholders, potential investors and others are cautioned that all forward-looking statements involve risks and uncertainty that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: product offerings, promotional activities and pricing strategies by competitors; future conduct of litigation processes; warranty expenses; foreign currency exchange rate fluctuations; environmental and product safety regulatory activity; effects of weather; uninsured product liability claims; and overall economic conditions, including inflation and consumer confidence and spending. POLARIS INDUSTRIES INC. 2001 ANNUAL REPORT 17 CONSOLIDATED BALANCE SHEETS in thousands, except per share data
December 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 40,530 $ 2,369 Trade receivables, net of allowance for doubtful accounts of $3,606 and $2,545 56,119 56,130 Inventories 152,717 143,491 Prepaid expenses and other 10,203 4,922 Deferred tax assets 45,748 34,000 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 305,317 240,912 - ------------------------------------------------------------------------------------------------------------------------ PROPERTY AND EQUIPMENT Land, buildings and improvements 54,350 51,135 Equipment and tooling 305,647 267,484 - ------------------------------------------------------------------------------------------------------------------------ 359,997 318,619 Less accumulated depreciation (189,674) (150,755) - ------------------------------------------------------------------------------------------------------------------------ Net property and equipment 170,323 167,864 - ------------------------------------------------------------------------------------------------------------------------ INVESTMENTS IN FINANCE AFFILIATE AND RETAIL CREDIT DEPOSIT 52,963 45,468 DEFERRED TAX ASSETS 9,361 11,384 GOODWILL AND OTHER ASSETS, NET 27,199 24,558 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 565,163 $ 490,186 ========================================================================================================================
The accompanying notes are an integral part of these consolidated balance sheets 18
December 31, 2001 2000 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 101,554 $ 89,498 Accrued expenses: Compensation 34,615 30,747 Warranties 33,301 34,216 Sales promotions and incentives 95,280 41,792 Other 27,715 26,234 Income taxes payable 15,872 15,897 - -------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 308,337 238,384 - -------------------------------------------------------------------------------------------------------------------------------- BORROWINGS UNDER CREDIT AGREEMENTS 18,043 47,068 - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities 326,380 285,452 - -------------------------------------------------------------------------------------------------------------------------------- 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, 22,927 and 23,542 shares issued and outstanding 229 235 Additional paid-in capital -- -- Deferred compensation (4,888) (3,300) Retained earnings 248,634 207,613 Accumulated other comprehensive income (loss) (5,192) 186 - -------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 238,783 204,734 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 565,163 $ 490,186 ================================================================================================================================
The accompanying notes are an integral part of these consolidated balance sheets. POLARIS INDUSTRIES INC. 2001 ANNUAL REPORT 19 CONSOLIDATED STATEMENTS OF OPERATIONS in thousands, except per share data
For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------- Sales $ 1,512,042 $ 1,425,678 $ 1,328,620 Cost of sales 1,167,668 1,097,574 1,030,570 - --------------------------------------------------------------------------------------------------------------------- Gross profit 344,374 328,104 298,050 - --------------------------------------------------------------------------------------------------------------------- Operating expenses: Selling and marketing 119,905 122,028 112,116 Research and development 35,708 32,360 31,311 General and administrative 58,943 51,922 40,977 - --------------------------------------------------------------------------------------------------------------------- Total operating expenses 214,556 206,310 184,404 - --------------------------------------------------------------------------------------------------------------------- Operating income 129,818 121,794 113,646 Nonoperating expense (income): Interest expense 7,251 7,704 4,285 Income from financial services (14,355) (14,123) (9,495) Other expense (income), net (2,641) (173) 521 - --------------------------------------------------------------------------------------------------------------------- Income before income taxes 139,563 128,386 118,335 Provision for income taxes 48,149 45,577 42,009 - --------------------------------------------------------------------------------------------------------------------- Net income $ 91,414 $ 82,809 $ 76,326 - --------------------------------------------------------------------------------------------------------------------- Basic net income per share $ 4.00 $ 3.52 $ 3.09 - --------------------------------------------------------------------------------------------------------------------- Diluted net income per share $ 3.88 $ 3.50 $ 3.07 - --------------------------------------------------------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding: Basic 22,864 23,501 24,732 - --------------------------------------------------------------------------------------------------------------------- Diluted 23,567 23,666 24,900 - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME in thousands
Accumulated Additional Compensation Other Common Paid-in Deferred Payable in Retained Comprehensive Stock Capital Compensation Common Stock Earnings Income (Loss) Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 253 $ 48,622 $ (6,726) $ 6,844 $ 104,240 $ -- $ 153,233 First Rights conversion to stock -- 323 -- (286) 7 -- 44 Employee stock compensation 4 12,439 (1,092) (583) -- -- 10,768 Cash dividends declared, $0.80 per share -- -- -- -- (19,732) -- (19,732) Repurchase and retirement of common shares (15) (52,397) -- -- -- -- (52,412) Net income -- -- -- -- 76,326 -- 76,326 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 242 8,987 (7,818) 5,975 160,841 -- 168,227 Employee stock compensation 5 15,234 4,518 (5,975) -- -- 13,782 Cash dividends declared, $0.88 per share -- -- -- -- (20,648) -- (20,648) Repurchase and retirement of common shares (12) (24,221) -- -- (15,389) -- (39,622) Comprehensive income: Net income -- -- -- -- 82,809 Foreign currency translation adjustments -- -- -- -- -- 186 Total comprehensive income 82,995 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 235 -- (3,300) -- 207,613 186 204,734 Employee stock compensation 5 21,649 (1,588) -- -- -- 20,066 Cash dividends declared, $1.00 per share -- -- -- -- (22,846) -- (22,846) Repurchase and retirement of common shares (11) (21,649) -- -- (27,547) -- (49,207) Comprehensive income net of tax: Net income -- -- -- -- 91,414 Foreign currency translation adjustment -- -- -- -- -- (160) Effect of adoption of SFAS No. 133 -- -- -- -- -- (2,544) Unrealized loss on derivative instruments -- -- -- -- -- (2,674) Total comprehensive income 86,036 - --------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2001 $ 229 $ -- $ (4,888) $ -- $ 248,634 $ (5,192) $ 238,783 =================================================================================================================================
The accompanying notes are an integral part of these consolidated statements. POLARIS INDUSTRIES INC. 2001 ANNUAL REPORT 21 CONSOLIDATED STATEMENTS OF CASH FLOWS in thousands
For the Years Ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 91,414 $ 82,809 $ 76,326 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 52,550 46,997 39,281 Noncash compensation 15,455 11,820 9,586 Noncash income from financial services (12,463) (14,123) (9,495) Deferred income taxes (9,725) 1,616 3,000 Changes in current operating items: Trade receivables 11 (2,837) (10,258) Inventories (9,226) (25,429) (10,626) Accounts payable 12,056 (2,307) 14,547 Accrued expenses 57,922 4,407 7,887 Income taxes payable (25) 2,484 6,402 Others, net (9,388) 2,229 (2,296) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 188,581 107,666 124,354 =========================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (53,982) (63,056) (65,063) Investments in finance affiliate and retail credit deposit (31,479) (8,857) (11,366) Distributions from finance affiliate and retail credit deposit 36,448 13,199 9,437 Other (3,753) (512) -- - --------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (52,766) (59,226) (66,992) =========================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit agreements 717,596 502,621 501,275 Repayments under credit agreements (746,621) (495,553) (481,775) Repurchase and retirement of common shares (49,207) (39,622) (52,412) Cash dividends to shareholders (22,846) (20,648) (19,732) Proceeds from the exercise of stock options 3,424 947 -- - --------------------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (97,654) (52,255) (52,644) =========================================================================================================================== Increase (decrease) in cash and cash equivalents 38,161 (3,815) 4,718 CASH AND CASH EQUIVALENTS Beginning 2,369 6,184 1,466 - --------------------------------------------------------------------------------------------------------------------------- Ending $ 40,530 $ 2,369 $ 6,184 =========================================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the year $ 35,091 $ 40,957 $ 36,620 - --------------------------------------------------------------------------------------------------------------------------- Income taxes paid during the year $ 55,548 $ 43,044 $ 38,651 ===========================================================================================================================
The accompanying notes are an integral part of these consolidated statements. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Polaris Industries Inc. ("Polaris" or the "Company") a Minnesota corporation, and its subsidiaries, are 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 all-terrain vehicles, snowmobiles, motorcycles and personal watercraft. Polaris products, together with related parts, garments and accessories are sold worldwide through a network of dealers, distributors and its subsidiaries located in the United States, Canada, France and Australia. BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Polaris and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. CASH EQUIVALENTS: Polaris considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents and are stated at cost, which approximates fair value. 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 (Note 2). 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, 2001 2000 - ------------------------------------------------------------------------ Raw materials and purchased components $ 22,107 $ 27,670 Service parts, garments and accessories 53,573 50,407 Finished goods 77,037 65,414 - ------------------------------------------------------------------------ $152,717 $143,491 ========================================================================
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 10-40 years for buildings and improvements and from 1-7 years for equipment and tooling. Fully depreciated tooling is eliminated from the accounting records annually. GOODWILL AND OTHER ASSETS: Goodwill and intangible assets are stated net of accumulated amortization which totaled $14,348,000 at December 31, 2001, and $13,322,000 at December 31, 2000. Goodwill consists of cost in excess of the net assets of the business acquired which is amortized on a straight-line basis over 5-40 years. Intangible assets are amortized using the straight-line method over their estimated useful lives ranging from 5-17 years. Polaris periodically assesses the amortization period and recoverability of the carrying amount of its goodwill and intangible assets to determine potential impairment based upon expected future cash flows from the related business. To date, management has determined no such impairment exists. In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS 142. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. As of December 31, 2001, the Company has unamortized goodwill of $24,434,000 that will be subject to the transition provisions of SFAS 142. The Company is in the process of completing an impairment test to determine the impact of adopting SFAS 142 on its earnings and financial position, and believes that the results of such analyses will not result in any transitional impairment losses. Application of the non-amortization provisions of SFAS 142 is expected to result in an increase in pre-tax income of approximately $800,000 in fiscal 2002. PRODUCT WARRANTIES: Polaris provides a limited warranty for ATVs for a period of six months and for a period of one year for its snowmobiles, motorcycles and PWC products. Polaris' standard warranties require the Company or its dealers to repair or replace defective product during such warranty period at no cost to the consumer. The warranty reserve is established at the time of sale to the dealer or distributor based on management's best estimate using historical rates and trends. Adjustments to the warranty reserve are made from time to time as actual claims become known in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. SALES PROMOTIONS AND INCENTIVES: Polaris generally provides for estimated sales promotion and incentive expenses, which are recognized as a sales reduction, at the time of sale to the dealer or distributor. Examples of sales promotion and incentive programs include dealer and consumer rebates, volume discounts, financing programs and sales associate incentives. Sales promotion and incentive expenses are estimated based on current programs and historical rates for each product line. In addition, Polaris provides a dealer incentive program whereby at the time of shipment Polaris withholds an amount until ultimate retail sale of the product. Polaris records this amount as a liability in the accompanying consolidated balance sheets as a component of Sales promotions and incentives accrual of $69,996,000 and $20,676,000 at December 31, 2001 and 2000, respectively. FOREIGN CURRENCY TRANSLATION: Polaris' Canadian and Australian subsidiaries use the U.S. dollar as their functional currencies. Polaris' French subsidiary uses the Euro as its functional currency. Assets and liabilities for Polaris' French subsidiary are translated at the foreign exchange rates in effect at the balance sheet date. Assets and liabilities for the Canadian and Australian subsidiaries are remeasured in U.S. dollars at their historical rates. Translation gains and losses from remeasurement of assets and liabilities that are not denominated in the functional currency are reflected in the results of operations for the Canadian and Australian subsidiaries. Translation gains and losses are reflected as a component of Accumulated other comprehensive income in the equity section of the balance sheet for the French subsidiary. POLARIS INDUSTRIES INC. 2001 ANNUAL REPORT 23 REVENUE RECOGNITION: Revenues are recognized at the time of shipment to the dealer or distributor. Product returns, whether in the normal course of business or resulting from repossession under its customer financing program (Note 2), have not been material. Polaris provides for estimated sales promotion expenses which are recognized as a reduction of sales when products are sold to the dealer or distributor customer. MAJOR SUPPLIER: During 2001, 2000, and 1999, purchases of engines and related components totaling 12, 15 and 15 percent respectively of Polaris' cost of sales were from a single Japanese supplier. Polaris has agreed with the supplier to share the impact of fluctuations in the exchange rate between the U.S. dollar and the Japanese yen. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES SFAS No. 133: Polaris adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The effect of adopting SFAS 133 was to establish the fair market value of certain interest rate swap agreements and foreign exchange contracts. The cumulative effect of adoption was $2,544,000, net of tax, and is reflected in accumulated other comprehensive income (loss) in the accompanying consolidated statements of shareholders' equity and comprehensive income. Interest rate swap agreement: At January 1, 2001, Polaris had two interest rate swap agreements on $38,000,000 of long term debt. One swap agreement, related to $18,000,000 of debt and expiring in 2007, has been designated as and meets the criteria as a cash flow hedge. Initial adoption of SFAS 133 resulted in the recording of a liability for the fair value of this swap agreement of $1,283,000. The other swap agreement, relating to $20,000,000 of debt, did not meet the criteria for hedge accounting. Initial adoption of SFAS 133 resulted in the recording of a liability of $53,000 with a corresponding charge to operations. On May 21, 2001 this swap agreement was terminated resulting in a charge to operations of $378,000. Foreign exchange contracts: Polaris enters into foreign exchange contracts to manage currency exposures of certain of its purchase commitments denominated in foreign currencies and transfers of funds from its Canadian subsidiary. Polaris does not use any financial contracts for trading purposes. The contracts have been designated as and meet the criteria for cash flow hedges. At January 1, 2001, Polaris had open Japanese yen foreign exchange contracts with notional amounts totaling $64,997,000 U.S. dollars. Initial adoption of SFAS 133 resulted in the recordings of a liability of $2,601,000 for the fair value of the foreign exchange contracts. At December 31, 2001, Polaris had open Japanese yen contracts with notional amounts totaling U.S. $76,182,000 and a net liability fair market value of $5,989,000. Comprehensive income: Comprehensive income reflects the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income represents net income adjusted for foreign currency translation adjustments and the gain/loss on derivative instruments. The Company has chosen to disclose comprehensive income in the accompanying consolidated statements of shareholders equity and comprehensive income. NEW ACCOUNTING PRONOUNCEMENTS: In April 2001, the Emerging Issues Task Force (EITF) of the FASB issued EITF No. 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products". EITF No. 00-25 addresses the timing, recognition, and classification in the income statement of certain promotional costs paid to a retailer or wholesaler by a vendor in connection with the sale of the vendor's products or promotion of sales of the vendor's products by the retailer or wholesaler. This guidance generally requires these costs to be recognized when incurred and reported as a reduction of revenue or an increase to cost of sales and requires restatement of previously reported results to the extent the Company's past accounting practice has differed from the requirements of EITF No. 00-25. The Company will adopt EITF No. 00-25 in the first quarter of 2002, which will result in a reclassification of cooperative advertising expenses resulting in an increase in previously reported cost of sales and a decrease in previously reported selling and marketing expenses by $12,986,000 in 2001, $7,720,000 in 2000 and $10,950,000 in 1999. This will have no impact on previously reported net income. NOTE 2 FINANCING BANK FINANCING: Polaris is a party to two unsecured bank line of credit arrangements under which it may borrow up to $250,000,000 until maturity. Interest is charged at rates based on LIBOR or "prime." A $150,000,000 line of credit expires on June 14, 2004, and a $100,000,000 364-day line of credit expires on June 13, 2002 at which time the outstanding balances are due. The arrangements contain various restrictive covenants which limits investments, acquisitions and indebtedness. The arrangements also require Polaris to maintain certain financial ratios including a minimum tangible net worth, a minimum interest coverage and a maximum leverage ratio. Polaris was in compliance with each of the covenants as of December 31, 2001. The following summarizes activity under Polaris' credit arrangements (in thousands):
2001 2000 1999 - ----------------------------------------------------------------------- Total borrowings at December 31 $18,043 $47,068 $40,024 Average outstanding borrowings during year $127,481 $112,141 $80,359 Maximum outstanding borrowings during year $199,500 $148,975 $131,500 Interest rate at December 31 2.50% 7.30% 6.16% =======================================================================
Polaris has entered into an interest rate swap agreement to manage exposures to fluctuations in interest rates. The effect of this agreement is to fix the interest rate at 7.21 percent for $18,000,000 of borrowings under the credit line until July 2007. The fair value of the interest rate swap was a liability of $1,977,000 as of December 31, 2001. LETTERS OF CREDIT: At December 31, 2001, Polaris had open letters of credit totaling approximately $5,100,000. The amounts outstanding are reduced as inventory purchases pertaining to the contracts are received. CUSTOMER FINANCING PROGRAMS: Certain finance companies, including Polaris Acceptance, an affiliate (Note 6), provide floor plan financing to dealers on the purchase of Polaris products. The amount financed by North American dealers under these arrangements at December 31, 2001, was approximately $620,000,000. Polaris has agreed to repurchase products repossessed by the finance companies up to an annual maximum of 15 percent of the average month-end balances outstanding during the prior calendar year. Polaris' financial exposure under these arrangements is limited to the difference between the 24 amount paid to the finance companies for repurchases and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements during the periods presented. As a part of its marketing program, Polaris contributes to the cost of dealer financing up to certain limits and subject to certain conditions. Such expenditures are included with selling and marketing expenses in the accompanying statements of operations. NOTE 3 INCOME TAX MATTERS Components of Polaris' provision for income taxes are as follows (in thousands):
For the Years Ended December 31, 2001 2000 1999 - ---------------------------------------------------------------- Current: Federal $51,766 $41,251 $36,141 State 3,701 2,250 1,550 Foreign 2,407 460 1,318 Deferred (9,725) 1,616 3,000 - --------------------------------------------------------------- Total $48,149 $45,577 $42,009 ===============================================================
Reconciliation of the Federal statutory income tax rate to the effective tax rate is as follows:
For the Years Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------ Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 1.6 1.3 1.0 Foreign sales corporation (1.2) (1.2) (1.2) Other permanent differences (.9) .4 .7 - ---------------------------------------------------------------------------- Effective income tax rate 34.5% 35.5% 35.5% ============================================================================
Polaris utilizes the liability method of accounting for income taxes whereby deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. The net deferred tax assets consist of the following (in thousands):
December 31, 2001 2000 1999 - ----------------------------------------------------------------------- Current deferred tax assets: Inventories $ 4,948 $ 4,857 $ 4,105 Accrued expenses 38,052 29,143 26,895 Derivative instruments 2,748 -- -- - --------------------------------------------------------------------- Total current 45,748 34,000 31,000 - --------------------------------------------------------------------- Noncurrent deferred tax assets: Cost in excess of net assets of business acquired 19,410 21,083 22,982 Property and equipment (14,654) (13,709) (8,857) Compensation payable in common stock 4,605 4,010 1,875 - -------------------------------------------------------------------- Total noncurrent 9,361 11,384 16,000 - -------------------------------------------------------------------- Total $55,109 $45,384 $47,000 ====================================================================
NOTE 4 STOCK-BASED COMPENSATION AND SAVINGS PLAN Polaris sponsors a 401(k) retirement savings plan under which eligible U.S. employees may choose to contribute up to 15 percent of eligible compensation on a pre-tax basis, subject to certain IRS limitations. The Company matches 100 percent of employee contributions up to a maximum of five percent of eligible compensation. Matching contributions were $5,406,000, $5,284,000 and $4,767,000 in 2001, 2000 and 1999, respectively. Polaris maintains a stock option plan (Option Plan) under which incentive and nonqualified stock options for a maximum of 3,100,000 shares of common stock may be issued to certain employees. Options granted to date generally vest three years from the award date and expire after ten years. Polaris maintains a broad based stock option plan (Broad Based Plan) under which incentive stock options for a maximum of 350,000 shares of common stock may be issued to substantially all Polaris employees. Options vest three years from the award date and expire after ten years. Options were granted under this plan during 1999 at an exercise price of $31.56. Polaris maintains a restricted stock plan (Restricted Plan) under which a maximum of 1,050,000 shares of common stock may be awarded as an incentive to certain employees with no cash payments required from the recipient. The restrictions lapse after a three to four year period for awards issued prior to 2000 if Polaris achieves certain performance measures. Awards issued in 2001 and 2000 did not contain performance measures. Shares of restricted stock granted, net of converted, lapsed and forfeited shares, totaled 20,648, 116,995, and 133,440 in 2001, 2000 and 1999, respectively. Polaris sponsors a qualified non-leveraged Employee Stock Ownership Plan (ESOP) under which a maximum of 1,250,000 shares of common stock can be awarded. The shares are allocated to eligible participants accounts based on total cash compensation earned during the calendar year. Shares vest immediately and require no cash payments from the recipient. Substantially all employees are eligible to participate in the ESOP. Total expense related to the ESOP was $8,043,000, $5,888,000 and $6,199,000 in 2001, 2000 and 1999, respectively. As of December 31, 2001 there were 798,153 shares vested in the plan. The following summarizes share activity in the Option and Broad Based Plans, and the weighted average exercise price for the Option Plan:
Broad Option Plan Based Plan ------------------------------------ Weighted Average Exercise Shares Price Shares - ----------------------------------------------------------------------------- Outstanding as of December 31,1998 1,077,725 $36.17 -- Granted 311,970 $32.47 337,900 Exercised (29,768) $29.54 -- Forfeited (19,774) $31.50 (19,300) - ------------------------------------------------------------------------- Outstanding as of December 31,1999 1,340,153 $35.06 318,600 Granted 410,300 $29.96 -- Exercised (31,931) $27.30 -- Forfeited (52,808) $31.94 (28,100) - ------------------------------------------------------------------------- Outstanding as of December 31,2000 1,665,714 $34.42 289,500 Granted 835,934 $48.56 -- Exercised (113,080) $30.84 -- Forfeited (39,804) $31.72 (27,450) - ------------------------------------------------------------------------- Outstanding as of December 31,2001 2,348,764 $36.54 262,050 =========================================================================
The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable ----------------------------------------------------------------- Weighted Weighted Weighted Range of Number Average Average Number Average Exercisable Outstanding Remaining Exercise Exercisable Exercise Options at 12/31/01 Contractual Life Price at 12/31/01 Price - --------------------------------------------------------------------------------------------- $25.75 to $ 36.63 1,524,064 6.8 $ 31.82 351,204 $ 30.87 $36.64 to $ 49.44 586,750 9.5 $ 44.26 -- -- $49.45 to $ 58.66 500,000 8.1 $ 54.06 250,000 $ 49.45 =============================================================================================
The weighted average exercise price of options exercisable as of December 31, 2001, 2000 and 1999 were $33.23, $29.37 and $30.91 respectively. The weighted average remaining contractual life of outstanding options was 7.6 years as of December 31, 2001, 2000 and 1999. POLARIS INDUSTRIES INC. 2001 ANNUAL REPORT 25 Polaris maintains a nonqualified deferred compensation plan (Director Plan) under which directors who are not Polaris officers or employees can elect to receive common stock equivalents in lieu of director's fees, which will be converted into common stock when board service ends. A maximum of 75,000 shares of common stock has been authorized under this plan of which 23,431 equivalents have been earned and 17,773 shares have been issued to retired directors as of December 31, 2001. Polaris accounts for all stock based compensation plans under APB Opinion No. 25,under which compensation costs of $15,455,000, $11,820,000 and $9,586,000, were recorded in 2001, 2000 and 1999, respectively. Had compensation costs for these plans been recorded at fair value consistent with the methodology prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation," Polaris' net income and net income per share would have been reduced to the following pro forma amounts:
2001 2000 1999 - --------------------------------------------------------------------- Net income (in thousands): As reported $91,414 $82,809 $76,326 Pro forma 87,200 79,640 73,500 Net income per share: As reported $ 3.88 $ 3.50 $ 3.07 Pro forma 3.70 3.37 2.95 - -------------------------------------------------------------------
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:
2001 2000 1999 - ----------------------------------------------------------------- Risk free interest rate 5.1% 6.4% 6.6% Expected life 7 years 7 years 7 years Expected volatility 17% 18% 23% Expected dividend yield 1.9% 2.4% 2.2% - ---------------------------------------------------------------
The weighted average fair values at the grant dates of shares awarded under the above plans are as follows:
2001 2000 1999 - --------------------------------------------------------------- Option Plan $ 7.30 $ 6.73 $ 8.99 Restricted Plan $ 48.56 $ 29.96 $ 32.47 ESOP $ 46.57 $ 33.04 $ 36.25 Broad Based Plan $ -- $ -- $ 8.99 - -------------------------------------------------------------
NOTE 5 SHAREHOLDERS' EQUITY STOCK REPURCHASE PROGRAM: The Polaris Board of Directors has authorized the cumulative repurchase of up to 9,500,000 shares of the Company's common stock. During 2001, Polaris paid $49,207,000 to repurchase and retire 1,083,000 shares. Cumulative repurchases through December 31, 2001 were 6,864,000 shares for $232,459,000. SHAREHOLDER RIGHTS PLAN: During 2000, the Polaris Board of Directors adopted a shareholder rights plan. Under the plan, a dividend of preferred stock purchase rights will become exercisable if a person or group should acquire 15 percent or more of the Company's stock. The dividend will consist of one purchase right for each outstanding share of the Company's common stock held by shareholders of record on June 1, 2000. Each right will entitle its holder to purchase one-hundredth of a new series of junior participating preferred stock at an exercise price of $150, subject to adjustment. The rights expire in 2010 and may be redeemed earlier by the Board of Directors for $0.01 per right. NET INCOME PER SHARE: Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each year, including shares earned under the Director Plan and the ESOP. Diluted earnings per share is computed under the treasury stock method and is calculated to compute the dilutive effect of outstanding stock options and certain shares issued under the Restricted Plan. A reconciliation of these amounts is as follows (in thousands, except per share data):
2001 2000 1999 - ---------------------------------------------------------------------- Net income available to common shareholders $ 91,414 $ 82,809 $ 76,326 ===================================================================== Weighted average number of common shares outstanding 22,669 23,304 24,539 Director Plan 25 27 23 ESOP 170 170 170 - --------------------------------------------------------------------- Common shares outstanding --basic 22,864 23,501 24,732 - --------------------------------------------------------------------- Dilutive effect of 266 31 -- Restricted Plan Dilutive effect of Option Plan 437 134 168 - --------------------------------------------------------------------- Common and potential common shares outstanding--diluted 23,567 23,666 24,900 ===================================================================== Basic earnings per share $ 4.00 $ 3.52 $ 3.09 ===================================================================== Diluted earnings per share $ 3.88 $ 3.50 $ 3.07 =====================================================================
Stock Purchase Plan: Polaris maintains an Employee Stock Purchase Plan (Purchase Plan). A total of 750,000 shares of common stock are reserved for this plan. The Purchase Plan permits eligible employees to purchase common stock at 85 percent of the average market price each month. As of December 31, 2001, approximately 131,000 shares have been purchased under this plan. NOTE 6 FINANCIAL SERVICES ARRANGEMENTS In 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with a wholly owned subsidiary of Transamerica Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris' dealers in the United States. Polaris' subsidiary has a 50 percent equity interest in Polaris Acceptance. The receivable portfolio is recorded on Polaris Acceptance's books, which is consolidated onto TDF's books and is funded 85 percent with TDF debt and 15 percent by cash investment shared equally between the two partners. Polaris has not guaranteed the outstanding indebtedness of Polaris Acceptance. Substantially all of Polaris' U.S. sales are financed through Polaris Acceptance whereby Polaris receives payment within a few days of shipment of the product. The amount financed for dealers under this arrangement at December 31, 2001 was approximately $547,309,000. Polaris' trade receivables from Polaris Acceptance were $11,891,000 and $19,866,000 at December 31, 2001 and 2000, respectively. Beginning in 1999, Polaris Acceptance entered into an income sharing agreement with Transamerica Retail Financial Services (TRFS), a subsidiary of TDF. TRFS provides private label retail credit financing to Polaris consumers through Polaris dealers in the United States. In October 2001, TRFS sold a significant portion of the retail portfolio to Household Bank, N.A. The remaining amount financed by consumers through TDF at December 31, 2001 was approximately $16,000,000. Polaris' investment in Polaris Acceptance at December 31, 2001 of $41,826,000 is accounted for under the equity method, and is recorded as a component of Investments in Finance Affiliate and Retail Credit Deposit in the accompanying consolidated balance sheets. The partnership agreement provides that all income and losses of the floor plan and retail credit portfolio are shared 50 percent to Polaris' wholly owned subsidiary and 50 percent to TDF's wholly owned subsidiary. Polaris' allocable share of the income of Polaris Acceptance has been included as a component of income from financial services in the 26 accompanying statements of operations. Summarized financial information for Polaris Acceptance is presented as follows (in thousands):
December 31, 2001 2000 - -------------------------------------------------------------------- Revenues $ 46,233 $ 57,721 Interest and operating expenses 21,307 29,475 - ------------------------------------------------------------------- Net income before income taxes $ 24,926 $ 28,246 - ------------------------------------------------------------------- Finance receivables, net $547,309 $482,771 Other assets 2,871 2,233 - ------------------------------------------------------------------- $550,180 $485,004 =================================================================== Notes payable $461,190 $385,465 Other liabilities 9,570 11,171 Partners' capital 79,420 88,368 - ------------------------------------------------------------------- $550,180 $485,004 ===================================================================
In October 2001, a wholly owned subsidiary of Polaris entered into an agreement with Household Bank, N.A. (Household) to provide private label retail credit financing to Polaris consumers through Polaris dealers in the United States. The receivable portfolio is owned and managed by Household and is funded 85 percent with Household debt and 15 percent cash deposit shared equally between the two parties. The amount financed by consumers under this arrangement at December 31, 2001 was approximately $160,000,000. Polaris' deposit in the retail credit portfolio of $11,137,000 at December 31, 2001 was reflected as a component of Investments in Finance Affiliate and Retail Credit Deposit in the accompanying consolidated balance sheet. The income sharing agreement with Household provides that all income and losses of the retail credit portfolio are shared 50 percent to Polaris and 50 percent to Household. Polaris' allocable share of the income from the retail credit portfolio has been included as a component of income from financial services in the accompanying consolidated statements of operations. Under the terms of the agreement, either party has the right to terminate the agreement if profitability of the portfolio falls below certain minimum levels. Polaris' financial exposure under this agreement is limited to its deposit plus an aggregate amount of not more than $15,000,000. Polaris also provides extended service contracts to consumers and certain insurance contracts to dealers and consumers through various third-party suppliers. Polaris does not retain any warranty, insurance or financial risk in any of these arrangements. Polaris' service fee income generated from these arrangements has been included as a component of income from financial services in the accompanying consolidated statements of operations. NOTE 7 INVESTMENT IN MANUFACTURING AFFILIATE Polaris is a partner with Fuji Heavy Industries Ltd. in Robin Manufacturing, U.S.A. (Robin). Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Polaris' investment at December 31, 2001 of $2,765,000 in Robin is accounted for under the equity method, and is recorded as a component of Goodwill and other assets in the accompanying consolidated balance sheets. Polaris' allocable share of the income of Robin has been included as a component of non-operating other expense (income) in the accompanying consolidated statements of operations. NOTE 8 COMMITMENTS AND CONTINGENCIES PRODUCT LIABILITY: Polaris is subject to product liability claims in the normal course of business. Polaris carries excess product liability insurance coverage for catastrophic product liability claims for incidents that exceed its self-insured retention level. 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. The Company utilizes historical trends and actuarial analysis tools to assist in determining the appropriate loss reserve levels. At December 31, 2001 the Company has accrued $5,865,000 for the defense and possible payment of pending claims, which reserve is included as a component of the other accrued expenses in the accompanying consolidated balance sheets. LITIGATION: Polaris is a defendant in lawsuits and subject to claims arising in the normal course of business. In the opinion of management, it is not a probability that any legal proceedings pending against or involving Polaris will have a material adverse effect on Polaris' financial position or results of operations. LEASES: Polaris leases buildings and equipment under noncancelable operating leases. Total rent expense under all lease agreements was $2,128,000, $2,275,000, and $2,295,000, for 2001, 2000 and 1999, respectively. Future minimum payments, exclusive of other costs, required under noncancelable operating leases at December 31, 2001, total $3,763,000 cumulatively through 2004. NOTE 9 SEGMENT REPORTING Polaris has reviewed SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and determined that the Company meets the aggregation criteria outlined since the Company's segments have similar (1) economic characteristics, (2) product and services, (3) production processes, (4) customers, (5) distribution channels, and (6) regulatory environments. Therefore, the Company reports as a single business segment. The following data relates to Polaris' foreign operations (in thousands of U.S. dollars):
For the Years Ended December 31, 2001 2000 1999 - -------------------------------------------------------------------------- Canadian subsidiary: Sales $ 181,493 $ 151,906 $ 145,856 Identifiable assets 23,906 22,344 23,568 Other foreign countries: Sales 88,071 83,309 68,315 Identifiable assets 17,040 9,212 4,643 - -------------------------------------------------------------------------
NOTE 10 QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share data)
Diluted Net Gross Net Income Sales Profit Income Per Share - --------------------------------------------------------------------------------------------------- 2001 First Quarter $ 294,021 $ 65,836 $ 10,423 $ 0.44 Second Quarter 362,499 74,301 17,077 0.72 Third Quarter 431,133 102,861 32,207 1.38 Fourth Quarter 424,389 101,376 31,707 1.35 - --------------------------------------------------------------------------------- Totals $1,512,042 $ 344,374 $ 91,414 $ 3.88 ================================================================================================== 2000 First Quarter $ 279,072 $ 61,547 $ 9,749 $ 0.41 Second Quarter 344,698 74,866 16,188 0.68 Third Quarter 401,259 98,886 29,266 1.24 Fourth Quarter 400,649 92,805 27,606 1.17 - --------------------------------------------------------------------------------- Totals $1,425,678 $ 328,104 $ 82,809 $ 3.50 ==================================================================================================
POLARIS INDUSTRIES INC. 201 ANNUAL REPORT 27 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, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity and comprehensive income and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of Polaris' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Minneapolis, Minnesota January 23, 2002 [POLARIS LETTERHEAD] INVESTOR INFORMATION [PII SYMBOL] [NYSE SYMBOL] STOCK EXCHANGES Shares of common stock of Polaris Industries Inc. trade on the New York Stock Exchange and on the Pacific Stock Exchange under the symbol PII. INDEPENDENT AUDITORS FOR 2001 Arthur Andersen LLP Minneapolis, MN TRANSFER AGENT AND REGISTRAR Communications concerning transfer requirements, address changes, dividends and lost certificates, as well as requests for Dividend Reinvestment Plan enrollment information, should be addressed to: Wells Fargo Bank Minnesota, N.A. Shareowner Services 161 North Concord Exchange South St. Paul, MN 55075-1139 1-800-468-9716 www.wellsfargo.com/com/shareowner_services FORM 10-K The Form 10-K annual report to the Securities and Exchange Commission is available without charge to shareholders upon written request to: Investor Relations Polaris Industries Inc. 2100 Highway 55 Medina, MN 55340 ANNUAL SHAREHOLDERS' MEETING The meeting will be held at 9 a.m., Thursday, May 2, 2002, at the Polaris Industries Inc. corporate headquarters, 2100 Highway 55, Medina, Minn. A proxy statement will be mailed on or about March 29, 2002, to each shareholder of record on March 12, 2002. SUMMARY OF TRADING
For the Years Ended December 31, 2001 2000 - -------------------------------------------------------------------------------- Quarter HIGH LOW High Low - -------------------------------------------------------------------------------- First $51.65 $38.13 $36.25 $25.56 Second 47.00 36.00 32.94 27.63 Third 51.36 35.10 36.25 29.19 Fourth 58.70 37.30 42.06 32.06 ================================================================================
CASH DIVIDENDS DECLARED Cash dividends are declared quarterly and have been paid since 1995. As of January 24, 2002, the quarterly dividend was increased to $0.28 per share.
Quarter 2001 2000 - -------------------------------------------------------------------------------- First $ 0.25 $ 0.22 Second 0.25 0.22 Third 0.25 0.22 Fourth 0.25 0.22 - -------------------------------------------------------------------------------- Total $ 1.00 $ 0.88 ================================================================================
STOCKHOLDERS OF RECORD Shareholders of record of the Company's common stock on March 1, 2002 were 2,592. DIVIDEND REINVESTMENT PLAN Shareholders may automatically reinvest their dividends in additional Polaris common stock through the Dividend Reinvestment Plan, which also provides for purchase of common stock by voluntary cash contributions. For additional information, please write, phone or visit the Wells Fargo Bank shareowner services Web site. PRODUCT BROCHURES For product brochures and dealer locations write or call: Polaris Industries Inc. 2100 Highway 55 Medina, MN 55340 1-800-Polaris (1-800-765-2747) INTERNET ACCESS To view the Company's annual report and financial information, products and specifications, press releases, and dealer locations, access Polaris on the Internet at: www.polarisindustries.com www.victory-usa.com INVESTOR RELATIONS Security analysts and investment professionals should direct their business-related inquiries to: Richard Edwards Director Investor Relations Polaris Industries Inc. 2100 Highway 55 Medina, MN 55340 763-513-3477 richard.edwards@polarisind.com EX-21 5 c68167ex21.txt SUBSIDIARIES EXHIBIT 21 REGISTRANT POLARIS INDUSTRIES INC.
State or Other Jurisdiction Name of Subsidiary of Incorporation or ------------------ Organization --------------------------- Polaris Industries Inc. Delaware Polaris Real Estate Corporation of Iowa, Inc. Delaware Polaris Real Estate Corporation Delaware Polaris Industries Export Ltd. Barbados Polaris Industries Ltd. Manitoba, Canada Polaris Acceptance Inc. Minnesota Polaris Sales Inc. Minnesota Polaris Industries Manufacturing LLC Minnesota Polaris Direct Inc. Minnesota Polaris Sales Australia Pty Ltd. Australia Polaris France France Polaris Britain Limited England
EX-23 6 c68167ex23.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF ARTHUR ANDERSEN LLP Consent of independent public accountants As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-57503, 33-60157, 333-05463, 333-21007, 333-77765, 333-94451 and 333-84478. Arthur Andersen LLP Minneapolis, Minnesota March 18, 2002 EX-24 7 c68167ex24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY (FORM 10-K) KNOW ALL MEN BY THESE PRESENTS, that POLARIS INDUSTRIES INC., a Minnesota corporation (the "Company"), and each of the undersigned directors of the Company, hereby constitutes and appoints Thomas C. Tiller and Michael W. Malone and each of them (with full power to each of them to act alone) its/his true and lawful attorney-in-fact and agent, for it/him and on its/his behalf and in its/his name, place and stead, in any and all capacities to sign, execute, affix its/his seal thereto and file the Annual Report on Form 10-K for the year ended December 31, 2001 under the Securities Exchange Act of 1933, as amended, with any amendment or amendments thereto, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority. There is hereby granted to said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in respect of the foregoing as fully as it/he or itself/himself might or could do if personally present, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same instrument and any of the undersigned directors may execute this Power of Attorney by signing any such counterpart. POLARIS INDUSTRIES INC. has caused this Power of Attorney to be executed in its name by its Chief Executive Officer on the 24th day of January, 2002. POLARIS INDUSTRIES INC. By /s/ Thomas C. Tiller ------------------------------------ Thomas C. Tiller Chief Executive Officer The undersigned, directors of POLARIS INDUSTRIES INC., have hereunto set their hands as of the 24th day of January, 2002. /s/ Andris A. Baltins /s/ Thomas C. Tiller - ------------------------------------ ------------------------------------- Andris A. Baltins Thomas C. Tiller /s/ J. Richard Stonesifer /s/ Robert S. Moe - ------------------------------------ ------------------------------------- J. Richard Stonesifer Robert S. Moe /s/ William E. Fruhan, Jr. /s/ R. M. (Mark) Schreck - ------------------------------------ ------------------------------------- William E. Fruhan, Jr. R. M. (Mark) Schreck /s/ John R. Menard, Jr. /s/ Gregory R. Palen - ------------------------------------ -------------------------------------- John R. Menard, Jr. Gregory R. Palen /s/ Richard A. Zona /s/ W. Hall Wendel, Jr. - ------------------------------------ ------------------------------------- Richard A. Zona W. Hall Wendel, Jr. D I R E C T O R S

EX-99 8 c68167ex99.txt LETTER TO SEC REPRESENTATIONS OF ARTHUR ANDERSEN EXHIBIT 99 [POLARIS INDUSTRIES INC. LETTERHEAD] March 22, 2002 United States Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 Dear Sir or Madam: This letter is being furnished to you pursuant to Temporary Note 3T to Article 3 of Regulation S-X in connection with the filing of the Form 10-K (the "Form 10-K") of Polaris Industries Inc. (the "Company") for the fiscal year of the Company ended December 31, 2001. Item 8 of the Form 10-K incorporates by reference the financial statements required by such Item and the report of Arthur Andersen LLP ("Andersen"), as the Company's independent public accountant for the year ended December 31, 2001 with respect to such financial statements, from the Company's Annual Report to Shareholders for the year ended December 31, 2001. The Form 10-K also contains a financial statement schedule, Schedule II-Valuation and Qualifying Accounts for the fiscal years ended December 31, 2001, 2000 and 1999, and the report of Andersen with respect to such schedule. The Company has received the written representations of Andersen that the audits that were the subject of the reports referred to above were subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Andersen personnel working on the audits, availability of national office consultation, and availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audits. Very truly yours, Polaris Industries Inc. By: /s/ Michael W. Malone Michael W. Malone Vice President-Finance, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----


(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11411






Minnesota		41-1790959
(State or other jurisdiction of incorporation or organization)		(IRS employer identification no.)





2100 Highway 55, Medina, MN		55340
(Address of principal executive offices)		(Zip Code)





(763) 542-0500
(Registrant’s telephone number, including area code)


		Name of each exchange
Title of each class		on which registered

Common Stock, $.01 par value		New York Stock Exchange
		Pacific Stock Exchange


PART I
Item 1. Description of Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
POLARIS INDUSTRIES INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
EXHIBIT INDEX
Revolving Program Agreement
Portions of the Annual Report to Security Holders
Subsidiaries
Consent of Arthur Andersen LLP
Power of Attorney
Letter to SEC Representations of Arthur Andersen


		Owned or		Square
Location	Facility Type/Use	Leased		Footage

Roseau, Minnesota	Whole Goods Manufacturing		Owned		579,000




Osceola, Wisconsin	Component Parts Manufacturing		Owned		190,000




Spirit Lake, Iowa	Whole Goods Manufacturing		Owned		223,000




Osceola, Wisconsin	Engine Manufacturing		Owned		90,000




Roseau, Minnesota	Injection Molding		Owned		58,000




Vermillion, South Dakota	Distribution Center		Owned		250,000




Medina, Minnesota	Headquarters		Owned		130,000




Winnipeg, Manitoba	Office and Warehouse		Leased		42,000




Spirit Lake, Iowa	Warehouse		Leased		11,000




Ballarat, Victoria, Australia	Office and Warehouse		Leased		12,000




Passy, France	Office and Warehouse		Leased		3,500




St. Croix Falls, Wisconsin	Component Parts Manufacturing		Leased		60,000




Mount Gambier, Australia	Warehouse		Leased		4,500

Table of Contents

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Year Ended December 31	ATVs		Snowmobiles		Motorcycles		PWC		PG&A

2001		56%		25%		1%		4%		14%




2000		59%		22%		1%		5%		13%




1999.		57%		24%		3%		4%		12%


Name	Age		Title

W. Hall Wendel, Jr.		59	Chairman of the Board




Thomas C. Tiller		40	Chief Executive Officer and President




Jeffrey A. Bjorkman		42	Vice President — Operations




John B. Corness		47	Vice President — Human Resources




Michael W. Malone		43	Vice President — Finance, Chief Financial Officer and Secretary




Richard R. Pollick		62	Vice President — International




Thomas H. Ruschhaupt		52	Vice President — Sales and Service




Kenneth J. Sobaski		46	Vice President — Marketing and Business Development


Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations


Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


Item 10.	Directors and Executive Officers of the Registrant


Item 12.	Security Ownership of Certain Beneficial Owners and Management


Item 13.	Certain Relationships and Related Transactions


Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K


Signature	Title	Date

* W. Hall Wendel, Jr.	Chairman and Director	March 22, 2002
/s/ THOMAS C. TILLER Thomas C. Tiller.	Chief Executive Officer and Director (Principal Executive Officer)	March 22, 2002
/s/ MICHAEL W. MALONE Michael W. Malone	Vice President Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	March 22, 2002
* Andris A. Baltins	Director	March 22, 2002
* William E. Fruhan, Jr.	Director	March 22, 2002
* John R. Menard, Jr.	Director	March 22, 2002
* Robert S. Moe	Director	March 22, 2002
* Gregory R. Palen	Director	March 22, 2002
* R. M. Schreck	Director	March 22, 2002
* J. Richard Stonesifer	Director	March 22, 2002
* Richard A. Zona	Director	March 22, 2002
*By: /s/ THOMAS C. TILLER (Thomas C. Tiller Attorney-in-Fact)		March 22, 2001


Item 6.	Selected Financial Data


Item 11.	Executive Compensation


	Included in Item 14(a)(3) above.


			Additions
	Balance at		Charged to
	Beginning of		Costs and		Other Changes			Balance at
	Period		Expenses		Add (Deduct)(1)			End of Period

1999: Deducted from asset accounts - Allowance for doubtful accounts receivable	$	1,566	$	1,421	$	(602	)	$	2,385

2000: Deducted from asset accounts - Allowance for doubtful accounts receivable	$	2,385	$	2,519	$	(2,359	)	$	2,545

2001: Deducted from asset accounts - Allowance for doubtful accounts receivable	$	2,545	$	1,858	$	(797	)	$	3,606


(1)	Uncollectible accounts receivable written off, net of recoveries.


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.(	a)	Specimen Stock Certificate of the Company, incorporated by reference to Exhibit 4 to the Form S-4.

	(	b)	Rights Agreement, dated as of May 18, 2000 between the Company and Norwest Bank Minnesota, N.A. (now Wells Fargo Bank Minnesota, N.A.), as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 8-A, filed on May 25, 2000.

	10.(	a)	Agreement for Deferred Compensation and Disability Income and Amendment No. 1 thereto with W. Hall Wendel, Jr. incorporated by reference to Exhibit 10 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1994.

	(	b)	Polaris 401(K) Retirement Savings Plan, incorporated by reference to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 11, 2000 (No. 333-94451)

	(	c)	Polaris Industries Inc. Employee Stock Ownership Plan effective January 1, 1997 incorporated by reference to Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997.

	(	d)	Polaris Industries Inc. 1999 Broad Based Stock Option Plan incorporated by reference to the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 5, 1999 (No. 333-77765)

	(	e)	Management Bonus Plan, incorporated by reference to Exhibit 10(j) to the Form S-1.

	(	f)	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 March 18, 2002 (No. 333-84478).

	(	g)	Polaris Industries Inc. Deferred Compensation Plan for Directors incorporated by reference to Exhibit 10(h) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995.

	(	h)	Joint Venture Agreement between the Company and Transamerica Commercial Finance Corporation, now known as Transamerica Distribution Finance (‘TDF‘) dated February 7, 1996 incorporated by reference to Exhibit 10(i) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995.

	(	i)	Manufacturer’s Repurchase Agreement between the Company and Polaris Acceptance dated February 7, 1996 incorporated by reference to Exhibit 10(j) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995.

	(	j)	Multi-Year Revolving Credit Agreement dated June 14, 2001, among the Company, certain subsidiaries of the Company, the lenders identified therein, Bank of America N.A., as administrative agent and U.S. Bank N.A., as syndication agent and issuing lender, incorporated by reference to Exhibit 10(s) to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2001.