-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BX34F/zv9FIuM/25bRwzHgHK91NznEfkG2UYU0G35dQXgMDgqYGayOMwtgl1/iW1 k1URNt1sfc5q+/rjJ+MEpA== 0001047469-98-012303.txt : 19980331 0001047469-98-012303.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012303 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: POLARIS INDUSTRIES INC/MN CENTRAL INDEX KEY: 0000931015 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] IRS NUMBER: 411790959 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11411 FILM NUMBER: 98577527 BUSINESS ADDRESS: STREET 1: 1225 HIGHWAY 169 N CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6125420500 MAIL ADDRESS: STREET 1: 1225 HIGHWAY 169 N STREET 2: 425 LEXINGTON AVE CITY: MINNESOTA STATE: MN ZIP: 55441 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-11411 POLARIS INDUSTRIES INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1790959 (State or other jurisdiction (IRS employer of incorporation or organization) identification no.) 1225 HIGHWAY 169 NORTH 55441 MINNEAPOLIS, MN (Zip Code) (Address of principal executive offices) (612) 542-0500 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - ---------------------------------------- -------------------------------------- Common Stock, $.01 par value New York Stock Exchange Pacific Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock of the registrant as of March 3, 1998 (based upon the closing reported sale price of the Common Stock at that date on the New York Stock Exchange) held by non-affiliates (23,779,217 shares) was approximately $768,365,949. APPLICABLE ONLY TO CORPORATE REGISTRANTS: Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of March 3, 1998, 26,234,550 shares of Common Stock of the registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997 furnished to the Securities and Exchange Commission (the "1997 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 21, 1998 filed with the Securities and Exchange Commission (the "1998 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. DESCRIPTION OF BUSINESS Polaris Industries Inc. (the "Company"), a Minnesota corporation, was formed in 1994 for the purpose of merging (the "Merger") a subsidiary of the Company into Polaris Industries Partners L.P., a Delaware limited partnership (the "Partnership") and merging Polaris Industries L.P., a Delaware limited partnership, into the Partnership. The Merger took place on December 22, 1994. Upon consummation of the Merger, each unit of Beneficial Assignment of Class A Limited Partnership Interests of the Partnership was exchanged for one share of common stock, $.01 par value of the Company. On December 31, 1996, the Partnership was merged with and into Polaris Industries Inc., a Delaware corporation (the "Operating Subsidiary"). The Company owns 100% of the Operating Subsidiary. The term "Polaris" as used herein refers to the business and operations of the Operating Subsidiary and its predecessors, Polaris Industries Partners L.P. and Polaris Industries L.P. Polaris designs, engineers and manufactures snowmobiles, all terrain recreational and utility vehicles ("ATVs"), motorcycles and personal watercraft ("PWC") and markets them, together with related replacement parts, garments and accessories ("PG&A") through dealers and distributors principally located in the United States, Canada and Europe. Sales of snowmobiles, ATVs and PWC in North America and International sales (each of which includes PG&A for these markets) accounted for the following approximate percentages of Polaris' sales for the periods indicated.
YEAR ENDED DECEMBER 31 SNOWMOBILES ATVS PWC INTERNATIONAL - --------------------------------------------------- ----------------- ----- ----- ------------------- 1997............................................... 42% 45% 7% 6% 1996............................................... 43% 37% 16% 4% 1995............................................... 46% 33% 16% 5%
INDUSTRY BACKGROUND SNOWMOBILES. In the early 1950s, a predecessor to Polaris produced a "gas powered sled" which became the forerunner of the Polaris snowmobile. Snowmobiles have been manufactured under the Polaris name since 1954. Originally conceived as a utility vehicle for northern, rural environments, the snowmobile gained popularity as a recreational vehicle. From the mid-1950s through the late 1960s, over 100 producers entered the snowmobile market and snowmobile sales reached a peak of approximately 495,000 units in 1971. The Polaris product survived the industry decline in which snowmobile sales fell to a low point of approximately 87,000 units in 1983 and the number of snowmobile manufacturers serving the North American market declined to four: Yamaha, Bombardier, Arctic Cat and Polaris. Polaris estimates that industry sales of snowmobiles on a worldwide basis were approximately 261,000 units for the season ended March 31, 1997. ALL TERRAIN VEHICLES. ATVs are four-wheel vehicles with balloon style tires designed for off road use and traversing rough terrain, swamps and marshland. ATVs are used for recreation, in such sports as fishing and hunting, as well as for utility purposes on farms, ranches and construction sites. ATVs were introduced to the North American market in 1971 by Honda. Other Japanese motorcycle manufacturers, Yamaha, Kawasaki and Suzuki, entered the North American market in the late 1970s and early 1980s. By 1980, the number of ATV units sold in the North American market annually had increased to approximately 140,000 units. Polaris entered the ATV market in 1985 and Arctic Cat entered the ATV market in 1995. In 1985, the number of three-and four-wheel ATVs sold in North America peaked at approximately 650,000 units per year. Polaris estimates that, since declining from that level, the industry has stabilized and has experienced modest growth with approximately 445,000 ATVs sold worldwide during the calendar year 1997. 1 MOTORCYCLES. Heavyweight motorcycles are over the road vehicles utilized as a mode of transportation as well as for recreational purposes. There are four segments including cruisers, touring, sportbikes, and standards. Polaris is entering the worldwide motorcycle market in 1998 with an initial entry product in the cruiser segment. U.S. retail cruiser sales nearly doubled from 1993 to 1997. Polaris estimates that approximately 128,000 cruiser motorcycles were sold in the U.S. market in 1997. Other major cruiser motorcycle manufacturers include Harley Davidson, Honda, Yamaha, Kawasaki, Suzuki and BMW. PERSONAL WATERCRAFT. PWC are sit-down versions of water scooter vehicles, and designed for use on lakes, rivers, oceans and bays. PWC are used primarily for recreational purposes and are designed for one, two or three passengers. Polaris entered the PWC market in 1992. After many years of rapid growth, Polaris estimates that worldwide sales for PWC declined during calendar 1997 to approximately 200,000 units. Other major PWC manufacturers are Bombardier, Yamaha, Kawasaki and Arctic Cat. PRODUCTS SNOWMOBILES. Polaris produces a full line of snowmobiles, consisting of thirty-one models, ranging from utility and economy models to performance and competition models, with 1998 model suggested retail prices ranging from approximately $3,200 to $8,500. Polaris snowmobiles are sold principally in the United States, Canada and Europe. Polaris believes it is the worldwide market share leader. Polaris believes that the Polaris snowmobile has a long-standing reputation for quality, dependability and performance. Polaris believes that it and its predecessors were the first to develop several features for commercial use in snowmobiles, including independent front suspension, variable transmission, hydraulic disc brakes, liquid cooled engines and brakes and a three cylinder engine. Polaris also markets a full line of snowmobile accessories, such as luggage, tow hitches, hand warmers, specialized instrumentation, reverse gear, special traction products, cargo racks, oils, lubricants, paints and parts. For the year ended December 31, 1997, North American sales of snowmobiles and related PG&A accounted for approximately 42% of Polaris' sales. ALL TERRAIN VEHICLES. Polaris entered the ATV market in the spring of 1985 with both a three-wheel and a four-wheel product. Polaris currently produces four-wheel ATVs, which provide more stability for the rider than the earlier three-wheel versions. Polaris' line of ATVs consisting of twelve models, includes general purpose, sport and four-wheel drive utility models, with 1998 suggested retail prices ranging from approximately $3,200 to $7,300. In addition, Polaris has a six-wheel off-road utility vehicle and a six-wheel drive off-road Polaris Ranger side by side utility and recreational vehicle. Polaris' ATV features 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 both two cycle and four cycle engines and both shaft and chain drive. In 1997, Polaris introduced the Concentric Drive System which combines advanced rear chain drive with front shaft drive which Polaris believes will deliver improved performance and handling with excellent long-term durability. Prior to 1989, the ATV industry experienced some reduced demand arising from publicity surrounding safety-related and environmental concerns. However, management believes that this market has stabilized since 1989 and has begun to resume modest growth. For the year ended December 31, 1997, North American sales of ATVs and related PG&A accounted for approximately 45% of Polaris' sales. MOTORCYCLES. In 1998, Polaris will begin manufacturing an American-made V-twin cruiser motorcycle, the "Victory V92C." Design and assembly of the engine will occur in Polaris' Osceola, Wisconsin facility 2 and final assembly will occur at Polaris' Spirit Lake, Iowa facility. The two facilities provide sufficient capacity to handle the first few years production of Victory motorcycles. The 1998 Victory V92C motorcycle suggested retail price will be $12,995. PERSONAL WATERCRAFT. In 1992, Polaris introduced the SL650 personal watercraft, Polaris' first entry into this product category. Polaris' line of PWC consisting of five models, includes touring, performance and racing. Management believes that its models had the industry's first three-cylinder engines developed specifically for PWC. The introduction of the PWC made use of Polaris' engineering, production and distribution strengths, and also reduced Polaris' dependence on its then existing product lines for overall sales and earnings. The 1997 suggested retail prices for Polaris' PWC range from approximately $5,900 to $9,400. For the year ended December 31, 1997, North American sales of PWC and related PG&A accounted for approximately 7% of Polaris' sales. INTERNATIONAL. Polaris sales to customers outside of North America include snowmobiles, ATVs, PWC, and related PG&A. Polaris currently markets its products through 54 distributors in 113 countries. This is a growth opportunity for Polaris in the future from a market share perspective for existing product lines as well as the planned introduction of Victory motorcycles to the international market by the year 2000. For the year ended December 31, 1997, International sales accounted for 6% of Polaris' sales. PARTS, GARMENTS AND ACCESSORIES. Polaris produces or supplies a variety of replacement parts and accessories for its snowmobiles, ATVs, motorcycles and PWC. Polaris also markets a full line of recreational clothing, which includes suits, helmets, gloves, boots, hats, sweaters and jackets for its snowmobile, ATV, motorcycle and PWC lines. The clothing is designed to Polaris' specifications, purchased from independent vendors and sold by Polaris through its dealers and distributors under the Polaris brand name. Replacement parts and accessories are also marketed by Polaris. MANUFACTURING OPERATIONS Polaris' products are assembled at its original manufacturing facility at Roseau, Minnesota and since October, 1994 at its facility in Spirit Lake, Iowa. Since snowmobiles, ATVs and PWC incorporate similar technology, substantially the same equipment and personnel are employed in their production. Polaris emphasizes vertical integration in its manufacturing process, which includes machining, stamping, welding, clutch assembly and balancing, painting, cutting and sewing, and manufacture of foam seats. Fuel tanks, hoods and hulls, tracks, tires and instruments, and certain other component parts are purchased from third party vendors. Polaris manufactures a number of other components for its snowmobiles, ATVs and PWC. Raw materials or standard parts are readily available from multiple sources for the components manufactured by Polaris. Polaris' work force is familiar with the use, operation and maintenance of the product, since many employees own snowmobiles, ATVs and PWC. In August of 1991, Polaris acquired a manufacturing facility in Osceola, Wisconsin to manufacture component parts previously produced by third party suppliers. In early 1998, the Victory motorcycle will be in production at Polaris' Spirit Lake, Iowa facility. The production will include welding, finish painting, and final assembly. Certain components, including engine assembly, seat manufacturing, and the bending of frame tubes will be manufactured at the Osceola, Wisconsin facility. In 1997, Polaris broke ground for the construction of a 58,000 square foot plastic injection molding facility adjacent to the Roseau, Minnesota facility. This will be a vertical integration project for Polaris in the manufacture of snowmobile hoods and certain large plastic molded parts on ATVs. The facility is expected to be operational in mid-1998. 3 Pursuant to informal agreements between Polaris and Fuji Heavy Industries Ltd. ("Fuji"), Fuji had been the exclusive manufacturer of the Polaris two-cycle snowmobile engines since 1968. Fuji has manufactured engines for Polaris' ATV products since their introduction in the spring of 1985 and also supplies engines for Polaris' PWC products. Such engines are developed by Fuji to the specific requirements of Polaris. Polaris believes its relationship with Fuji to be excellent. If, however, its informal relationship were terminated by Fuji, interruption in the supply of engines would adversely affect Polaris' production pending the continued development of substitute supply arrangements. Since October, 1995, Polaris has been designing and producing its own engines for selected models of PWC and snowmobiles, and purchased a 90,000 square foot building adjacent to the Osceola facility to house the manufacturing of these Polaris designed and built domestic engines. In addition, in February, 1995, Polaris entered into an agreement with Fuji to form Robin Manufacturing, U.S.A. ("Robin"). Under the agreement, Polaris made an investment for a 40% ownership position in Robin, which builds engines in the United States for recreational and industrial products. Potential advantages to Polaris of these additional sources of engines include reduced foreign exchange risk, lower shipping costs and less dependence in the future on a single supplier for engines. Polaris anticipates no significant difficulties in obtaining substitute supply arrangements for other raw materials or components for which it relies upon limited sources of supply. Polaris' products are shipped from its manufacturing facilities by a contract carrier. PRODUCTION SCHEDULING Snowmobiles are used principally in the northern United States, Canada and northern Europe in what is referred to as the "snow belt." Delivery of snowmobiles to consumers begins in autumn and continues during the winter season. Orders for each year's production of snowmobiles are placed in the spring and orders for ATVs and PWC are placed in autumn after meetings with dealers and distributors, and units are built to order each year. In addition, non-refundable deposits made by consumers to dealers in the spring for snowmobiles assist in production planning. The budgeted volume of units to be produced each year is sold to dealers and distributors prior to production. Sales activity at the dealer level is monitored on a monthly basis for each of snowmobiles, ATVs and PWC. In early 1998, motorcycle production will begin based on orders placed after the initial Victory dealer meeting held in January, 1998. Manufacture of snowmobiles commences in the spring and continues through late autumn or early winter. Polaris manufactures PWC during the fall, winter and spring months. Since May 1993, Polaris has had the ability to manufacture ATVs year round. Generally, Polaris commences ATV production in late autumn and continues through early autumn of the following year. Initially, motorcycles will be manufactured and assembled in the spring and summer. Long term, manufacturing of motorcycles will commence in late autumn and continue through early autumn of the following year. SALES AND MARKETING Polaris products are sold through a network of nearly 2,000 dealers in North America and 54 distributors in 113 countries. With the exception of Illinois, upper Michigan and eastern Wisconsin, where Polaris sells its snowmobiles through an independent distributor, Polaris sells its snowmobiles directly to dealers in the snowbelt regions of the United States and Canada. Snowmobile sales in Europe and other offshore markets are handled through independent distributors. See Note 1 of Notes to Consolidated Financial Statements for discussion of foreign and domestic operations and export sales. 4 Most dealers and distributors of Polaris snowmobiles also distribute Polaris' ATVs and PWC. At the end of 1997, approximately 400 dealerships were located in the southern United States where snowmobiles are not regularly sold. Unlike its primary competitors, which market their ATV products principally through their affiliated motorcycle dealers, Polaris also sells its ATVs and PWC through lawn and garden, boat and marine, and farm implement dealers. Victory motorcycles will be distributed direct through authorized Victory dealers. Polaris has a high quality dealer network in North America for its other product lines from which most of the initial 200 Victory dealers will be selected. Polaris expects to develop a Victory dealer network of approximately 500 to 600 dealers over the next three to four years. Dealers and distributors sell Polaris' products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products, required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. Polaris believes that a sufficient number of qualified dealers and distributors exists in all areas to permit orderly transition whenever necessary. In February, 1996, Polaris entered into a partnership agreement with Transamerica Distribution Finance ("TDF") to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris' dealers and distributors and may in the future provide other financial services to dealers, distributors and retail customers. Under the partnership agreement, Polaris had a 25% equity interest in Polaris Acceptance throughout 1996. In January, 1997, Polaris exercised its option to increase its equity interest in Polaris Acceptance to 50% for an additional investment of approximately $10.4 million. Additionally, Polaris guarantees 50% of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TDF. At December 31, 1997, Polaris' contingent liability with respect to the guarantee was approximately $92.0 million. Polaris has arrangements with Polaris Acceptance, TDF, and Deutsche Financial Services Canada Corporation, a Deutsche Bank Company, to provide floor plan financing for its dealers and distributors. Substantially all of Polaris' sales of snowmobiles, ATVs and PWC are financed under arrangements in which Polaris is paid within a few days of shipment of its product. Polaris participates in the cost of dealer and distributor financing and is required to repurchase products from the finance companies under certain circumstances and subject to certain limitations. Polaris has not historically recorded a sales return allowance because it has not been required to repurchase a significant number of units in the past. However, there can be no assurance that this will continue to be the case. If necessary, Polaris will record a sales return allowance at the time of sale should management anticipate material repurchases of units financed through the finance companies. See Notes 1 and 2 of Notes to Consolidated Financial Statements. Polaris does not directly finance the purchase of Polaris snowmobiles, ATVs or PWC by consumers. However, retail financing plans are offered by certain of the dealers and Polaris has programs to make consumer financing available to its dealers through unaffiliated third parties. Polaris' marketing activities are designed primarily to promote and communicate directly with consumers and secondarily to assist the selling and marketing efforts of its dealers and distributors. From time to time Polaris makes available discount or rebate programs or other incentives for its dealers and distributors to remain price competitive in order to accelerate reduction of retail inventories. Polaris advertises its products directly using print advertising in the industry press and in user group publications, on billboards, and, less extensively, on television and radio. Polaris also provides media advertising and partially underwrites dealer and distributor media advertising to a degree and on terms which vary by product and from year to year. Most dealer and distributor advertising appears in newspapers and on radio. Each season Polaris produces a promotional film for its snowmobiles, ATVs, motorcycles and PWC which is available to dealers for use in the showroom or at special promotions. Polaris also provides 5 product brochures, leaflets, posters, dealer signs, and miscellaneous other promotional items for use by dealers. ENGINEERING, RESEARCH AND DEVELOPMENT, AND NEW PRODUCT INTRODUCTION Polaris employs approximately 290 persons who are engaged in the development and testing of existing products and research and development of new products and improved production techniques. Polaris believes that Polaris and its predecessors were the first to develop, for commercial use, independent front end suspension for snowmobiles, the long travel rear suspension for snowmobiles, direct drive of the snowmobile track, the use of liquid cooling in snowmobile engines and brakes, the use of hydraulic brakes in snowmobiles, the three cylinder engine in snowmobiles and PWC, the adaptation of the MacPherson strut front suspension, "on demand" four-wheel drive systems and the Concentric Drive System for use in ATVs and the application of a forced air cooled variable power transmission system to ATVs. Polaris utilizes internal combustion engine testing facilities to design and optimize engine configurations for its products. Polaris utilizes specialized facilities for matching engine, exhaust system and clutch performance parameters in its products to achieve desired fuel consumption, power output, noise level and other objectives. Polaris' engineering department is equipped to make small quantities of new product prototypes for testing by Polaris' testing teams and for the planning of manufacturing procedures. In addition, Polaris' manufacturing facility in Roseau, Minnesota has a proving ground where each of the products is extensively tested under actual use conditions. Polaris expended for research and development approximately $26.7 million for 1997, $28.3 million for 1996 and $19.9 million for 1995, which amounts were included as a component of operating expenses in the period incurred. COMPETITION The snowmobile, ATV, motorcycle and PWC markets in the United States and Canada are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors including sales and marketing support programs (such as financing and cooperative advertising). Certain of Polaris' competitors are more diversified and have financial marketing resources which are substantially greater than those of Polaris. Polaris snowmobiles, ATVs, motorcycles and PWC are competitively priced and management believes Polaris' sales and marketing support programs for dealers are comparable to those provided by its competitors. Polaris' products compete with many other recreational products for the discretionary spending of consumers, and, to a lesser extent, with other vehicles designed for utility applications. PRODUCT SAFETY AND REGULATION Snowmobiles, ATVs, motorcycles and PWC are motorized machines which may be operated at high speeds and in a careless or reckless manner. Accidents involving property damage, personal injuries and deaths occur in the use of snowmobiles, ATVs, motorcycles and PWC. Laws and regulations have been promulgated or are under consideration in a number of states relating to the use or manner of use of snowmobiles, ATVs and PWC. State approved trails and recreational areas for snowmobile and ATV use have been developed in response to environmental and safety concerns. Polaris has supported laws and regulations pertaining to safety and noise abatement and believes that its products would be no more adversely affected than those of its competitors by the adoption of any pending laws or regulations. In September 1986, the staff of the Consumer Products Safety Commission ("CPSC") ATV Task Force issued a report on regulatory options for ATVs. The Task Force recommended that the ATV 6 industry voluntarily cease marketing ATVs intended for use by children under 12 years of age. It proposed that warning labels be placed on ATVs intended for use by children under age 14 stating that these ATVs are not recommended for use by children under 12, and on adult-sized ATVs stating that these ATVs are not recommended for use by children under the age of 16. Warning labels were recommended for use on all ATVs stating that operator training is necessary to reduce risk of injury or death. In December 1986, in a follow-up measure to the Task Force Report, the CPSC voted unanimously to continue efforts with the ATV industry to develop a voluntary standard regarding the dynamic stability characteristics of ATVs. In February 1987, the CPSC formally requested that the Justice Department initiate an enforcement action against the ATV industry seeking a voluntary recall of all three-wheel ATVs and four-wheel ATVs sold with the intention that they be used by children under 16, as well as a requirement that ATV purchasers receive "hands-on" training. Except for 1,700 three-wheel models initially produced, Polaris manufactures only four-wheel ATVs and six-wheel off-road vehicle products. Polaris has always placed warning labels on its ATVs stating that they are designed for use only by persons aged 16 or older (which warning was revised in 1987 to provide that only adults over age 18 should operate the vehicle), that operators should always wear approved safety helmets and that riders should complete proper training prior to operating an ATV. On December 30, 1987, Polaris reached an agreement with the CPSC regarding ATV safety. The agreement called for the repurchase of all three-wheel ATVs remaining in the hands of its distributors and dealers, the provision of additional safety oriented point-of-purchase materials in all Polaris ATV dealerships, and the addition of a mandatory "hands on" consumer and dealer safety training program designed to give all Polaris ATV dealers and consumers maximum exposure to safe riding techniques. Polaris conditions its ATV warranties described below under "Product Liability" on completion of the mandatory "hands on" consumer training program. Pursuant to the agreement with the CPSC, Polaris has procedures in place for ascertaining dealer compliance with the provisions of the CPSC consent decree, including random "undercover" on-site inspections of dealerships to ensure compliance with the age restriction. Polaris continually attempts to assure that its dealers are in compliance with the provisions of the CPSC consent decree. Polaris has notified its dealers that it will terminate any dealer it determines to have violated the provisions of the CPSC consent decree. To date, it has terminated or not renewed nine dealers for such reason. The Consent Decree with the CPSC expires in April, 1998. Discussions are proceeding with the CPSC regarding modifications or an extension of the Consent Decree. The Company does not believe that the agreement with the CPSC has had or will have a material adverse effect on Polaris. Nevertheless, there can be no assurance that future recommendations or regulatory actions by the CPSC, the Justice Department or individual states would not have an adverse effect on the Company. Certain state attorneys-general have asserted that the CPSC agreement is inadequate and have indicated that they will seek stricter ATV regulation. Polaris is unable to predict the outcome of such action or the possible effect on its ATV business. California has recently enacted legislation setting maximum emission standards for ATVs and the federal government has proposed legislation setting maximum emission standards for a number of vehicles including ATVs and snowmobiles. Currently Polaris' two-cycle engines do not meet the California emission requirements or those proposed under the federal legislation without technical enhancement, which is under development. However, Polaris has developed and sells ATVs with four-cycle engines that meet the California emission standards. The federal government has also enacted legislation mandating maximum emission standards for PWC beginning in 1999 with annual reductions in permitted maximums through 2006. Currently, Polaris' two-cycle engines for PWC would not meet the new emission requirements without technical enhancement, which is under development. Polaris is unable to predict the ultimate 7 impact of the enacted or proposed legislation on Polaris and its operations. Polaris recently signed an agreement with Outboard Marine Corporation ("OMC") licensing the Ficht fuel injection technology. This technology may be used in Polaris vehicles to meet emission standards in the future, particularly in Polaris vehicles with two-cycle engines. Finally, some states may pass legislation and local ordinances have been and may from time to time be considered and adopted which restrict the use of PWC to specified hours and locations. Polaris is unable to predict the outcome of such actions or the possible effect on its PWC business. However, Polaris continues to monitor these legislative activities together with the industry associations and supports balanced and appropriate programs that educate the customer on safe use of the product and protect the environment. Victory motorcycles will be subject to federal and state emissions, vehicle safety and other standards. Polaris anticipates that its motorcycles will comply fully with all such applicable standards and related regulations. PRODUCT LIABILITY Polaris' product liability insurance limits and coverages had been adversely affected by the general decline in the availability of liability insurance. As a result of the high cost of premiums, and in view of the historically small amount of claims paid by Polaris, Polaris was self-insured from June 1985 to June 1996. In June, 1996 Polaris purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceed a self-insured retention. Product liability claims are made against Polaris from time to time. Since its inception in 1981 through December 31, 1997, Polaris has paid an aggregate of approximately $3.7 million in product liability claims and accrued $7.0 million at December 31, 1997, for the defense and possible payment of pending claims. Polaris believes such accruals are adequate. Polaris does not believe that the outcome of any pending product liability litigation will have a material adverse effect on the operations of Polaris. However, no assurance can be given that its historical claims record, which did not include ATVs prior to 1985, PWC prior to 1992, or motorcycles prior to 1998, will not change or that material product liability claims against Polaris will not be made in the future. Adverse determination of material product liability claims made against Polaris would have a material adverse effect on Polaris' financial condition. See Note 7 of Notes to Consolidated Financial Statements. WARRANTY Polaris warrants its snowmobiles, ATVs, motorcycles and PWC under a "limited warranty" for a period of one year, six months, one year and one year, respectively. Although Polaris employs quality control procedures, a product is sometimes distributed which needs repair or replacement. Historically, product recalls have been administered through Polaris' dealers and distributors and have not had a material effect on Polaris' business. EFFECTS OF WEATHER Lack of snowfall in any year in any particular region of the United States or Canada may adversely affect snowmobile retail sales in that region. Polaris seeks to minimize this potential effect by stressing pre-season sales (see "Production Scheduling") and shifting dealer inventories from one location to another. However, there is no assurance that weather conditions would not have a material effect on Polaris' sales of snowmobiles, ATVs, motorcycles or PWC. EMPLOYMENT Due to the seasonality of the Polaris business and certain changes in production cycles, total employment levels vary throughout the year. During 1997, Polaris employed an average of approximately 2,900 persons. Approximately 780 of its employees are salaried. Polaris considers its relations with its personnel to be excellent. 8 Historically, Polaris' snowmobile business has been seasonal, resulting in significant differences in employment levels during the year. Despite such variations in employment levels, employee turnover has not been high. With the introduction of the ATV line in 1985, Polaris' employment levels have become more stable. Polaris' employees have not been represented by a union since July 1982. YEAR 2000 COMPLIANCE In 1997, Polaris evaluated its computer system year 2000 compliance issues and began a conversion process to address necessary changes. In order for a computer system to be year 2000 compliant, its time sensitive software must recognize a date using "00" as the year 2000 rather than 1900. Polaris has implemented a plan to make its computer systems critical to managing its business year 2000 compliant by the end of 1998 and to make its remaining computer systems year 2000 compliant by the end of 1999. Expenses incurred by Polaris in 1997 to address year 2000 compliance issues were immaterial and Polaris does not expect the level of expenses to be incurred under its conversion program during the next two years to have material impact on its financial results of operations. ITEM 2. PROPERTIES Polaris owns its principal manufacturing facility in Roseau, Minnesota. The facility consists of approximately 509,000 square feet of manufacturing space located on approximately 100 acres. In 1991, Polaris acquired a fabricating facility in order to bring more component parts manufacturing in-house. This facility consists of a 190,000 square foot plant situated on 38 acres and is located in Osceola, Wisconsin. Polaris makes ongoing capital investments in its facilities. In August, 1994, Polaris signed a one-year lease agreement for a 223,000 square foot assembly facility located on 24 acres of land in Spirit Lake, Iowa. Polaris exercised its option to purchase the facility during 1995. Polaris currently uses the facility to assemble all of its PWC product line, certain ATV models and, in 1998, its motorcycle product line. In August, 1995, Polaris purchased a 90,000 square foot building adjacent to the Osceola facility to house the manufacturing of Polaris designed and built domestic engines. These investments have increased production capacity for snowmobiles, ATVs, motorcycles and PWC. The Company believes that Polaris' manufacturing facilities are adequate in size and suitability for its present manufacturing needs. Polaris owns all tooling and machinery (including heavy presses, conventional and computer-controlled welding facilities for steel and aluminum, assembly lines, paint lines, and sewing lines) used in the manufacture of its products. Although Polaris holds numerous patents and uses various registered trademarks and names, it believes that the loss of any of them would not have a material effect on its business. Polaris leases 92,000 square feet of headquarters and warehouse space in Minneapolis, Minnesota from related parties pursuant to a lease that will terminate in 2002. Polaris also leases an additional 13,000 square feet of office space in Minneapolis, Minnesota and 42,000 square feet of office and warehouse space in Winnipeg, Manitoba. Polaris does not anticipate any difficulty in securing alternate facilities on competitive terms, if necessary, upon the termination of any of its leases. Polaris completed construction of a 259,000 square foot PG&A distribution center on 50 acres in Vermillion, South Dakota in 1997. In 1997, Polaris broke ground for the construction of a 58,000 square foot plastic injection molding facility adjacent to the Roseau, Minnesota facility. This will be a vertical integration project for Polaris in the manufacture of snowmobile hoods and certain large plastic molded parts on ATVs. The facility is expected to be operational in mid-1998. ITEM 3. LEGAL PROCEEDINGS Polaris is involved in a number of legal proceedings, none of which is expected to have a material effect on the financial condition or the business of Polaris. 9 Injection Research Specialists commenced an action in 1990 against Polaris in Colorado Federal Court alleging various claims relating to electronic fuel injection systems for snowmobiles. In April 1997, a judgment was entered in favor of Injection Research Specialists, before interest, for $24.0 million in compensatory damages and $10.0 million in punitive damages against Polaris, and $15.0 million in compensatory damages and $8.0 million in punitive damages against Fuji, one of Polaris' engine suppliers. The judgment against Fuji was subsequently reduced on post trial motions to $11.6 million in compensatory damages and no punitive damages. Polaris has appealed the judgment against Polaris and has been advised that Fuji has also appealed the judgment against it. Depending upon the conclusion of the appeal, Polaris may require additional reserves associated with this litigation on its financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names of the executive officers of the Company as of March 3, 1998, their ages, titles, the year first appointed as an executive officer of the Company and employment for the past five years:
NAME AGE TITLE - -------------------------- --- ------------------------------------------------------ W. Hall Wendel, Jr. 55 Chairman and Chief Executive Officer Kenneth D. Larson 57 President and Chief Operating Officer Charles A. Baxter 50 Vice President--Engineering and General Manager Engines Jeffrey A. Bjorkman 38 Vice President--Manufacturing Michael W. Malone 39 Vice President--Finance, Chief Financial Officer and Secretary Thomas H. Ruschhaupt 49 Vice President--Sales and Services Ed Skomoroh 60 Vice President--Marketing
Executive officers of the Company are elected at the discretion of the Board of Directors with no fixed term. There are no family relationships between or among any of the executive officers or directors of the Company. Mr. Wendel has served as Chairman and Chief Executive Officer since the Company's formation in 1994. Mr. Wendel was the Chief Executive Officer of Polaris Industries Capital Corporation ("PICC"), which was the managing general partner of Polaris Industries Associates L.P., which was the operating general partner of Polaris Industries L.P. from 1987 to December 1994. From 1981 to 1987, Mr. Wendel was Chief Executive Officer of a predecessor of Polaris, which was formed to purchase the snowmobile assets of the Polaris E-Z-GO Division of Textron Inc. Before that time, Mr. Wendel was President of the Polaris E-Z-GO Division for two years and prior thereto, held marketing positions as Vice President of Sales and Marketing and National Sales Manager since 1974. Mr. Larson has been President and Chief Operating Officer of the Company since 1994. Mr. Larson was President and Chief Operating Officer of PICC from October 1988 to December 1994. Prior thereto, Mr. Larson was Executive Vice President of The Toro Company and was responsible for its commercial, consumer and international equipment business, and had held a number of general management positions since joining The Toro Company in 1975. Mr. Baxter has been Vice President--Engineering of the Company since December 1994 and held that position with PICC or its predecessor since 1981. Prior thereto, since 1970, Mr. Baxter was employed as Director of Engineering of the Polaris E-Z-GO Division of Textron. 10 Mr. Bjorkman has been Vice President--Manufacturing of the Company since January 1995, and prior thereto held positions of Plant Manager and Manufacturing Engineering Manager since July 1990. Prior to joining Polaris, Mr. Bjorkman was employed by General Motors Corporation in various management positions for nine years. Mr. Malone has been Vice President--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. Ruschhaupt has been Vice President--Sales and Service since March, 1998. Prior to joining Polaris, Mr. Ruschhaupt was employed by Goodyear Tire and Rubber Corporation in various management positions for twenty years. Mr. Skomoroh has been Vice President--Marketing of the Company since February, 1998. Mr. Skomoroh was Vice President--Sales and Marketing of the Company from December 1994 and held that position with PICC since October 1988. Prior thereto, he was Vice President, Polaris Canada and President, Secretary and Director of Polaris Industries, Inc., an Ontario corporation and a wholly owned subsidiary of Polaris Industries Partners L.P. Mr. Skomoroh joined Polaris in 1982 as General Manager, Canada, and was prior thereto the General Manager of the Canadian operations of Arctic Enterprises, Inc., a snowmobile manufacturer. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the caption "Investor Information" included in the Company's 1997 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information under the caption "Selected Financial Data" included in the Company's 1997 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis" included in the Company's 1997 Annual Report is included herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Registrant, included in the Company's 1997 Annual Report, are incorporated herein by reference: Consolidated Balance Sheets--December 31, 1997 and 1996. Consolidated Statements of Operations--Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Shareholders' Equity--Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. Report of Independent Public Accountants. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors of the Registrant The information under the caption "Election of Directors--Information Concerning Nominees and Directors" in the Company's 1998 Proxy Statement is incorporated herein by reference. (b) Executive Officers of the Registrant Information concerning Executive Officers of the Company is included in this Report after Item 4, under "Executive Officers of the Registrant." (c) Compliance with Section 16(a) of the Exchange Act The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's 1998 Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation and Other Information" and "Election of Directors--Directors' Remuneration" in the Company's 1998 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's 1998 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Relationships and Related Transactions" in the Company's 1998 Proxy Statement is incorporated herein by reference. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: (1) Consolidated Financial Statements Information concerning financial statements of Polaris Industries Inc. included in the Company's 1997 Annual Report are incorporated by reference to this Report under Item 8 "Financial Statements and Supplementary Data". (2) Financial Statement Schedules All supplemental financial statement schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. (3) Exhibits The Exhibits to this Report are listed in the Exhibit Index on page E-1. A copy of any of these Exhibits will be furnished at a reasonable cost to any person who was a shareholder of the Company as of March 25, 1998, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to Polaris Industries Inc., 1225 Highway 169 North, Minneapolis, Minnesota 55441, Attention: Investor Relations. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1997. (c) Exhibits Included in Item 14(a)(3) above. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis, State of Minnesota on March 30, 1998. POLARIS INDUSTRIES INC. By: /s/ W. HALL WENDEL, JR. ----------------------------------------- W. Hall Wendel, Jr. CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------ -------------------------- -------------- /s/ W. HALL WENDEL, JR. Chief Executive Officer - ------------------------------------ and Director (Principal March 30, 1998 W. Hall Wendel, Jr. Executive Officer) Vice President--Finance, /s/ MICHAEL W. MALONE Chief Financial Officer - ------------------------------------ and Secretary (Principal March 30, 1998 Michael W. Malone Financial and Accounting Officer) * - ------------------------------------ Director March 30, 1998 Andris A. Baltins * - ------------------------------------ Director March 30, 1998 Raymond J. Biggs * - ------------------------------------ Director March 30, 1998 Beverly F. Dolan * - ------------------------------------ Director March 30, 1998 Kenneth D. Larson * - ------------------------------------ Director March 30, 1998 Robert S. Moe * - ------------------------------------ Director March 30, 1998 Gregory R. Palen * - ------------------------------------ Director March 30, 1998 Stephen G. Shank *By: /s/ W. HALL WENDEL, JR. March 30, 1998 ------------------------------ (W. Hall Wendel, Jr. Attorney-in-Fact)
- ------------------------ * W. Hall Wendel, Jr., pursuant to Powers of Attorney executed by each of the officers and directors listed above whose name is marked by an "*" and filed as an exhibit hereto, by signing his name hereto does hereby sign and execute this Report of Polaris Industries Inc. on behalf of each of such officers and directors in the capacities in which the names of each appear above. 15 POLARIS INDUSTRIES INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBIT NUMBER DESCRIPTION - ------------ ---------------------------------------------------------------------- 3.(a) Articles of Incorporation of Polaris Industries Inc. ("the Company"), as amended, incorporated by reference to Exhibit 3(a) to the Company's Registration Statement on Form S-4 (No. 33-55769) (the "Form S-4"). (b) Bylaws of the Company, incorporated by reference to Exhibit 3(b) to the Form S-4. 4. Specimen Stock Certificate of the Company, incorporated by reference to Exhibit 4 to the Form S-4. 10.(a) Agreement for Deferred Compensation and Disability Income and Amendment No. 1 thereto with W. Hall Wendel, Jr. incorporated by reference to Exhibit 10 to the Company's Annual Report on Form 10-K dated May 15, 1995. (b) [RESERVED] (c) Retirement Savings Plan, incorporated by reference to Exhibit 10(g) to the Form S-1. (d) Polaris Industries Inc. Employee Stock Ownership Plan dated January 1, 1997. (e) Fourth Amendment to Credit Agreement by and between the Company and First Bank. (f) Management Bonus Plan, incorporated by reference to Exhibit 10(j) to the Form S-1. (g) Polaris Industries Inc. 1995 Stock Option Plan, incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 12, 1995 (No. 33-60157). (h) Polaris Industries Inc. Deferred Compensation Plan for Directors incorporated by reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K dated March 22, 1996. (i) Joint Venture Agreement between the Company and Transamerica Commercial Finance Corporation, now known as Transamerica Distribution Finance ("TDF") dated February 7, 1996 incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K dated March 22, 1996. (j) Manufacturer's Repurchase Agreement between the Company and Polaris Acceptance dated February 7, 1996 incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K dated March 22, 1996. (k) Credit Agreement by and between the Company and First Bank National Association and Bank of America Illinois and First Union National Bank of North Carolina, Dated May 8, 1995 incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q dated May 15, 1995. (l) Plymouth, Minnesota, Executive Office Lease, incorporated by reference to Exhibit 10(m) to the Form S-1 ("the Executive Office Lease"). (m) Shareholder Agreement with Fuji Heavy Industries LTD., incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K dated March 24, 1995. (n) Registration Rights Agreement between and among the Company, Victor K. Atkins, EIP I Inc., EIP Holdings Inc. and LB I Group Inc., incorporated by reference to Exhibit 10(1) to the Company's Annual Report on Form 10-K dated March 24, 1995.
16
EXHIBIT NUMBER DESCRIPTION - ------------ ---------------------------------------------------------------------- (o) Amended and Restated Polaris Industries Inc. 1996 Restricted Stock Plan, incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on June 7, 1996 (No. 333-05463). (p) Polaris Industries Inc. Employee Stock Purchase Plan, incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 3, 1997 (No. 333-21007). (q) Form of Change of Control Agreement entered into with executive officers of Company incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K dated March 18, 1997. (r) Amendment to Executive Office Lease dated November 22, 1996 incorporated by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K dated March 18, 1997. 13. Portions of the Annual Report to Security Holders for the Year Ended December 31, 1997 included pursuant to Note 2 to General Instruction G. 21. Subsidiaries of Registrant. 23. Consent of Arthur Andersen LLP. 24. Power of Attorney. 27.(a) Financial Data Schedule. (b) Restated Financial Data Schedule for Nine Month Period Ended September 30, 1997.
17 EX-10.(D) 2 EMPLOYEE STOCK OWNERSHIP PLAN POLARIS INDUSTRIES INC. EMPLOYEE STOCK OWNERSHIP PLAN EFFECTIVE JANUARY 1, 1997 TABLE OF CONTENTS ARTICLE I INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.01 Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.02 Affiliated Company. . . . . . . . . . . . . . . . . . . . . . . 1 2.03 Anniversary Date. . . . . . . . . . . . . . . . . . . . . . . . 2 2.04 Annual Addition . . . . . . . . . . . . . . . . . . . . . . . . 2 2.05 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.06 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . 2 2.07 Break in Continuous Service . . . . . . . . . . . . . . . . . . 2 2.08 Capital Accumulation. . . . . . . . . . . . . . . . . . . . . . 2 2.09 Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.10 Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.11 Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.12 Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.13 Company Stock Account . . . . . . . . . . . . . . . . . . . . . 2 2.14 Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.15 Continuous Service. . . . . . . . . . . . . . . . . . . . . . . 3 2.16 Direct Rollover . . . . . . . . . . . . . . . . . . . . . . . . 3 2.17 Distributee . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.18 Election Period . . . . . . . . . . . . . . . . . . . . . . . . 3 2.19 Eligible Diversification Amount . . . . . . . . . . . . . . . . 3 2.20 Eligible Retirement Plan. . . . . . . . . . . . . . . . . . . . 3 2.21 Eligible Rollover Distribution. . . . . . . . . . . . . . . . . 4 2.22 Employee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.23 Employer. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.24 Employer Contributions. . . . . . . . . . . . . . . . . . . . . 4 2.25 Employer Securities . . . . . . . . . . . . . . . . . . . . . . 4 2.26 Enrollment Date . . . . . . . . . . . . . . . . . . . . . . . . 4 2.27 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.28 Highly Compensated Employee . . . . . . . . . . . . . . . . . . 4 2.29 Hour of Service . . . . . . . . . . . . . . . . . . . . . . . . 5 2.30 Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.31 Non-Highly Compensated Employee . . . . . . . . . . . . . . . . 6 2.32 Other Investments Account . . . . . . . . . . . . . . . . . . . 6 i 2.33 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.34 Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.35 Plan Year . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.36 Qualified Participant . . . . . . . . . . . . . . . . . . . . . 6 2.37 Retirement. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.38 Section 414(s) Compensation . . . . . . . . . . . . . . . . . . 6 2.39 Suspense Account. . . . . . . . . . . . . . . . . . . . . . . . 6 2.40 Total Distribution. . . . . . . . . . . . . . . . . . . . . . . 6 2.41 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.42 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . 7 2.43 Trust Assets. . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.44 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.45 Year of Eligibility Service . . . . . . . . . . . . . . . . . . 7 ARTICLE III ELIGIBILITY AND PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . 7 3.01 Eligibility for Participation . . . . . . . . . . . . . . . . . 7 3.02 Reemployment of Participant . . . . . . . . . . . . . . . . . . 8 ARTICLE IV EMPLOYEE CONTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE V EMPLOYER CONTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.01 Employer Contributions. . . . . . . . . . . . . . . . . . . . . 8 ARTICLE VI INVESTMENT OF TRUST ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . 9 6.01 Investment of Trust Assets. . . . . . . . . . . . . . . . . . . 9 6.02 Diversification . . . . . . . . . . . . . . . . . . . . . . . . 10 6.03 Exempt Loan . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VII ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 7.01 Allocations to Participants' Accounts . . . . . . . . . . . . . 13 7.02 Allocable Shares. . . . . . . . . . . . . . . . . . . . . . . . 14 7.03 Allocation Limitations. . . . . . . . . . . . . . . . . . . . . 15 7.04 Allocation of Net Income (or Loss) of the Trust . . . . . . . . 16 ii 7.05 Accounting for Allocations. . . . . . . . . . . . . . . . . . . 16 7.06 Nonallocation . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE VIII EXPENSES OF THE PLAN AND TRUST. . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE IX VOTING COMPANY STOCK AND EXERCISE OF OTHER RIGHTS . . . . . . . . . . . . . 17 9.01 Voting and Tender or Exchange Rights. . . . . . . . . . . . . . 17 ARTICLE X CAPITAL ACCUMULATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE XI DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 11.01 Time of Distribution to Participants. . . . . . . . . . . . . . 22 11.02 Benefit Forms for Participants. . . . . . . . . . . . . . . . . 22 11.03 Benefit Form on a Participant's Death . . . . . . . . . . . . . 23 11.04 Distribution in Company Stock . . . . . . . . . . . . . . . . . 23 11.05 Delay in Benefit Determination. . . . . . . . . . . . . . . . . 23 11.06 Designated Beneficiaries. . . . . . . . . . . . . . . . . . . . 23 11.07 Additional Distribution Requirements. . . . . . . . . . . . . . 24 11.08 Distributions Pursuant to Qualified Domestic Relations Orders . 25 ARTICLE XII DETERMINATION OF SERVICE 12.01 Continuous Service. . . . . . . . . . . . . . . . . . . . . . . 28 12.02 Break in Continuous Service . . . . . . . . . . . . . . . . . . 28 12.03 Affiliated Companies. . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE XIII PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 13.01 Named Fiduciaries . . . . . . . . . . . . . . . . . . . . . . . 29 13.02 Fiduciary Limitations . . . . . . . . . . . . . . . . . . . . . 30 13.03 Company Responsibilities. . . . . . . . . . . . . . . . . . . . 30 13.04 Trustee Responsibilities. . . . . . . . . . . . . . . . . . . . 30 13.05 Appointment of Committee. . . . . . . . . . . . . . . . . . . . 30 iii 13.06 Organization and Powers of the Committee. . . . . . . . . . . . 31 13.07 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE XIV AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 33 14.01 Company's Right to Amend. . . . . . . . . . . . . . . . . . . . 33 14.02 Mandatory Amendments. . . . . . . . . . . . . . . . . . . . . . 33 14.03 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 34 14.04 Employee Nonforfeitable Rights. . . . . . . . . . . . . . . . . 34 14.05 Distribution upon Termination . . . . . . . . . . . . . . . . . 34 ARTICLE XV GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 15.01 Participants' Rights. . . . . . . . . . . . . . . . . . . . . . 34 15.02 Spendthrift Clause. . . . . . . . . . . . . . . . . . . . . . . 35 15.03 Company's Liability . . . . . . . . . . . . . . . . . . . . . . 35 15.04 Merger or Consolidation . . . . . . . . . . . . . . . . . . . . 35 15.05 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 35 15.06 Legal Action. . . . . . . . . . . . . . . . . . . . . . . . . . 35 15.07 Binding on All Parties. . . . . . . . . . . . . . . . . . . . . 35 15.08 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 15.09 Severability of Provisions. . . . . . . . . . . . . . . . . . . 36 15.10 Service of Process. . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE XVI TOP-HEAVY COMPLIANCE PROVISIONS 16.01 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 36 16.02 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 36 16.03 Determination of Whether Plan is "Top-Heavy." . . . . . . . . . 37 16.04 Aggregation Group of Employer Plans . . . . . . . . . . . . . . 37 16.05 Special Minimum Contribution Becoming Operative in the Event the Plan Becomes "Top-Heavy." . . . . . . . . . . . . . . 38 16.06 Pre-"Top-Heavy" Plan Terminated Participant . . . . . . . . . . 38 16.07 Special "Top-Heavy" Reduction in Combined Benefit and Contribution Limitation . . . . . . . . . . . . . . . . . . 38 16.08 Termination of "Top-Heavy" Status . . . . . . . . . . . . . . . 39 16.09 Multiple "Top-Heavy" Plans. . . . . . . . . . . . . . . . . . . 39 16.10 Effect of the Plan Becoming "Super Top-Heavy" . . . . . . . . . 39 ARTICLE XVII iv DIRECT ROLLOVER AND ELIGIBLE ROLLOVER DISTRIBUTIONS . . . . . . . . . . . . 39 ARTICLE XVII EXECUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE I INTRODUCTION The purposes of the Plan are to enable participating Employees to share in the growth and prosperity of the Company and to provide Participants with an opportunity to accumulate capital for their future economic security. Accordingly, Plan assets will be invested primarily in Employer Securities and up to one hundred (100) percent of the Plan assets may be invested in Company Stock. The Plan is intended to be a stock bonus plan qualified under Section 401(a) of the Code, which constitutes an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code and Section 407(d)(6) of ERISA. All Trust Assets acquired under the Plan as a result of Employer Contributions and other additions to the Trust will be administered, distributed, and otherwise governed by the provisions of the Plan. All such assets will be held in the Trust by the Trustee in accordance with the provisions of the Trust Agreement. The Plan shall be administered by the Committee for the exclusive benefit of Participants and their Beneficiaries. ARTICLE II DEFINITIONS In the Plan, whenever the context so requires, the singular or plural and the masculine, feminine or neuter gender shall each be deemed to include the others; the terms "he," "his" and "him" shall refer to an Employee or a Participant; references to a section of the Code, the Treasury Regulations, the Labor Regulations or ERISA shall include any subsequent amendments to such section; and capitalized terms shall have the following meanings: 2.01 ACCOUNT. One of the bookkeeping accounts maintained to record the allocated interest of each Participant in the Plan. Such Accounts shall include Company Stock Accounts and Other Investments Accounts. 2.02 AFFILIATED COMPANY. Any corporation that is, along with the Company, a member of a controlled group of corporations (within the meaning of Section 414(b) of the 1 Code) or any other trade or business (whether or not incorporated) which is under common control with the Company (as defined in Section 414(c) of the Code) or any member of an "affiliated service group" (as such term is defined in Section 414(m) of the Code) of which the Company is also a member or as may be provided in regulations under Section 414(o) of the Code. For purposes of Section 7.03, the preceding references to Sections 414(b) and 414(c) of the Code shall be modified by Section 415(h) of the Code. 2.03 ANNIVERSARY DATE. The last day of each Plan Year and such interim dates as the Committee shall determine from time to time. 2.04 ANNUAL ADDITION. For any Plan Year, the (a) Employer Contributions, if any, allocated to a Participant's Accounts under the Plan and (b) employer contributions and forfeitures allocated to a Participant's accounts under all other defined contribution plans maintained by the Company or an Affiliated Company. Notwithstanding the foregoing, if no more than one-third (1/3) of Employer Contributions for a Plan Year are allocated to the group of Highly Compensated Employees, Annual Additions shall not include Employer Contributions applied to the repayment of interest on a Loan of Employer Securities acquired with the proceeds of a Loan. 2.05 BENEFICIARY. The person (or persons) designated under Section 11.06 as entitled to receive any benefits under the Plan in the event of a Participant's death. 2.06 BOARD OF DIRECTORS. The Board of Directors of the Company. 2.07 BREAK IN CONTINUOUS SERVICE. A Break in Continuous Service determined pursuant to Section 12.02. 2.08 CAPITAL ACCUMULATION. A Participant's vested (nonforfeitable) interest in his Accounts under the Plan as described in Article X. 2.09 CODE. The Internal Revenue Code of 1986, as amended from time to time. 2.10 COMMITTEE. The Committee consisting of such persons appointed by the Board of Directors to administer the Plan and to give instructions to the Trustee. 2.11 COMPANY. Polaris Industries Inc. and any corporation which shall be its successor. 2.12 COMPANY STOCK. Any qualifying employer security within the meaning of Section 407(d)(5) of ERISA and regulations thereunder including any share of stock, common or preferred, issued by the Company or an Affiliated Company. 2 2.13 COMPANY STOCK ACCOUNT. An Account of a Participant which is credited with his allocable share of Company Stock purchased and paid for by the Trust or contributed or transferred to the Trust. 2.14 COMPENSATION. The total amount of compensation that is paid by the Employer to an Employee for services rendered in the course of employment and that is includable in such Employee's gross income for the Plan Year. Compensation shall include salary reduction contributions to a Cafeteria plan or cash or deferred 401(k) plan sponsored by an Employer. Notwithstanding the foregoing, compensation shall not include any profit sharing or any other incentive or extraordinary compensation or compensation paid with respect to a Participant's disability. The maximum amount of Compensation that may be taken into account for any Plan Year shall not exceed $150,000 (or such greater amount as shall be provided pursuant to Section 401(a)(17) of the Code). 2.15 CONTINUOUS SERVICE. Continuous Service determined pursuant to Article XII. 2.16 DIRECT ROLLOVER. A payment by the Plan to the Eligible Retirement Plan specified by the Distributee. 2.17 DISTRIBUTEE. An Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the Alternate Payee under a Qualified Domestic Relations Order, as such terms are defined in Section 414(p) of the Code and Section 11.08(c) of the Plan, are Distributees with regard to the interest of the spouse or former spouse. 2.18 ELECTION PERIOD. A Qualified Participant's Election Period shall be the six (6) Plan Year period beginning with the Plan Year in which the Participant attains age fifty-five (55); provided, however, that if the Participant has not completed ten (10) years of Plan participation by the Plan Year in which age fifty-five (55) is attained, the Election Period with respect to such Participant shall be the six (6) Plan Year period beginning with the Plan Year in which the Participant completes ten (10) years of Plan participation. 2.19 ELIGIBLE DIVERSIFICATION AMOUNT. For any Plan Year during the Election Period of a Qualified Participant, that portion of the Qualified Participant's Accounts equal to the product of (a), (b), (c) and (d): (a) the number of shares of Company Stock allocated to such Qualified Participant's Accounts as of the Anniversary Date of the immediately preceding Plan Year; (b) plus the number of shares of Company Stock, if any, previously elected to be diversified pursuant to Section 6.02; 3 (c) such sum multiplied by .25 or, in the case of the last year in such Qualified Participant's Election Period, .50; and (d) less the number of shares of Company Stock, if any, previously elected to be diversified pursuant to Section 6.02. 2.20 ELIGIBLE RETIREMENT PLAN. An individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code or a qualified trust described in Section 401(a) of the Code that accepts the Distributee's Eligible Rollover Distribution; provided, however, that in the case of an Eligible Rollover Distribution to a surviving spouse, an Eligible Retirement Plan only means an individual retirement plan or individual retirement annuity. 2.21 ELIGIBLE ROLLOVER DISTRIBUTION. Any distribution of all or any portion of the balance of a Participant's Accounts to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (made not less frequently than annually) made for the life (or life expectancy) of such Distributee or the joint lives (or joint life expectancies) of such Distributee and such Distributee's designated Beneficiary or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer Securities). 2.22 EMPLOYEE. Any person who is employed by the Employer on an employer-employee basis. "Employee" shall also include any "leased employee" within the meaning of Section 414(n)(2) or 414(o)(2) of the Code, unless such leased employee is covered by a plan described in Section 414(n)(5) of the Code and all such leased employees do not constitute more than twenty (20) percent of the combined non-highly compensated workforce (within the meaning of Section 414(n)(5)(C)(ii) of the Code) of the Company and Affiliated Companies. 2.23 EMPLOYER. The Company or any Affiliated Company which has adopted the Plan and which has agreed to be bound by the terms of the Plan and Trust Agreement. Except where the context clearly provides otherwise, any reference in the Plan to the term "Company" shall also mean any Employer with respect to its Employees only, as though the term "Employer" was substituted for the term "Company." 2.24 EMPLOYER CONTRIBUTIONS. Employer Contributions made to the Trust pursuant to Section 5.01. 4 2.25 EMPLOYER SECURITIES. Shares of Company Stock which meet the requirements of Section 409(l) of the Code. 2.26 ENROLLMENT DATE. January 1 of the Plan Year. 2.27 ERISA. The Employee Retirement Income Security Act of 1974, as amended from time to time. 2.28 HIGHLY COMPENSATED EMPLOYEE. Any individual who with respect to a Plan Year: (a) was a five-percent owner (as defined by Section 416(i)(1) of the Code) at any time during such Plan Year or the preceding Plan Year; or (b) for the Plan Year preceding such Plan Year: (1) had Section 414(s) Compensation from the Company in excess of $80,000 (as such amount may be adjusted from time to time pursuant to Sections 414(q) and 415(d) of the Code), and (2) to the extent elected by the Company with respect to such preceding Plan Year was in the top-paid group of Employees for such preceding Plan Year. For purposes of this Section 2.28, the "top-paid group of Employees" for a Plan Year shall be the group consisting of the top twenty percent of the Company's Employees when ranked on the basis of Section 414(s) Compensation paid during such Plan Year; provided, however, that the following Employees shall be excluded from the top-paid group of Employees: (i) Employees who have not completed six months of Continuous Service; (ii) Employees who normally work less than 17-1/2 hours per week; (iii) Employees who normally work during not more than six months during any Plan Year, (iv) Employees who have not attained age 21, and (v) except to the extent otherwise provided by regulations of the Secretary of the Treasury, Employees covered by a collective bargaining agreement between Employee representatives and the Employer, as determined by the Secretary of Labor. A former Employee shall be treated as a Highly Compensated Employee if (i) such Employee was a Highly Compensated Employee when such Employer separated from service or (ii) such Employee was a Highly Compensated Employee at any time after attaining age 55. For purposes of this Section 2.28, an Employee who is a nonresident alien and who receives no earned income (within the meaning of Code Section 911(d)(2)) from the 5 Company which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3) shall not be treated as an Employee. 2.29 HOUR OF SERVICE. Each hour for which an Employee is directly or indirectly compensated or entitled to compensation, by the Employer for the performance of duties during the applicable computation period, including hours for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by an Employer, and further including hours for which an Employee is either directly or indirectly compensated, or entitled to compensation, by the Employer, for reasons (such as vacation, sickness or disability) other than the performance of duties during the applicable computation period. Hours during which an Employee would have worked during an Employer-approved leave of absence shall also be credited. The method of determining the number of Hours of Service to be credited and the method of crediting such Hours to computation periods shall conform to the requirements set forth in Section 2530.200b-2(b) & (c) of the Department of Labor Regulations. 2.30 LOAN. Any loan to the Trustee made or guaranteed by a disqualified person (within the meaning of Section 4975(e)(2) of the Code), including, but not limited to, a direct loan of cash, a purchase-money transaction, an assumption of an obligation of the Trustee, an unsecured guarantee or the use of assets of a disqualified person (within the meaning of Section 4975(e)(2) of the Code) as collateral for a loan. 2.31 NON-HIGHLY COMPENSATED EMPLOYEE. Any eligible Employee who is not a Highly Compensated Employee. 2.32 OTHER INVESTMENTS ACCOUNT. An Account of a Participant which is credited with his share of the net income (or loss) of the Trust and Employer Contributions in other than Company Stock and which is debited with payments made to pay for Company Stock. 2.33 PARTICIPANT. Any Employee who has met the eligibility requirements set forth in Article III and is participating in the Plan. 2.34 PLAN. This Polaris Industries Inc. Employee Stock Ownership Plan, as hereafter amended from time to time. 2.35 PLAN YEAR. The twelve (12) month period beginning on January 1 and ending on December 31. The Plan Year is also the limitation year for purposes of Section 415 of the Code. 2.36 QUALIFIED PARTICIPANT. Any Participant who has completed at least ten (10) years of Plan participation and attained age fifty-five (55). 6 2.37 RETIREMENT. Termination of a Participant's employment with the Company or a subsidiary after he has attained age fifty-nine and one-half (59-1/2). 2.38 SECTION 414(s) COMPENSATION. Compensation as described under Section 415(c)(3) of the Code and the regulations thereunder, including all amounts currently not included in an Employee's gross income by reason of Sections 125 and 402(a)(8) of the Code. 2.39 SUSPENSE ACCOUNT. The account maintained by the Trustee to record unallocated Employer Securities used as collateral on a Loan pursuant to Section 6.03. 2.40 TOTAL DISTRIBUTION. A distribution to a Participant or Beneficiary, within a single taxable year of such Participant or Beneficiary, of the entire balance credited to such Participant's or Beneficiary's Accounts. 2.41 TRUST. The trust created by the Trust Agreement entered into pursuant to the Plan between the Company and the Trustee. 2.42 TRUST AGREEMENT. The agreement between the Company and the Trustee (or any successor Trustee) establishing the Trust and specifying the duties of the Trustee. 2.43 TRUST ASSETS. All cash, Company Stock and other property held in the Trust for the exclusive benefit of Participants and their Beneficiaries. 2.44 TRUSTEE. The Trustee or Trustees (and any successor Trustee) designated by the Company's Board of Directors which agrees to serve by executing the Trust Agreement. 2.45 YEAR OF ELIGIBILITY SERVICE. An Employee will be deemed to have completed a Year of Eligibility Service if he completes one thousand (1,000) or more Hours of Service during the twelve (12)-month period beginning on the date he first completes an Hour of Service for the Employer. If the Employee does not complete at least one thousand (1,000) Hours of Service during the first twelve (12) months of his employment, he will be deemed to have completed a Year of Eligibility Service in the first Plan Year during which he is credited with at least one thousand (1,000) Hours of Service. ARTICLE III ELIGIBILITY AND PARTICIPATION 3.01 ELIGIBILITY FOR PARTICIPATION. 7 (a) Each Employee, except those described in Sections 3.01(b) and 3.01(c) below, shall become eligible to participate in the Plan as follows: (1) Each salaried Employee, except those described in clause (3) below, shall become a Participant in the Plan as of the Enrollment Date within the first Plan Year during which he completes at least one month of Continuous Service. (2) Each hourly paid Employee, except those described in clause (3) below, shall become a Participant in the Plan as of the Enrollment Date within the first Plan Year during which such Employee completes 480 or more Hours of Service. (3) Each part-time Employee and each seasonal Employee shall become a Participant in the Plan as of the Enrollment Date within the first Plan Year during which such Employee completes 1,000 Hours of Service provided that the Employee completes at least one month of Continuous Service during such Plan Year. (b) Employees covered by a collective bargaining agreement (as defined by the United States Secretary of Labor) between Employees' representatives and an Employer are not eligible to participate in the Plan if retirement benefits were the subject of good faith bargaining between such Employees' representatives and the Employer and such collective bargaining agreement does not provide for participation in the Plan. No Employee shall participate in the Plan while he is actually employed by a leasing organization rather than the Employer. In addition, Employees (i) who are non-resident aliens, and (ii) whose primary place of employment is not located in the United States, are not eligible to participate in the Plan. (c) Any Employee who is a temporary Employee or a student Employee shall not be eligible to participate in the Plan. (d) Notwithstanding the requirements of Section 3.01(a)(3) and Section 3.01(c), a regular part-time, seasonal or temporary Employee shall become a Participant no later than the Enrollment Date within the first Plan Year during which such Employee completes one Year of Eligibility Service. 3.02 REEMPLOYMENT OF PARTICIPANT. A Participant who terminates employment and is subsequently reemployed by the Company shall be reinstated as a Participant as of his reemployment date. 8 ARTICLE IV EMPLOYEE CONTRIBUTIONS Contributions by Employees to the Plan are not required or permitted. ARTICLE V EMPLOYER CONTRIBUTIONS 5.01 EMPLOYER CONTRIBUTIONS. (a) For each Plan Year, Employer Contributions may be paid to the Trustee in such amounts (or under such formula) as may be determined by the Board of Directors not later than the due date for filing the Company's federal income tax return, including any extensions of such due date; provided, however, that such Employer Contributions shall not be paid to the Trust in amounts which would permit the limitation described in Section 7.03 to be exceeded. (b) Employer Contributions may be paid to the Trust in cash or in shares of Company Stock, as determined by the Board of Directors; provided, however, that Employer Contributions shall be paid in cash in such amounts and at such times as needed to provide the Trust with funds sufficient to pay in full when due any principal and interest payments required by a Loan incurred by the Trustee pursuant to Article VI to finance the acquisition of Company Stock, except to the extent such principal and interest payments have been satisfied by the Trustee from cash dividends paid to it with respect to Employer Securities (whether allocated or unallocated) acquired with the proceeds of such Loan or from the proceeds of sale of Employer Securities. (c) Employer Contributions may be returned to the Employer if (i) made in excess of the amount deductible by the Employer for its taxable year (all such Employer Contributions being automatically conditioned upon such deductibility), or (ii) made because of a reasonable mistake as to the facts and circumstances existing at the time the contribution was fixed; provided, however, that such return is limited, respectively, to (i) that portion in excess of the amount deductible for the Employer's taxable year which is not necessary to enable the Trustee to make Loan payments, or (ii) that portion of the contribution attributable to a reasonable mistake of fact, and provided, further, that any such return must be made within one (1) year of the date the deduction was disallowed or the mistaken contribution was made. 9 ARTICLE VI INVESTMENT OF TRUST ASSETS 6.01 INVESTMENT OF TRUST ASSETS. Trust Assets will be invested primarily in Employer Securities. Employer Contributions and cash dividends paid on Company Stock may be used to acquire shares of Company Stock from Company shareholders (including former Participants) or from the Company, except that any Company Stock acquired with the proceeds of a Loan shall be limited to Employer Securities. Except as otherwise provided in Section 6.02, Trust Assets not acquired with the proceeds of a Loan and not invested in Company Stock shall be invested by the Trustee in accordance with the Trust Agreement. All investments in Company Stock will be made by the Trustee only upon the direction of the Committee. The Committee may direct that all Trust Assets be invested and held in Company Stock. All purchases of Company Stock by the Trust will be made at a price or at prices which, in the judgment of the Committee, do not exceed the fair market value of such Company Stock at the time of purchase. The Committee may direct the Trustee to sell or resell shares of Company Stock to any person, including the Company; provided, however, that any such sale to any disqualified person (as defined by Section 4975(e)(2) of the Code), including the Company, shall be made at not less than the fair market value of such shares of Company Stock. Any such sale shall be made in conformance with Section 408(e) of ERISA. Notwithstanding any other provision of the Plan, the dividends paid with respect to Company Stock may be (i) paid directly to Participants, (ii) paid to the Trustee and then distributed to Participants within 90 days thereafter, or (iii) allocated to the Accounts of Participants, as determined by the Committee in its sole discretion. 6.02 DIVERSIFICATION. Each Qualified Participant may, by applying to the Committee within ninety (90) days after the close of each Plan Year during such Qualified Participant's Election Period, elect to have his Eligible Diversification Amount transferred to the Polaris Industries Inc. 401(k) Retirement Savings Plan and invested in accordance with the provisions of such Plan. Such transfer shall be completed by the Committee no later than one hundred eighty (180) days after the first day of the Plan Year in which such application is made. The Committee may, in a manner consistent with the applicable requirements of the Code and regulations issued pursuant thereto, limit or prohibit diversification by Qualified Participants of de minimis amounts. 6.03 EXEMPT LOAN. (a) The Committee may direct the Trustee to obtain Loans. Any such Loan shall meet all requirements necessary to constitute an "exempt loan" within the meaning of Treasury Regulation Section 54.4975-7(b)(1)(iii) and shall be used primarily for the benefit of Participants (and their Beneficiaries). The proceeds of any such Loan shall be used, within a reasonable time after the Loan is obtained, only to purchase Employer Securities, repay the Loan or repay any prior Loan. Any such Loan shall provide for no more than a reasonable 10 rate of interest, as determined under Treasury Regulation Section 54.4975-7(b)(7), and must be without recourse against the Plan. The number of years to maturity under the Loan must be definitely ascertainable at all times. The only assets of the Plan that may be given as collateral for a Loan are shares of Employer Securities acquired with the proceeds of the Loan and shares of Employer Securities that were used as collateral on a prior Loan repaid with the proceeds of the current Loan. Such Employer Securities so pledged shall be placed in a Suspense Account. No person entitled to payment under a Loan shall have recourse against Trust Assets other than such collateral, Employer Contributions that are available under the Plan to meet obligations under the Loan and earnings attributable to such collateral and the investment of such Employer Contributions. All Employer Contributions paid during the Plan Year in which a Loan is made (whether before or after the date the proceeds of the Loan are received), all Employer Contributions paid thereafter until the Loan has been repaid in full and all earnings from investment of such Employer Contributions, without regard to whether any such Employer Contributions and earnings have been allocated to Participants' Other Investments Accounts, shall be available to meet obligations under the Loan, unless otherwise provided by the Company at the time any such Employer Contribution is made. Any pledge of Employer Securities must provide for the release of an appropriate number of shares so pledged, as provided below, upon the payment of any portion of the Loan. For each Plan Year during the duration of the Loan, the number of shares of Employer Securities released from such pledge must equal the number of encumbered securities held immediately before release for the current Plan Year multiplied by a fraction, the numerator of which is the amount of principal paid for the year and the denominator of which is the sum of the numerator plus the principal to be paid for all future years. Such years will be determined without taking into account any possible extension or renewal periods. The Loan shall (i) provide for annual payments of principal and interest at a cumulative rate that is not less rapid at any time than level annual payment of such amount for ten (10) years, (ii) provide that interest included in any payment is disregarded for the purpose of the release from pledge only to the extent that it would be determined to be interest under standard loan amortization tables and (iii) provide that the duration of the Loan including renewal extension, or refinancing, shall not exceed ten (10) years. Notwithstanding the foregoing, the Committee may elect, in its sole discretion, to provide for the release of Employer Securities from the Suspense Account on the basis of both principal and interest paid during the Plan Year. If the Committee elects to apply this method, it shall be applied throughout the period of such Loan, and the limitations set forth in clauses (i), (ii) and (iii) above shall not apply to the Loan. In the event such interest is variable, the interest to be paid in future years must be computed by using the interest rate applicable as of the end of the Plan Year. If the collateral includes more than one class of Employer Securities, the number of shares of each class to be released for a Plan Year must be determined by applying the same fraction to each class. (b) Payments of principal and interest on a Loan during a Plan Year shall be made by the Trustee (as directed by the Committee) only from (i) Employer Contributions to 11 the Trust made to meet the Plan's obligation under such Loan, earnings from such Employer Contributions and any earnings attributable to Employer Securities held as collateral for such Loan (both received during or prior to the Plan Year), less such payments in prior years; (ii) the proceeds of a subsequent Loan made to repay such prior Loan; and (iii) the proceeds of the sale of any Employer Securities held as collateral for such Loan. Such Employer Contributions and earnings must be accounted for separately by the Plan until the Loan is repaid. (c) Employer Securities released by reason of the payment of principal or interest on a Loan from amounts allocated to Participants' Other Investments Accounts shall immediately upon payment be credited pro rata to the corresponding Participants' Company Stock Accounts. In the event that cash dividends paid on Employer Securities allocated to Participants' Accounts are used to repay a Loan, before determining Participants' allocable shares of Employer Securities released from the Suspense Account for any Plan Year pursuant to Section 7.02, there shall first be allocated to the Company Stock Accounts of Participants to whose Accounts such cash dividends would have been allocated but for such Loan repayment a number of Employer Securities having a fair market value not less than the amount of the cash dividends so applied. Only that number of Employer Securities released from the Suspense Account which is in excess of the number allocated pursuant to the immediately preceding sentence shall be available for allocation pursuant to Section 7.02(a). (d) The Employer shall contribute to the Trust amounts sufficient, after taking into account cash dividends on Employer Securities (whether allocated or unallocated) and the proceeds of sale, if any, of Employer Securities acquired with the proceeds of a Loan available for such purpose, to enable the Trust to pay principal and interest on any such Loan as they are due; provided, however, that no such Employer Contribution shall exceed the limitations in Section 7.03. In the event that such Employer Contributions are insufficient by reason of the limitations in Section 7.03 to enable the Trust to pay the principal of and interest on such Loan as they are due, then, at the election of the Committee, the Employer shall: (1) Make a Loan to the Trust, as described in Treasury Regulation Section 54.4975-7(b)(4)(iii), in an amount sufficient to meet such principal and interest payments. Such new Loan shall also meet all requirements of an "exempt loan" within the meaning of Treasury Regulation Section 54.4975-7(b)(1)(iii). Employer Securities released from the pledge of the prior Loan shall be pledged as collateral to secure the new Loan. Such Employer Securities will be released from this new pledge and allocated to the Accounts of the Participants in accordance with the applicable provisions of the Plan; or (2) Purchase any Employer Securities pledged as collateral in an amount necessary to provide the Trustee with funds sufficient to make the 12 principal and interest payments. Any such sale by the Plan shall meet the requirements of Section 408(3) of ERISA; or (3) Do any combination of the foregoing. However, the Employer shall not, pursuant to the provisions of this Section 6.03(d), do, fail to do, cause to be done or cause to be not done any act or thing which would result in a disqualification of the Plan as a leveraged employee stock ownership plan under the Code. (e) PUT OPTION. Shares of Employer Securities acquired with the proceeds of a Loan by the Trust shall be subject to a "put" option at the time of distribution; provided, however, that at such time the shares of Employer Securities are not publicly traded within the meaning of Treasury Regulation Section 54.4975-7(b)(1)(iv) or, if publicly traded, are subject to a trading limitation (a "trading limitation" on a security is a restriction under any federal or state securities law, any regulation thereunder or an agreement affecting the security which would make the security not as freely tradeable as one not subject to such restriction). The "put" option shall be exercisable by the Participant or Beneficiary, by the donees of either or by a person (including an estate or its distributee) to whom the Employer Securities pass by reason of the Participant's or Beneficiary's death. This "put" option provides that, for a period of at least sixty (60) consecutive days immediately following the date shares are distributed to the holder of the option and for another sixty (60) consecutive day period during the Plan Year next following the Plan Year in which shares were distributed, the holder of the option shall have the right to cause the Company, by notifying it in writing, to purchase such shares at their fair market value, as determined by the Committee. The Committee may, with the consent of the Trustee, direct the Trustee to assume the rights and obligations of the Company at the time a "put" option is exercised, insofar as the repurchase of Employer Securities is concerned. The period during which a "put" option is exercisable shall not include any period during which the holder is unable to exercise such "put" option because the Company is prohibited from honoring it by federal or state law. The terms of payment for the purchase of such shares of Employer Securities shall be as set forth in the "put" and: (1) If the distribution constitutes a Total Distribution, payment of the fair market value of the Employer Securities shall be made in five (5) substantially equal annual payments. The first such installment shall be paid no later than thirty (30) days after exercise of the "put" option. The Company or the Plan, as the case may be, shall pay a reasonable rate of interest and provide adequate security on amounts not paid after thirty (30) days. (2) If the distribution does not constitute a Total Distribution, the Company or the Plan, as the case may be, shall pay the Participant or Beneficiary an amount equal to the fair market value of the Employer Securities 13 repurchased no later than thirty (30) days after the "put" option is exercised. The "put" option provided for by this Section 6.03(e) shall continue to apply to shares of Employer Securities purchased by the Trustee with the proceeds of a Loan as described herein, notwithstanding any amendment to or termination of the Plan which causes the Plan to cease to be a leveraged employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code. (f) NONTERMINABLE PROTECTIONS AND RIGHTS. No Employer Securities acquired with the proceeds of a Loan shall be subject to any put, call or other option, or buy-sell or similar arrangement while held by and when distributed from the Plan, other than those described in Section 6.03(e) or as otherwise required by applicable law. These protections and rights are nonterminable. ARTICLE VII ALLOCATIONS 7.01 ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. (a) Separate Company Stock Accounts and Other Investments Accounts will be established to reflect Participants' interests under the Plan. Records shall be kept by the Committee from which can be determined the portion of each Other Investments Account which at any time is available to meet Loan obligations and the portion which is not so available as determined pursuant to Section 6.03. (b) As of each Anniversary Date, the Company Stock Account maintained for each Participant under the Plan will be credited with his allocable shares of Company Stock (including fractional shares) purchased and paid for by the Trust or contributed in kind to the Trust with Employer Contributions and any stock dividends on Company Stock allocable to his Company Stock Account. Employer Securities acquired by the Trust with the proceeds of a Loan obtained pursuant to Section 6.03 shall be allocated to the Company Stock Accounts of Participants as the Employer Securities are released from the Suspense Account as provided for in Section 6.03. (c) As of each Anniversary Date, each Other Investments Account maintained for each Participant under the Plan will be credited (or debited) with its share of the net income (or loss) of the Trust, with any cash dividends on Company Stock allocable to his Company Stock Account and with Employer Contributions in cash. Each such Other Investments Account will be debited with its share of any cash payments for the acquisition of Company Stock for the benefit of Company Stock Accounts or for any payment of principal of 14 and interest on any Loan or other debt chargeable to Participants' Company Stock Accounts; provided, however, that only the portion of each Other Investments Account which is available to meet obligations under Loans as determined pursuant to the provisions of Section 6.03(a) shall be used to pay principal or interest on a Loan. 7.02 ALLOCABLE SHARES. (a) Each Plan Year, Employer Contributions not applied to pay principal of or interest on a Loan and, subject to Section 6.03(c), Employer Securities released from the Suspense Account for a Plan Year (the "Allocable Amounts") shall be divided into two parts and allocated as set forth in subsections 7.02(a)(1) and 7.02(a)(2) below. (1) The first 85% of the Allocable Amounts for such Plan Year shall be allocated to the Company Stock Accounts for all Participants entitled to receive an allocation for such Plan Year. The allocation to which each such Participant shall be entitled under this Section 7.02(a)(1) shall be determined by multiplying 85% of such Allocable Amounts by a fraction, the numerator of which is such Participant's Compensation for such Plan Year and the denominator of which is the sum of the Compensation of each Participant entitled to an allocation for such Plan Year. (2) The remaining 15% of the Allocable Amounts for such Plan Year shall be allocated to the Company Stock Accounts for all Participants entitled to receive an allocation for such Plan Year. The allocation to which each such Participant shall be entitled under this Section 7.02(a)(2) shall be determined by multiplying 15% of such Allocable Amounts by a fraction, the numerator of which is such Participant's months of Continuous Service prior to and including such Plan Year, and the denominator of which is the aggregate months of Continuous Service of each Participant entitled to an allocation for such Plan Year prior to and including such Plan Year. (b) A Participant must be actively employed by the Employer on the Anniversary Date of any Plan Year in order to share in the allocation of any Employer Contributions for such Plan Year made pursuant to Section 7.02(a) except in the case of the Participant's death during such Plan Year. 7.03 ALLOCATION LIMITATIONS. (a) For each Plan Year, the Annual Addition to the Accounts of a Participant under the Plan and to the accounts of such Participant under all other defined 15 contribution plans maintained by the Company or any Affiliated Company, may not exceed the lesser of: (1) twenty-five (25) percent of his Section 414(s) Compensation; or (2) $30,000 or, if greater, one-fourth (1/4) of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code as in effect for such Plan Year. If this limitation would be exceeded as to any Participant, the allocation of Employer Contributions shall be reduced with respect to such Participant, with a reallocation made to other Participants according to the allocable share of each as determined under Section 7.02 (to the extent not exceeding the limitation as to each). In the event the Plan is terminated and there are amounts which cannot be allocated to Participants' Accounts due to this limitation, such amounts will be returned to the Employer. If a Participant is, or was, covered under a defined benefit plan and a defined contribution plan maintained by the Employer, the sum of such Participant's defined benefit plan fraction and defined contribution plan fraction (both calculated as provided below) may not exceed one (1.0) in any Plan Year. A defined benefit plan fraction is a fraction, the numerator of which is the sum of a Participant's projected annual benefits (as defined below) under all defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of (i) one and one-quarter (1.25) times the dollar limitation of Section 415(b)(1)(A) of the Code in effect for a Plan Year and (ii) one and four-tenths (1.4) times such Participant's average Section 414(s) Compensation for the three (3) consecutive years that produce the highest average. A defined contribution plan fraction is a fraction, the numerator of which is the sum of the Annual Additions to a Participant's accounts under all defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior limitation years, and the denominator of which is the sum of the lesser of the following amounts determined for such year and for each prior year of Service with the Employer: (i) one and one-quarter (1.25) times the dollar limitation in effect under Section 415(c)(1)(A) of the Code for each such year and (ii) one and four-tenths (1.4) times the amount which may be taken into account under Section 415(c)(1)(B) of the Code. Projected annual benefit means the annual benefit to which a Participant would be entitled under the terms of the applicable defined benefit plan, if such Participant continued employment until normal retirement age (or current age, if later) and such Participant's compensation for the limitation year and all other relevant factors used to determine such benefit remained constant until normal retirement age (or current age, if later). 16 If, in any Plan Year, the sum of a Participant's defined benefit plan fraction and defined contribution plan fraction would exceed one (1.0), such Participant's Annual Addition under the Plan will be limited to the extent necessary to comply with Section 415 of the Code. 7.04 ALLOCATION OF NET INCOME (OR LOSS) OF THE TRUST. The net income (or loss) attributable to Trust Assets for each Plan Year will be determined as of each Anniversary Date. Each Participant's allocable share of the net income (or loss) will be allocated to his Other Investments Account in the ratio in which the credit balance of each such Account on the preceding Anniversary Date (reduced by the amount of any distribution of Capital Accumulation from such Account) bears to the sum of such balances for all Participants as of that date. The net income (or loss) includes the increase (or decrease) in the fair market value of Trust Assets (other than Company Stock), interest income, dividends and other income (or loss) attributable to Trust Assets (other than allocated Company Stock) since the preceding Anniversary Date. For purposes of computing net income (or loss), interest paid on any Loan or installment sales contract for the acquisition of Employer Securities by the Trustee shall be disregarded. 7.05 ACCOUNTING FOR ALLOCATIONS. The Committee shall adopt accounting procedures for the purpose of making the allocations, valuations and adjustments to Participants' Accounts provided for in this Article VII. Except as provided in Treasury Regulation Section 54.4975-11, Company Stock acquired by the Plan shall be accounted for as provided under Treasury Regulation Section 1.402(a)-1(b)(2)(ii), allocations of Company Stock shall be made separately for each class of stock and the Committee shall maintain adequate records of the cost basis of all shares of Company Stock allocated to each Participant's Company Stock Account. From time to time, the Committee may modify the accounting procedures for the purpose of achieving equitable and nondiscriminatory allocations among the Accounts of Participants in accordance with the general concepts of the Plan and the provisions of this Section. Annual valuations of Trust Assets shall be made at fair market value. All valuations of shares of Company Stock which are not readily tradeable on an established securities market shall be made by an independent appraiser meeting requirements similar to those contained in Treasury Regulations under Section 170(a)(1) of the Code. 7.06 NONALLOCATION. Notwithstanding any provision in this Plan to the contrary, in accordance with Section 409(n) of the Code, if shares of Company Stock are sold to the Plan by a shareholder of the Company in a transaction for which special tax treatment is elected pursuant to Section 1042 of the Code by such shareholder, no assets attributable to such Company Stock may be allocated during the period beginning on the date of the sale of such shares of Company Stock to the Trust and ending on the later of the tenth (10th) year anniversary of the date of sale or the date of the allocation attributable to the final payment on the Loan incurred with respect to the sale to the Accounts of such shareholder, any person who is related to such shareholder (within the meaning of Section 267(b) of the Code, but excluding lineal descendants of such shareholder as long as no more than five (5) percent of the aggregate amount of all shares of Company Stock sold by such shareholder in a transaction 17 to which Section 1042 of the Code applies is allocated to lineal descendants of such shareholder) or any other person who owns (after application of Section 318(a) of the Code) more than twenty-five (25) percent in value of the outstanding securities of the Employer. Further, no allocation of contributions may be made to the Accounts of such persons unless additional allocations are made to other Participants, in compliance with the provisions of Sections 401(a)(4) and 410 of the Code, computed without regard to the allocation of any stock acquired by the Plan in a transaction to which Section 1042 applied. ARTICLE VIII EXPENSES OF THE PLAN AND TRUST All expenses of administering the Plan shall be paid by the Trust to the extent such are not paid by the Company. The Company may, but shall not be required to, pay such expenses from time to time. Each Employer, other than the Company, shall reimburse the Company for that portion of costs and expenses paid by the Company for any Plan Year as the amount of Employer Contributions from each such Employer for such Plan Year bears to the aggregate Employer Contributions from all Employers for that Plan Year. ARTICLE IX VOTING COMPANY STOCK AND EXERCISE OF OTHER RIGHTS 9.01 VOTING AND TENDER OR EXCHANGE RIGHTS. If the Company or any Affiliated Company has a registration-type class of securities (as defined in Section 409(e)(4) of the Code), then, all shares of Company Stock allocated to Company Stock Accounts or the Suspense Account and entitled to vote shall be voted only in accordance with the provisions of Sections 9.01(a), (b), (d) and (e) applicable to voting. If neither the Company nor any Affiliated Company has a registration-type class of securities (as defined in Section 409(e)(4) of the Code), then, only with respect to any corporate matter which involves the voting of Company Stock allocated to Company Stock Accounts or the Suspense Account with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business or such other similar transaction that Treasury Regulations require, all shares of such Company Stock shall be voted only in accordance with the provisions of Sections 9.01(a), (b), (d) and (e) applicable to voting. In all cases in which a "tender offer" (as defined in Section 9.01(a)) is made for Company Stock, the provisions of Sections 9.01(a), (c), (d) and (e) applicable to a tender offer (as so defined) shall apply. Where the Trustee is not required to solicit voting instructions under the second sentence of this paragraph or where the Committee is explicitly given discretion under Section 9.01(a), (b) or (c), the Trustee shall vote and take action, as applicable, only as the Committee directs in the Committee's sole discretion, after the 18 Committee determines such action to be in the best interests of Participants and Beneficiaries. If any action of holders of Company Stock is sought to be taken by means of a written consent of such holders in lieu of a meeting of such holders, the giving of such consent is a vote in favor of such action and the provisions of this Section 9.01 applicable to voting shall apply. (a) To the extent provided under the foregoing paragraph, the Trustee shall vote the shares of Company Stock allocated to any Participant's or Beneficiary's Accounts (including fractional as well as whole shares) in accordance with timely directions of such Participant or Beneficiary, respectively; provided, however, that if a Participant or Beneficiary fails to give such timely direction the shares allocated to such Participant's or Beneficiary's Accounts shall be voted in the manner directed by the Committee. The Trustee shall, with respect to the shares of Company Stock allocated to any Participant's or Beneficiary's Accounts (including fractional as well as whole shares), act in response to any tender offer or exchange offer for shares of Company Stock commenced by any person or group of persons, including, but not limited to, a tender offer or exchange offer within the meaning of the Securities Exchange Act of 1934, as amended from time to time (any such tender or exchange offer being a "tender offer"), in accordance with timely directions of such Participant or Beneficiary; provided, however, that if a Participant or Beneficiary fails to give such timely direction the manner in which the Trustee is to act in response to a tender offer with respect to the shares of Company Stock allocated to such Participant's or Beneficiary's Accounts shall be directed by the Committee. For purposes of determining the number of shares of Company Stock to be voted in any particular manner or to be the subject of any particular response to a tender offer, the Trustee shall use the nearest practicable date as determined by the Trustee. (b) The Trustee's functions and responsibilities with respect to shares of Company Stock, including shares of Company Stock in the Suspense Account, with respect to voting, shall be exercised as follows: (1) Each Participant: (i) is hereby designated as a named fiduciary for purposes of ERISA with respect to the voting of shares of Company Stock allocated to the applicable Accounts, and with respect to the voting of the applicable portion (as determined under Section 9.01(b)(3)) of the shares of Company Stock held in the Suspense Account, and (ii) shall have the right to direct the Trustee with respect to the voting of such shares of Company Stock on each matter brought before any meeting of the stockholders of the Company and on which such shares are entitled to vote. (2) Before each such meeting of shareholders, the Trustee shall cause to be furnished to each Participant and Beneficiary a copy of the proxy solicitation or information materials as shall have been furnished to the Trustee by the issuer of the Company Stock to be voted at such meeting or, in the case of a proxy solicitation by any person or group of persons 19 other than the board of directors of such issuer, such person or group, together with a form requesting confidential directions for the Trustee on how the whole and fractional shares of Company Stock which are allocated to such Participant's or Beneficiary's Accounts (or with respect to which such Participant or Beneficiary otherwise has control under Section 9.01(b)(3)) shall be voted on each such matter. The Company and the Committee shall cooperate with the Trustee in an attempt to ensure that Participants and Beneficiaries receive the requisite information in a timely manner. Upon timely receipt of such directions, the Trustee shall on each such matter vote as directed the number of shares (including fractional shares of Company Stock) allocated to such Participant's or Beneficiary's Accounts. The instructions received by the Trustee from Participants and Beneficiaries shall be held by the Trustee in confidence and shall not be divulged or released to any person, including the Committee or the officers or Employees of the Company or any Affiliated Company. (3) The Trustee shall vote all shares of Company Stock in the Suspense Account in the same proportion as the allocated shares of Company Stock for which affirmative directions from Participants to vote for or against each proposal are voted. The Committee may establish procedures, which shall be followed by the Trustee upon and after its receipt of notice thereof, by which Participants may provide separate sets of instructions with respect to shares of Company Stock allocated to their Accounts and the pro rata amount of unallocated shares of Company Stock over which they have voting control. If a vote is taken at a time when there are no allocated shares of Company Stock, the Trustee shall vote the shares of Company Stock in the Suspense Account as directed by the Committee in the Committee's discretion. (c) The Trustee's functions and responsibilities with respect to shares of Company Stock, including shares of Company Stock in the Suspense Account, with respect to all decisions made in response to a tender offer, shall be exercised as follows: (1) In the event a tender offer is commenced, the Committee, promptly after receiving notice of the commencement of any such tender offer, shall transfer certain of the Plan's record-keeping functions to an independent record-keeper (which, if the Committee consents in writing, may be the Trustee). The functions so transferred shall be those necessary to preserve the confidentiality of any directions given by Participants and Beneficiaries in connection with the tender offer. Such record-keeper shall use its best efforts to distribute or cause to be distributed on a timely basis to each Participant and Beneficiary such information as is 20 being distributed to other shareholders of the Company in connection with any such tender offer. The Company and the Committee shall cooperate with such record-keeper in an attempt to ensure that Participants and Beneficiaries receive the requisite information in a timely manner. The independent record-keeper shall solicit confidentially from each Participant and Beneficiary the directions described below as to the action to be taken with respect to shares of Company Stock held under the Plan in response to a tender offer. The independent record-keeper, if different from the Trustee, shall instruct the Trustee as to all required action, including an identification of the amount of shares of Company Stock covered by any particular required action, in accordance with the following provisions. (2) Each Participant: (i) is hereby designated as a named fiduciary for purposes of ERISA with respect to all decisions made in response to a tender offer regarding shares of Company Stock allocated to the applicable Accounts, and with respect to all such decisions regarding the applicable portion (as determined under Section 9.01(c)(4)) of the shares of Company Stock held in the Suspense Account, and (ii) shall have the right to direct the Trustee with respect to all such decisions. (3) Upon timely receipt of such directions, the Trustee shall on each such matter act as directed (including, without limitation, to engage in selling, exchanging, tendering or retaining) with respect to the number of shares of Company Stock (including fractional shares of Company Stock) allocated to such Participant's Accounts. The instructions received by the Trustee from Participants shall be held by the Trustee in confidence and shall not be divulged or released to any person, including the Committee or the officers or Employees of the Company or any Affiliated Company. (4) The Trustee shall act as directed (including, without limitation, to engage in selling, exchanging, tendering or retaining) with respect to the number of shares of Company Stock (including fractional shares) in the Suspense Account in the same proportion as it acts regarding shares of Company Stock allocated to the Accounts of Participants. The Committee may establish procedures, which shall be followed by the Trustee upon and after its receipt of notice thereof, by which Participants may provide separate sets of instructions with respect to shares of Company Stock allocated to their Accounts and the pro rata amount of unallocated shares of Company Stock over which they have control regarding tender offers. If a tender offer occurs at a time when there are no allocated shares of Company Stock, the Trustee shall act in 21 response to the tender offer with respect to shares of Company Stock in the Suspense Account as directed by the Committee in the Committee's discretion. (d) Nothing contained in this Section 9.01 shall confer upon Participants, Beneficiaries, the Committee or the Trustee any additional voting rights in respect of shares of Company Stock held under the Plan other than the rights set forth in the certificate of incorporation of the Company and under state and federal law. Nothing contained in this Section 9.01 shall confer upon Participants, Beneficiaries, the Committee or the Trustee any additional rights in respect of a tender offer, merger or consolidation relating to the shares of Company Stock held under the Plan other than the rights set forth in the certificate of incorporation of the Company and under state and federal law. (e) Any individual who has an interest under the Plan in the nature of the interest of a Participant or Beneficiary but who is not technically a Participant or Beneficiary shall be treated as a Beneficiary for purposes of the foregoing provisions of this Section. ARTICLE X CAPITAL ACCUMULATION Each Participant shall at all times have a 100% fully vested interest in his Accounts. ARTICLE XI DISTRIBUTIONS 11.01 TIME OF DISTRIBUTION TO PARTICIPANTS. (a) Any Participant whose employment ends by reason of his Retirement, death or Disability shall receive the vested balance in his Accounts as soon as is administratively practicable after the end of the Plan Year in which his employment ends, unless such Participant, or such Participant's Beneficiary in the event of the Participant's death, elects to defer payment until a later date. (b) Any Participant whose employment ends for any reason other than those specified in Section 11.01(a) shall receive the vested balance in his Accounts as soon as is 22 administratively practicable after the end of the fifth Plan Year following the Plan Year in which his employment ends, unless such Participant elects to defer payment until a later date. (c) Notwithstanding any other provision of this Plan, distribution of the benefits of any Participant who reaches age seventy and one-half (70-1/2) shall commence no later than the later of (i) the April 1st next following the end of the calendar year in which he reaches age seventy and one-half (70-1/2) or (ii) the date on which such Participant's employment with the Company terminates, regardless of whether any Loan has been repaid. Notwithstanding the foregoing, in the case of a Participant who is a five-percent owner (as defined in Code Section 416(i)), distribution of such Participant's benefits shall commence no later than the April 1 next following the end of the calendar year in which he reaches age seventy and one-half (70-1/2) 11.02 BENEFIT FORMS FOR PARTICIPANTS. A Participant's Capital Accumulation shall, at the election of such Participant, be paid to him in either a single distribution or a number of annual installments not to exceed five (5). In the case of an installment distribution, each installment shall be equal to (i) the number of shares of Company Stock credited to such Participant's Company Stock Account and the balance credited to such Participant's Other Investments Account, each divided by (ii) the number of installments which remain to be paid (including the current installment being computed). 11.03 BENEFIT FORM ON A PARTICIPANT'S DEATH. If a Participant's employment is ended by death, or if a terminated Participant has a Capital Accumulation which has not been fully distributed at the time of his death, such Participant's remaining Capital Accumulation shall be paid to his Beneficiary in a single lump sum, within one (1) year after the end of the Plan Year in which such Participant died. 11.04 DISTRIBUTION IN COMPANY STOCK. A Participant's benefits shall be paid in the form of Company Stock; provided, however, that the value of any fractional shares of Company Stock shall be paid in cash. 11.05 DELAY IN BENEFIT DETERMINATION. If the Committee is unable to determine the benefits payable to a Participant or Beneficiary on or before the latest date prescribed for payment, the benefits shall be paid within sixty (60) days after the date they can first be determined, with whatever makeup payments may be appropriate in view of the delay. 11.06 DESIGNATED BENEFICIARIES. (a) Any person who may become entitled to receive a distribution under this Article XI may appoint any other person or persons (including a trust or trusts) as his Beneficiary or Beneficiaries for receipt of such distribution in the event of his death by filing an appointment with the Committee on forms provided by it. In the absence of such appointment, a person's Beneficiary or Beneficiaries will be deemed to be the Beneficiary or 23 Beneficiaries designated by such person under the Polaris Industries Inc. 401(k) Retirement Savings Plan, if any, or, if none, the Beneficiary or Beneficiaries designated by such Plan. Notwithstanding the foregoing, in the case of a Participant who is legally married at the date of his death, his Beneficiary shall be deemed to be the person to whom he was so married, notwithstanding and disregarding any failure by such Participant to appoint a Beneficiary, or his appointment of a trust or any other person as his Beneficiary, unless such Participant had obtained, on forms provided by the Committee, the consent of the person to whom he was so married to his appointment of a trust or other person or to his appointment of no Beneficiary. The spouse's consent to payment to a designated Beneficiary other than the spouse must be in writing on such forms, must designate a Beneficiary which may not be changed without spousal consent (unless the consent of the spouse expressly permits designations by the Participant without any requirement of further consent by the spouse), must acknowledge the effect of such election and must be witnessed by a notary public. (b) Subject to the provisions of Section 11.06(a), a Beneficiary appointment may be revoked or changed by the appointing person's filing with the Committee, on forms provided by it, a notice of revocation or change, with a change of Beneficiary being considered a revocation and the naming of a new Beneficiary. (c) An appointment shall not be effective if the Beneficiary named therein fails to survive the appointing person. 11.07 ADDITIONAL DISTRIBUTION REQUIREMENTS. All benefit distributions shall be subject to the following additional requirements: (a) DURATION OF BENEFIT PAYMENTS. The distribution of benefit payments to each Participant shall be made in accordance with regulations prescribed by the Secretary of the Treasury over a period not extending beyond the life expectancy of such Participant or the joint life expectancy of such Participant and a designated Beneficiary, except that in no event shall the period of distribution exceed that otherwise permitted under the Plan. (b) DEATH OF PARTICIPANT BEFORE BENEFITS COMMENCE. In the event that a Participant dies before the commencement of benefits hereunder, the entire interest of such Participant under the Plan (if any) shall be distributed not later than the last day of the calendar year in which occurs the fifth (5th) anniversary of the death of such Participant or, where any portion of such Participant's benefit is to be paid to (or for the benefit of) such Participant's surviving spouse or other designated Beneficiary, such benefit must commence not later than the last day of the calendar year following the calendar year in which such Participant's death occurred and be paid over a period not exceeding the life (of life expectancy) of the surviving spouse or designated Beneficiary, except that where the Beneficiary is such Participant's surviving spouse, payments to the surviving spouse need not begin before the date on which such Participant would have attained age seventy and one-half (70-1/2). However, in no event 24 shall the commencement date or period of distribution exceed that otherwise permitted under the Plan. (c) DEATH AFTER COMMENCEMENT OF BENEFITS. If the distribution of benefits hereunder has commenced and a Participant dies before his entire interest has been distributed to him, the remaining part of such interest will be distributed to the surviving payee no less rapidly than under the method of distribution which was in effect on the date of such Participant's death. (d) "INCIDENTAL" BENEFITS AND EFFECT OF REQUIREMENTS. In the event that any payment hereunder is to be made to someone other than a Participant or jointly to such Participant and his spouse or other payee, such payments must conform to the "incidental benefit" rules of Section 401(a)(9)(G) of the Code and Treasury Regulation Section 1.401(a)(9)-2. In addition, all distributions from the Plan must conform to the rules of this Section, Section 401(a)(9) of the Code and the regulations promulgated thereunder to the extent not in conflict with any other provision of the Code. (e) LUMP SUM PAYMENT. If a Participant's Capital Accumulation is more than $3,500, such Participant shall be given written notice of his right to defer the date of distribution of his benefit, and if he does not elect a current distribution by giving his consent in writing within sixty (60) days of such notice, the Capital Accumulation shall be retained in the Trust until the earlier of the date on which such Participant dies, requests distribution in writing or the date such Participant attains his normal retirement age (59-1/2). 11.08 DISTRIBUTIONS PURSUANT TO QUALIFIED DOMESTIC RELATIONS ORDERS. (a) PAYMENTS TO AN ALTERNATE PAYEE UNDER A QUALIFIED DOMESTIC RELATIONS ORDER. The Committee shall pay benefits to the Alternate Payee(s) (as defined below) in accordance with the terms of this Section 11.08, any government regulations adopted under Section 206 of ERISA and the applicable provisions of any Qualified Domestic Relations Order (as defined below) entered by a court of competent jurisdiction on or after January 1, 1985. In the case of a Domestic Relations Order (defined below) entered by a court of competent jurisdiction before January 1, 1985, the Committee may, in its discretion, treat any such order as a Qualified Domestic Relations Order under this Section 11.08 even if such order does not meet the requirements therefor. (b) PLAN PROCEDURES RELATIVE TO QUALIFIED DOMESTIC RELATIONS ORDERS. (1) NOTIFICATION. Following its receipt of any Domestic Relations Order, the Committee shall promptly notify in writing the affected Participant or former Participant and Alternate Payee(s) of its receipt of the order, and shall furnish such persons a copy of the order and of these Plan procedures (and any other procedures which may have been adopted by 25 the Committee) for determining whether the order is a Qualified Domestic Relations Order. Such notice and all other notices pursuant to this Section 11.08 will be sent to the address included in the Domestic Relations Order (or to such other address as is known to the Committee or as may thereafter be specified in writing by the addressee). Any Alternate Payee shall be permitted to designate a representative for receipt of copies of notices that are to be sent to the Alternate Payee. Such notice shall set a time and date no less than fifteen (15) days after the date of such notice on which the Committee will meet to determine whether the order is a Qualified Domestic Relations Order and shall inform the Participant and Alternate Payee that they may present written or oral comments at that time with regard to such determination. (2) DETERMINATION OF COMMITTEE. On the date specified in the above described notice, the Committee shall examine the Domestic Relations Order in light of any comments received and in light of applicable law and regulations, and shall make one of three determinations: (i) that the order is a Qualified Domestic Relations Order; (ii) that the order is not a Qualified Domestic Relations Order; or (iii) that the determination of whether the order is a Qualified Domestic Relations Order should be submitted to and made by a court of competent jurisdiction. If, within eighteen (18) months from the date on which the first payment of benefits would be required to be made under such order, it is determined by the Committee or a court of competent jurisdiction that the order (or modification thereof) is a Qualified Domestic Relations Order, then the Committee shall pay any separately allocated amounts (plus income or other allocated interest or earnings thereon) to the specified Alternate Payee, and thereafter shall pay the Alternate Payee the amount specified by the Qualified Domestic Relations Order. If, within the aforesaid eighteen (18) month period, it is determined by the Committee or a court of competent jurisdiction that the order is not a Qualified Domestic Relations Order, or the question of whether the order is a Qualified Domestic Relations Order is not determined by the Committee or a court of competent jurisdiction, then the Committee shall pay any amounts (plus any income or other allocated interest or earnings thereon) separately accounted for as described below to the applicable Participant, former Participant or other person or persons who would have been entitled thereto if there had been no Domestic Relations Order. Any determination after the close of the aforesaid eighteen (18) month period shall be applied prospectively only. (3) SEPARATE ACCOUNTING OF PARTICIPANT'S AND ALTERNATE PAYEE'S BENEFITS. During any period in which a Participant otherwise would have had a 26 right to payment of Plan benefits and in which the issue of whether an order is a Qualified Domestic Relations Order is being determined, the Committee shall separately account for the amounts as to which the Participant or former Participant otherwise would have had a right to payment during such period and the amounts which would have been payable to the Alternate Payee during such period if the order had been determined to be payable to such Alternate Payee in accordance with a Qualified Domestic Relations Order shall not be considered to be part of such Participant's Accounts with respect to any other spouse or Beneficiary of such Participant. (c) DEFINITIONS. (1) ALTERNATE PAYEE. Any spouse, former spouse, child or other dependent of a Participant or former Participant who is recognized by a Domestic Relations Order as having a right to receive all, or a portion, of the benefits payable under the Plan with respect to such Participant or former Participant. (2) DOMESTIC RELATIONS ORDER. Any judgment, decree or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant, and is made pursuant to a state's domestic relations law or community property law. (3) QUALIFIED DOMESTIC RELATIONS ORDER. A Domestic Relations Order which: (A) Creates or recognizes the existence of an Alternate Payee's right to, or assigns to an Alternate Payee the right to, receive all or a portion of the Plan benefits payable with respect to a Participant or former Participant; and (B) In the order clearly specifies (w) the name and last known mailing address (if any) of such Participant or former Participant, and of each Alternate Payee covered by the order, (x) the amount or percentage of such Participant's or former Participant's benefits to be paid by the Plan to each Alternate Payee, or the manner in which such amount or percentage is to be determined, (y) the number of payments or period to which such order applies and (z) each plan to which such order applies; and 27 (C) Does not require the Plan to provide any type or form of benefit, or any option, not otherwise provided by the Plan; and (D) Does not require the Plan to provide increased benefits, determined on the basis of actuarial value; and (E) Does not require the payment of benefits to an Alternate Payee under another order previously determined to be a Qualified Domestic Relations Order; and (F) In the case of any payment before such Participant has separated from Service, does not require payment to the Alternate Payee before the earlier of (x) the date such Participant or former Participant attains age fifty (50), or (y) the earliest date on which he could begin receiving benefits if he separated from Service; and (G) Requires payment in a form provided by the Plan. In no event may payment be in the form of a joint and survivor annuity with respect to an Alternate Payee and his subsequent spouse. 28 ARTICLE XII DETERMINATION OF SERVICE 12.01 CONTINUOUS SERVICE. The term "Continuous Service" as used in the Plan means service with the Company or any Affiliated Company, including service prior to the adoption of the Plan, whether on a salaried or hourly basis, calculated from the Employee's most recent employment commencement date (which means, in the case of a Break in Continuous Service, that Continuous Service shall be calculated from his reemployment commencement date following the last unremoved Break in Continuous Service) to his Break in Continuous Service in accordance with the following provisions: (a) An Employee's employment commencement date shall be the first date on which he performs an Hour of Service for the Company. (b) An Employee shall incur a 1-year Break in Continuous Service upon the completion of a 12-consecutive month period beginning on the date on which he incurs a Break in Continuous Service as provided in Section 12.02, during which period the Employee did not perform an Hour of Service. (c) There shall be no deduction for any time lost which does not constitute a Break in Continuous Service. 12.02 BREAK IN CONTINUOUS SERVICE. (a) An employee shall incur a Break in Continuous Service upon: (1) Retirement or death; (2) quit, discharge or other termination of employment by action of the Company; or (3) failure to return to work upon expiration of an approved leave of absence. (b) Continuous Service shall not be considered broken for any Employee who (i) has entered the military, naval or merchant marine service of the United States if such Employee complies with the requirements of reemployment laws applicable to him and is reemployed; (ii) is on an approved leave of absence; or (iii) is receiving benefits under an Employer's long-term disability policy. (c) In the case of an Employee who is absent from work for maternity or paternity reasons, the twelve (12) consecutive month period beginning on the first anniversary 29 of the first date of such absence shall not constitute a one (1) year Break in Continuous Service. For purposes of the previous sentence, an absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of the child with the Employee in connection with the adoption of such child by such Employee, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement. (d) Notwithstanding any other provision in subsection (a) of this Section 12.02, an Employee shall not be deemed to incur a Break in Continuous Service until the expiration of the twelve (12) consecutive month period following the date the Employee was first absent from work for any reason other than retirement, quit or discharge, during which he did not perform an Hour of Service for the Company or Affiliated Company. (e) An Employee who incurs a Break in Continuous Service on account of Retirement, quit or discharge and who thereafter performs an Hour of Service with the Company within the twelve (12) consecutive month period of severance between the break and performance of an Hour of Service for the purpose of vesting under the Plan. (f) In the case of a reemployed Employee who was not a Participant in the Plan during his prior period of employment or in the case of a Participant whose prior employment terminated without a Capital Accumulation, any Continuous Service attributable to his prior period of employment will be restored only if such aggregate number of years of Continuous Service prior to such termination equals or exceeds the greater of (i) five (5) years or (ii) the Employee's prior period of severance. 12.03 AFFILIATED COMPANIES. Notwithstanding any provisions in Sections 12.01 and 12.02, and solely for the purposes of vesting under the Plan, Continuous Service shall include service in the employ of any Affiliated Company which has adopted the Plan. ARTICLE XIII PLAN ADMINISTRATION 13.01 NAMED FIDUCIARIES. The Committee and the Company shall each be a "named fiduciary" within the meaning of Section 402 of ERISA, but each such party's role as a named fiduciary shall be limited solely to the exercise of its own authority and discretion, as defined under the terms of the Plan, to control and manage the operation and administration of the Plan (other than authority and discretion assigned under this Plan, or delegated pursuant thereto, to the Trustee). A named fiduciary may designate other persons who are not named fiduciaries to carry out its fiduciary responsibilities hereunder, and any such person shall become a fiduciary under the Plan with respect to such delegated responsibilities. In the event 30 of such a designation, the named fiduciary shall not be liable for an act or omission of the designee in carrying out responsibilities delegated to him except to the extent provided in Section 405 of ERISA. Article IX describes circumstances under which Participants shall be named fiduciaries for certain purposes under the Plan. 13.02 FIDUCIARY LIMITATIONS. Named fiduciaries under the Plan, as well as the Trustee and any other person who may be a fiduciary by virtue of Section 3(21) of ERISA, shall exercise and discharge their respective powers and duties in the following manner: (a) By acting solely in the interest of the Participants and their Beneficiaries; (b) By acting for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Trust Assets and Plan; (c) By acting with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (d) By otherwise acting in accordance with the Plan and Trust Agreement to the extent consistent with Title I of ERISA. 13.03 COMPANY RESPONSIBILITIES. The Company, acting through the Board of Directors, shall have the authority to amend or terminate the Plan pursuant to the provisions of Article XIV, to determine the amount of Employer Contributions to the Plan pursuant to Article V, to appoint a Trustee and Committee, to approve the adoption of the Plan by any other Employer and to act as agent for any Affiliated Company which has adopted the Plan. Whenever the Company is permitted or required to do or perform any act under the terms of this Plan, it shall be done and performed by any officer duly authorized by the Board of Directors. To enable the Committee to perform its duties, the Company shall supply completely and timely all information which the Committee may from time to time require. 13.04 TRUSTEE RESPONSIBILITIES. The Trustee shall have, to the extent set forth in the Trust Agreement, authority and discretion to receive, hold and distribute Trust Assets, fiduciary responsibilities in connection with the exercise of such authority and discretion and a duty to issue reports and otherwise to account to the Company and the Committee. All contributions under the Plan shall be paid over to the Trustee and, together with accretions thereto, shall be invested by the Trustee in accordance with the directions permitted under the Plan and Trust Agreement. 13.05 APPOINTMENT OF COMMITTEE. The Plan will be administered by a Committee composed of individuals appointed by the Board of Directors of the Company to 31 serve at its pleasure. A member of the Committee may be removed by the Board of Directors at any time with or without cause upon written notice from the Board of Directors, and any member of the Committee may resign by delivering his written resignation to the Board of Directors. 13.06 ORGANIZATION AND POWERS OF THE COMMITTEE. (a) A majority of the members of the Committee at the time in office may do any act which the Plan authorizes or requires the full Committee to do, and the action of such majority of the members expressed from time to time by a vote at a meeting, or in writing without a meeting, shall constitute the action of the Committee and shall have the same effect for all purposes as if assented to by all the members in office at the time. A member of the Committee who is also a Participant in the Plan shall not vote or act on any matter relating solely to himself. Any one member of the Committee may advise the Trustee in writing with respect to any action taken by the Committee. The Committee, as Plan administrator, shall have complete control of the administration of the Plan with all powers necessary to enable it properly to carry out its duties in that respect. A benefit administrator may be appointed by the Committee. The duties of the benefit administrator may include, but shall not be limited to, the day-to-day supervision of the Plan, handling written requests of Participants or Beneficiaries regarding the Plan and performing any duties with respect to claims for benefits specified by the Committee. The Committee and its delegates shall have sole and complete discretion in the administration and operation of the Plan. The determination of the Committee as to any question involving the general administration of the Plan, including, but not limited to, determinations regarding eligibility for participation, entitlement to benefit distributions, calculation of benefits and the timing and form of payment of distributions, shall be conclusive, final and binding on all parties, including the Employer, the Trustee and Participants and Beneficiaries. The Committee may appoint counsel or Plan consultants and hire or retain agents and such clerical, medical and accounting services as it may require in carrying out the provisions of the Plan. (b) DUTIES. The Company shall administer the Plan through the Committee as Plan administrator. As such, the Committee provides for the necessary reporting and disclosure and appoints the Plan consultants and certified public accountant. In addition, the Committee considers appeals and provides for general administration of the Plan as elsewhere herein provided. 32 Upon the request of the Board of Directors, the Committee shall cause to be presented to the Board of Directors a report for the past calendar year (or applicable period thereof) on the status of the Plan and its operation. (c) REIMBURSEMENT OF COMMITTEE. The members of the Committee shall serve without compensation for services as such. The Company, upon an equitable basis, shall pay or reimburse the members of the Committee for all expenses reasonably incurred by them in or about Committee business. (d) CLAIMS PROCEDURE. Any claim by a Participant or Beneficiary shall be filed in writing with the Committee. Any decision by the Committee denying a claim by a Participant or a Beneficiary for benefits under the Plan shall be communicated in writing to the Participant or Beneficiary, setting forth the specific reasons for such denial. Any such Participant or Beneficiary whose claim has been denied, or his duly authorized representative, may (i) appeal to the Committee in writing within sixty (60) days after receipt of the notice of denial for a full review of the decision by the Committee; (ii) review pertinent documents; and (iii) submit issues and comments in writing. The decision by the Committee following such review shall be made no later than sixty (60) days after the date of receipt by the Committee of the request for review, and shall be conclusive as to all persons affected thereby. Such decision shall be in writing and shall include both specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. 13.07 INDEMNIFICATION. The officers, directors and employees of the Company, and the members of the Committee, shall be entitled to indemnification by the Company to the extent permitted under the laws of the State of Minnesota and ERISA with regard to any fiduciary liability they or any one or more of them may incur as a named fiduciary to or in connection with the Plan to the extent permitted under the Company's by-laws or provided in any applicable insurance contract(s) which may be maintained by the Company, except to the extent that such person shall be determined to be liable by a court of competent jurisdiction for his own willful misconduct. In addition, they each shall be entitled to rely upon all tables, certificates and reports made by a certified public accountant for the Plan and upon all written opinions given by any legal counsel, to the extent it is prudent to so rely, and shall be fully protected with respect to any action prudently taken or suffered by them in good faith based on such reliance. The foregoing rights of indemnification shall be in addition to such other rights as the above persons may enjoy as a matter of law or by reason of insurance coverage of any kind. To the extent permitted by law, except as limited by any written agreement between the Company and the Committee, the Company shall indemnify and save the Committee, as Plan administrator, the benefit administrator and members of the Committee harmless against expenses, claims and liability arising out of being the Plan administrator, the benefit administrator or a Committee member. The Company shall maintain insurance against 33 acts or omissions of the Plan administrator, the benefit administrator and the Committee members. ARTICLE XIV AMENDMENT AND TERMINATION 14.01 COMPANY'S RIGHT TO AMEND. Subject to the provisions hereinafter set forth, the Company reserves the right, at any time or from time to time, by action of the Board of Directors, to amend in whole or in part any or all of the provisions of this Plan; provided, however, that no such amendment shall be made which: (a) Will deprive any Participant of any benefit to which he has a nonforfeitable right under Article X of this Plan; or (b) Shall make it possible for any part of the Trust Assets or its income to be used for, or diverted to, purposes other than for the exclusive benefit of the Participants. No such amendment which affects the rights, duties or responsibilities of the Trustee may be made without the Trustee's written consent. No amendment to the Plan shall decrease a Participant's Account balances or eliminate an optional form of distribution. Notwithstanding the preceding sentence, a Participant's Account balances may be reduced to the extent permitted under Section 412(c)(8) of the Code. Furthermore, no amendment to the Plan shall have the effect of decreasing a Participant's Capital Accumulation determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective. If the Plan's vesting schedule is amended, or the Plan is amended in any way that directly or indirectly affects the computation of any Participant's nonforfeitable percentage, or if the Plan is deemed amended by an automatic change to or from a "top-heavy" vesting schedule, each Participant with at least five (5) years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have his nonforfeitable percentage computed under the Plan without regard to such amendment or change. 14.02 MANDATORY AMENDMENTS. Notwithstanding the provisions of this Article XIV, or of any other provision of this Plan, any amendment may be made, retroactively if necessary, which the Company deems necessary or appropriate to conform the Plan to, or to satisfy the conditions of, any law, government regulation or ruling, and to permit the Plan to meet the requirements for qualification under Sections 4975(e)(7) and 401(a) of the Code, and to permit the Trust to meet the requirements for tax-exempt status under Section 501 of the Code. In the event that an initial favorable determination letter from the Internal Revenue Service is denied with respect to the adoption of this Plan, then this Plan shall at the option of the Board of Directors be declared null and void. 34 14.03 TERMINATION. The Company shall have the right at any time to terminate the Plan and the Trust created concurrently herewith by delivering to the Committee written notice of such termination and by further informing the Trustee by written notice of such termination. Each Employer reserves the right to terminate the participation of its Employees under the Plan. Upon any such termination, such action shall be taken as to render it impossible for any part of the corpus of the Trust or income of the Plan to be at any time used for, or diverted to, purposes other than for the exclusive benefit of Participants and their Beneficiaries. 14.04 EMPLOYEE NONFORFEITABLE RIGHTS. Upon termination (or partial termination) of the Plan within the meaning of Section 411(d)(3) of the Code or a complete discontinuance of Employer Contributions hereunder, each Participant (or in the case of a partial termination, each Participant affected) shall continue to have a nonforfeitable right to one hundred (100) percent of the balance in each of his Accounts as of the date of termination, partial termination or complete discontinuance; provided, however, that replacement of this Plan with a comparable plan qualified under Section 401(a) of the Code shall not be a termination for purposes of this Section 14.04. 14.05 DISTRIBUTION UPON TERMINATION. In the event of termination of the Plan pursuant to Section 14.03, the assets then held in Trust under the Plan shall be distributed to the Participants in accordance with Article XI as if a Break in Service occurred as of the date the Plan terminated. ARTICLE XV GENERAL PROVISIONS 15.01 PARTICIPANTS' RIGHTS. Neither the establishment of the Plan, nor any modification hereof, nor the creation of any fund or account, nor the payment of any benefits, shall be construed as giving to any Participant or other person any legal or equitable right against the Company or an Affiliated Company, or any officer or Employee thereof, or the Trustee, or the Committee, except as herein provided. The adoption and maintenance of the Plan shall not be deemed to constitute a contract of employment or otherwise between an Employer and any Employee, or to be a consideration for, or an inducement or condition of, any employment. Nothing contained herein shall be deemed to give an Employee the right to be retained in the service of an Employer or otherwise interfere with the right of an Employer to discharge, with or without cause, any Employee at any time. 15.02 SPENDTHRIFT CLAUSE. No benefit which shall be payable out of the Trust Assets to any Participant and/or his Beneficiary shall be subject in any manner to any voluntary or involuntary anticipation, alienation, sale, transfer, assignment, garnishment, pledge, encumbrance or charge, and any attempt to anticipate any such benefit shall be void; 35 and no such benefit shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any such Participant and/or his Beneficiary nor shall it be subject to attachment or legal process for or against such person, and the same will not be recognized by the Trustee except to such an extent as may be required by law. The limitations contained in this Section 15.02 shall apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a Domestic Relations Order unless such order is determined to be a Qualified Domestic Relations Order as defined in Section 414(p) of the Code, and as defined in Section 11.08(c)(3). 15.03 COMPANY'S LIABILITY. All Capital Accumulations will be paid only from the Trust Assets, and neither the Company nor any Employer nor the Committee nor the Trustee shall have any duty or liability to furnish the Trust with any funds, securities or other assets, except as expressly provided in the Plan. 15.04 MERGER OR CONSOLIDATION. In the event of a merger or consolidation of the Plan with, or transfer in whole or in part of the Trust Assets or liabilities to, another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants, Trust Assets or liabilities shall be transferred to the other trust fund only if each Participant or Beneficiary would be entitled to a benefit immediately after the merger, consolidation or transfer (assuming the other plan and trust had then terminated) which is equal to or greater than the benefit to which he would have been entitled to receive immediately before the merger, consolidation or transfer (as if the Plan had then terminated). 15.05 GOVERNING LAW. This Plan shall be construed according to the laws of the State of Minnesota and all provisions hereof shall be administered according to, and its validity shall be determined under, the laws of such State, except to the extent that such laws have been specifically preempted by ERISA or other federal legislation. 15.06 LEGAL ACTION. In any action or proceeding involving the Trust, or any property constituting part or all thereof, or the administration thereof, Employees or former Employees of the Company or an Affiliated Company or the Beneficiaries or any other person having or claiming to have an interest in the Trust Assets or under the Plan shall not be necessary parties nor entitled to any notice of process. 15.07 BINDING ON ALL PARTIES. Any applicable final judgment which is not appealed or appealable that may be entered in any legal action or proceeding shall be binding and conclusive on the Committee and all persons having or claiming to have an interest in the Trust Assets or under the Plan. 15.08 HEADINGS. The headings of the Plan are inserted for convenience of reference only and are not to be considered in the construction or the interpretation of the Plan. 36 15.09 SEVERABILITY OF PROVISIONS. If any provision of the Plan is held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision, and the Plan shall be construed and enforced as if such provision had not been included. 15.10 SERVICE OF PROCESS. The Committee is the designated agent of the Plan for the service of process in connection with all matters affecting the Plan. ARTICLE XVI TOP-HEAVY COMPLIANCE PROVISIONS 16.01 PURPOSE. The purpose of this Article XVI of the Plan is to comply with the special rules applicable to "top-heavy" plans contained in Section 416 of the Code, as added by Section 240 of the Tax Equity and Fiscal Responsibility Act of 1982, and the appropriate Regulations of the Internal Revenue Service thereunder, including Treasury Regulation Section 1.416-1 and successor Regulations. The rules set forth in this Article XVI shall be operative if the Plan is, or becomes, "top-heavy" within the meaning of Section 416 of the Code and the Regulations thereunder. In the event that by statutory repeal or amendment, or regulatory change or ruling by the Internal Revenue Service, any of the limitations or restrictions of this Article XVI are no longer necessary in order for the Plan to meet the requirements of Section 416 of the Code or other applicable provisions of the Code then in effect, such limitations or restrictions shall immediately become null and void and shall no longer apply without the necessity of further amendment to the Plan. 16.02 DEFINITIONS. For purposes of this Article XVI only, the following terms shall have the meanings set forth below: (a) "Determination Date" means, as to any Plan Year, the last day of any preceding Plan Year or, in the case of the first Plan Year, the last day of such Plan Year. (b) "Key Employee" means any Employee, or former Employee, or Beneficiary of either, who at any time during the Plan Year or the four (4) preceding Plan Years, is: (1) an officer of an Employer having an annual Section 414(s) Compensation greater than the amount determined by multiplying one hundred fifty (150) percent of the dollar limitation under Section 415(c)(1)(A) of the Code; 37 (2) one of the 10 (ten) Employees owning the largest interests in an Employer having an annual Section 414(s) Compensation at least equal to the dollar limitation under Section 415(c)(1)(A) of the Code; (3) a five (5) percent owner of an Employer; or (4) a one (1) percent owner of an Employer having aggregate annual Section 414(s) Compensation of $50,000 or more from the Employer and all entities required to be aggregated with the Employer under Sections 414(b), (c) and (m) of the Code. For purposes of subparagraphs (2), (3) and (4) above, owners of an Employer shall include those considered as owners within the meaning of Section 318 of the Code. In identifying the top ten (10) Employee owners under Section 16.02(b)(2), only owners of greater than a one-half (1/2) percent interest will be considered, and if several Employees have equal ownership interests, those Employees with higher Section 414(s) Compensation shall be treated as having a greater ownership interest. The determination of who is a Key Employee shall be made in accordance with Section 416(i) of the Code and the Regulations thereunder, the provisions of which are incorporated herein by reference. As used herein, the term non-Key Employee shall mean any employee who is not a Key Employee. (c) "Valuation Date" means the most recent Valuation Date occurring within the twelve (12) month period ending on the Determination Date. 16.03 DETERMINATION OF WHETHER PLAN IS "TOP-HEAVY." The Plan will be deemed to be "top-heavy" in any Plan Year if, as of the Determination Date, the sum of the present value of accrued benefits of Key Employees exceeds sixty (60) percent of the sum of the present value of accrued benefits of all Participants, excluding former Key Employees. As used in this Section 16.03, the present value of accrued benefits includes the amounts attributable to Employer Contributions allocated to the individual accounts of Participants and former Participants. The determination of whether the Plan is "top-heavy" and the extent to which distributions, rollovers and transfers are taken into account in such calculation shall be made in accordance with Section 416 of the Code and the regulations thereunder which are herein incorporated by reference. Furthermore, a former Participant's Account balances are to be disregarded in determining whether the Plan is "top-heavy" unless the Participant performed any services for an Employer within the five (5) year period ending on the Determination Date. 38 16.04 AGGREGATION GROUP OF EMPLOYER PLANS. All corporations and businesses that are aggregated under Sections 414(b), (c) and (m) of the Code with the Employer must be considered with the Employer for the purposes of determining whether the Plan is "top-heavy." All plans of the Employer in which a Key Employee participates, and each other stock bonus, pension or profit sharing plan, if any, of the Employer which enables any plan in which a Key Employee participates to meet the requirements of Section 401(a)(4) or Section 410 of the Code, will be aggregated as a required aggregation group within the meaning of Section 416(g) of the Code. Each plan in the required aggregation group will be "top-heavy" if the group is "top-heavy," and no plan in the group will be top-heavy if the group is not "top-heavy." In addition, the Employer may elect to include as part of the permissive aggregation group under Section 416(g) of the Code any plans that are not part of a required aggregation group but that satisfy the requirements of Sections 401(a)(4) and 410 of the Code when considered together with the plans constituting the required aggregation group. If the permissive aggregation group is "top-heavy," only those plans which are part of the required aggregation group will be subject to the additional requirements applicable to "top-heavy" plans as herein provided. 16.05 SPECIAL MINIMUM CONTRIBUTION BECOMING OPERATIVE IN THE EVENT THE PLAN BECOMES "TOP-HEAVY." In the event that the Plan shall be determined to be "top-heavy" as to any Plan Year, the Employer Contributions allocated to the Accounts under the Plan of a non-Key Employee for each Plan Year in which the Plan is "top-heavy" shall equal the lesser of (a) three (3) percent of Section 414(s) Compensation for such Plan Year and (b) the largest percentage of Section 414(s) Compensation, subject to the Compensation Limitation, allocated to the Accounts of a Key Employee under the Plan for that Plan Year. All Participants who have not terminated employment as of the last day of the Plan Year must receive the minimum contribution. Employees who (a) failed to complete one thousand (1,000) Hours of Service during the Plan Year, (b) declined to make mandatory contributions to the Plan or (c) would have been excluded from the Plan because their Compensation is less than a stated amount, must nevertheless be considered Participants for purposes of the minimum contribution in this Section 16.05 if such Employees are required to satisfy the coverage requirements of Section 410(b) of the Code in accordance with Section 401(a)(5) of the Code. The minimum contribution is determined without regard to any Social Security contribution. 16.06 PRE-"TOP-HEAVY" PLAN TERMINATED PARTICIPANT. This Article XVI shall not apply to any Participant who does not complete an Hour of Service after the Plan becomes "top-heavy." 16.07 SPECIAL "TOP-HEAVY" REDUCTION IN COMBINED BENEFIT AND CONTRIBUTION LIMITATION. In the event that the Plan shall be determined to be "top-heavy" in any Plan Year, 39 the multiple applicable to the dollar limitation in the denominator of the defined benefit fraction described in Section 7.03 of the Plan and the multiple applicable to the dollar limitation in the denominator of the defined contribution fraction described in Section 7.03 of the Plan shall be one (1) rather than one and one-quarter (1.25); provided, however, that this Section 16.07 shall not apply in the event that the Plan is not a "super top-heavy" plan as defined in Section 16.10(a) and each Participant who is a non-Key Employee shall receive the minimum contribution set forth in Section 16.05, except that the multiple in clause (a) of Section 16.05 shall be four (4) percent rather than three (3) percent. 16.08 TERMINATION OF "TOP-HEAVY" STATUS. In the event that the Plan shall be "top-heavy" within the meaning of Section 416 of the Code for any Plan Year, and in a subsequent Plan Year the Plan shall cease to be "top-heavy," the special "top-heavy" minimum contribution and Compensation Limitation Rules shall cease to apply with respect to any Plan Year for which the Plan is not "top-heavy"; provided, however, that in no event shall a reduction in a Participant's nonforfeitable percentage occur by reason of a change in the Plan's status. 16.09 MULTIPLE "TOP-HEAVY" PLANS. In the event that a Participant in the Plan is also participating in a defined benefit plan maintained by an Employer or an affiliated employer during a Plan Year in which both the Plan and such defined benefit plan are "top-heavy," the Participant shall receive the minimum accrued benefit under the defined benefit plan rather than the minimum contribution provided for in this Plan. 16.10 EFFECT OF THE PLAN BECOMING "SUPER TOP-HEAVY". (a) The Plan shall be deemed to be "super top-heavy" if, as of the most recent Valuation Date, the sum of the present value of accrued benefits for Key Employees is more than ninety (90) percent of the sum of the present value of accrued benefits for all Employees, excluding former Key Employees. (b) In the event that the Plan shall be determined to be "super top-heavy" in any Plan Year, the multiple applicable to the dollar limitation in the denominator of the defined benefit fraction described in Section 7.03 of the Plan and the multiple applicable to the dollar limitation in the denominator of the defined contribution fraction described in Section 7.03 of the Plan shall be one (1) rather than one and one-quarter (1.25). ARTICLE XII DIRECT ROLLOVER AND ELIGIBLE ROLLOVER DISTRIBUTIONS 40 17.01 PURPOSE. This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. 17.02 DEFINITIONS. (a) ELIGIBLE ROLLOVER DISTRIBUTION. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: (1) Any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; (2) Any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and (3) The portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (b) ELIGIBLE RETIREMENT PLAN. An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) DISTRIBUTEE. A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (d) DIRECT ROLLOVER. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. 41 ARTICLE XVIII EXECUTION To record the adoption of the Plan, the Employer has caused its proper officer to set his hand as of the 17th day of November, 1997. POLARIS INDUSTRIES INC. By: /s/Michael Malone -------------------------------------------------- Title: Vice President and Chief Financial Officer ----------------------------------------------- 42 EX-10.(E) 3 FOURTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 10(E) FOURTH AMENDMENT TO CREDIT AGREEMENT This Fourth Amendment to Credit Agreement, dated as of March 31, 1997 ("Fourth Amendment"), is made by and between POLARIS INDUSTRIES INC., a Minnesota corporation (the "Borrower"); FIRST BANK NATIONAL ASSOCIATION, BANK OF AMERICA ILLINOIS and FIRST UNION NATIONAL BANK OF NORTH CAROLINA (collectively, the "Banks"); and FIRST BANK NATIONAL ASSOCIATION, as administrative agent for the Banks (the "Administrative Agent"). WHEREAS, the Borrower, the Banks and the Administrative Agent have entered into that certain Credit Agreement dated as of May 8, 1995, as amended by First Amendment to Credit Agreement dated as of November 15, 1995, Second Amendment to Credit Agreement dated as of February 13, 1996 and Third Amendment to Credit Agreement dated as of September 30, 1996 (as so amended, the "Credit Agreement"). WHEREAS, the Borrower has requested the Banks and the Administrative Agent to modify certain provisions of the Credit Agreement, and the Banks and the Administrative Agent are willing to do so on the terms and conditions set forth herein. NOW THEREFORE, in consideration of the premises and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree to be bound as follows: Section 1. CAPITALIZED TERMS. All capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Credit Agreement. Section 2. AMENDMENTS. (a) The definitions of "Guarantors," "Revolving Commitment Amount" and "Revolving Note" in Section 1.1 of the Credit Agreement are amended to read in their entirety as follows: "GUARANTORS": Collectively, Polaris Acceptance Inc., Polaris Industries Inc., Polaris Industries Export Ltd., Polaris Real Estate Corporation of Iowa, Inc., Polaris Real Estate Corporation and any Additional Guarantors. "REVOLVING COMMITMENT AMOUNT": With respect to a Bank: (a) during the period ending on and including March 31, 1998, the amount set opposite such Bank's name in the table immediately below or as specified in the most recent Assignment Agreement to which such Bank is a party, but as the same may be from time to time reduced pursuant to Section 2.14:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Bank Revolving Commitment Amount Prior to ---- ------------------------------------ April 1, 1998 ------------- - -------------------------------------------------------------------------------- First Bank National Association $54,000,000 - -------------------------------------------------------------------------------- Bank of America Illinois $48,000,000 - -------------------------------------------------------------------------------- First Union National Bank of North $48,000,000 Carolina - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(b) during the period beginning on April 1, 1998 and ending on the Revolving Commitment Date, the amount set opposite such Bank's name in the table immediately below or as specified in the most recent Assignment Agreement to which such Bank is a party, but as the same may be from time to time reduced pursuant to Section 2.14:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Bank Revolving Commitment Amount on and ---- ---------------------------------- after April 1, 1998 ------------------- - -------------------------------------------------------------------------------- First Bank National Association $45,000,000 - -------------------------------------------------------------------------------- Bank of America Illinois $40,000,000 - -------------------------------------------------------------------------------- First Union National Bank of $40,000,000 North Carolina - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
"REVOLVING NOTE": A promissory note of the Borrower in the form of Exhibit 1.1-2-4 hereto. (b) The definition of "Co-Lead Manager" is deleted from Section 1.1 of the Credit Agreement, and a new definition of "Documentation Agent" is added to Section 1.1 of the Credit Agreement, in appropriate alphabetical order, to read in its entirety as follows: "DOCUMENTATION AGENT": Each of Bank of American Illinois and First Union National Bank of North Carolina. (c) Section 2.6 of the Credit Agreement is amended to read in its entirety as follows: Section 2.6 REPAYMENT. On April 1, 1998, the Borrower shall pay the amount, if any, by which the unpaid principal amount of all Advances exceeds the Aggregate 2 Revolving Commitment Amounts as of April 1, 1998. The unpaid principal amount of all Advances, together with all accrued and unpaid interest thereon, shall be due and payable on the Termination Date. (d) Section 2.20 of the Credit Agreement is amended by deleting the date "March 31, 1998" therefrom and inserting the date "March 31, 2000" in its place. (e) Sections 6.12 and 6.13 of the Credit Agreement are amended to read in their entirety as follows: Section 6.12 CONTINGENT LIABILITIES. The Borrower will not, and will not permit any Subsidiary to, be or become liable on any Contingent Obligations except: (i) Contingent Obligations existing on the date of this Agreement and described on Exhibit 6.12-4; (ii) the Borrower's guarantee of up to a percentage of Acceptance Partnership's Indebtedness under the Acceptance Partnership Credit Agreement equal to PAI's percentage ownership of Acceptance Partnership and the Borrower's guarantee of PAI's obligation to make additional capital contributions to Acceptance Partnership, PROVIDED that the Borrower's maximum liability under such guarantee does not exceed $250,000,000 (with respect to loans) and $50,000,000 (with respect to capital contributions); (iii) PAI's liability as general partner for up to a percentage of Acceptance Partnership's Indebtedness under the Acceptance Partnership Credit Agreement equal to PAI's percentage ownership of Acceptance Partnership, PROVIDED that PAI's maximum liability with respect thereto does not exceed $250,000,000; and (iv) PAI's obligation to make additional capital contributions to Acceptance Partnership, PROVIDED that the sum of such obligation, to the extent quantified at any time, and all Investments in Acceptance Partnership then existing does not exceed $50,000,000. Section 6.13 TANGIBLE NET WORTH. The Borrower will not permit its Tangible Net Worth at any time to be less than: (a) $50,000,000 at all times until December 31, 1996; (b) $75,000,000 at all times on and after December 31, 1996, until December 31, 1997; (b) $100,000,000 at all times on and after December 31, 1997, until December 31, 1998; and (d) $125,000,000 at all times on and after December 31, 1998. (f) Section 9.6(c) of the Credit Agreement is amended by adding a new sentence to the end thereof, to read in its entirety as follows: If an Assignment Agreement is executed prior to April 1, 1998, it shall specify the Revolving Commitment of the assigning Bank and the Assignee both before and after April 1, 1998, and the Revolving Percentages of each of the assigning Bank and the Assignee shall be the same before and after April 1, 1998. 3 (g) Exhibits 1.1-2 and 6.12 are deleted from the Credit Agreement and new Exhibits 1.1-2-4 and 6.12-4, in the forms of Exhibits 1.1-2-4 and 6.12-4 attached hereto, are added to the Credit Agreement. Section 3. CONDITIONS TO EFFECTIVENESS OF FOURTH AMENDMENT. The Amendments contained in this Fourth Amendment shall not become effective until, and shall become effective when, the Administrative Agent shall have received each of the following, in sufficient number to distribute to each Bank. (a) The Agent shall have received, with a counterpart for each Bank, this Amendment, duly executed by the Borrower, the Banks and the Agent, and consented to by the Guarantors; (b) The Agent shall have received a Revolving Note in the form of Exhibit 1.1-2-4 to this Amendment, duly executed by the Borrower, payable to each Bank in the amount shown as that Bank's Revolving Commitment Amount in clause (a) of the definition of that term in Section 1.1, as amended by this Agreement (each, a "Replacement Revolving Note;" collectively as to all the Banks, the "Replacement Revolving Notes"); (c) The Agent shall have received, with a counterpart for each Bank, a copy of resolutions adopted by the Borrower, authorizing the execution, delivery and performance of this Amendment and the Replacement Revolving Notes by the Borrower, certified by the Borrower's secretary or assistant secretary; (d) The Agent shall have received, with a counterpart for each Bank, a copy of resolutions adopted by each Guarantor, authorizing the execution, delivery and performance of that Guarantor's consent to this Amendment, certified by that Guarantor's secretary or assistant secretary; (e) The Agent shall have received, with a counterpart for each Bank, a certificate signed by the secretary or assistant secretary of the Borrower certifying (i) as to the incumbency of the person or persons authorized to execute and deliver on behalf of the Borrower this Amendment and the Replacement Revolving Notes, and (ii) that the articles or certificate of incorporation and bylaws of the Borrower have not been repealed, rescinded, amended or otherwise modified since copies of the same were delivered to the Banks on or about May 8, 1995, pursuant to Section 3.1 of the Credit Agreement;; (f) The Agent shall have received, with a counterpart for each Bank, a certificate signed by the secretary or assistant secretary of each Guarantor certifying (i) as to the incumbency of the person or persons authorized to execute and deliver on behalf of that Guarantor its consent to this Amendment, and (ii) that the articles or certificate of incorporation and bylaws of that Guarantor have not been repealed, rescinded, amended 4 or otherwise modified since copies of the same were delivered to the Banks on or about (x) May 8, 1995, pursuant to Section 3.1 of the Credit Agreement, or (y) the date such Guarantor became a Guarantor, pursuant to Section 6.5 of the Credit Agreement; (g) The Agent shall have received certificates of good standing for the Borrower and each Guarantor, in the jurisdiction of its incorporation or organization, in the State of Iowa (with respect to the Borrower), in the State of Wisconsin (with respect to Polaris Real Estate Corporation), in the State of Iowa (with respect to Polaris Real Estate Corporation of Iowa), and in the State of Minnesota (with respect to Polaris Industries Inc.), certified by the appropriate governmental officials as of a date not more than 15 days prior to the date hereof; (h) The Agent shall have received, for the account of each Bank, a written opinion from Kaplan, Strangis & Kaplan, P.A. covering the matters set forth on Exhibit A attached hereto; and (i) The Agent shall have received, with a counterpart for each Bank, such other documents, instruments, approvals, and, if requested by the Agent, certified duplicates of executed copies thereof, that the Agent may reasonably request. Upon execution and delivery by the Borrower of the Replacement Revolving Notes and the satisfaction of all of the conditions specified in this Section 3: (i) all amounts of principal and interest due and payable on those certain Revolving Notes dated May 8, 1995, in the aggregate principal amount of $125,000,000, shall be due and payable under the appropriate Replacement Revolving Notes; and (ii) each reference to the Revolving Notes in the Credit Agreement, any Loan Document or any other document related thereto shall be deemed to be a reference to the Replacement Revolving Notes in the form of Exhibit 1.1-2-4 attached hereto. Section 4. ACKNOWLEDGMENT. The Borrower acknowledges and agrees that its obligations to the Banks and the Administrative Agent under the Credit Agreement, as amended hereby, and the Revolving Notes exist and are owing without offset, defense or counterclaim assertable by the Borrower against the Banks and the Administrative Agent. Section 5. EFFECT OF FOURTH AMENDMENT; REPRESENTATIONS AND WARRANTIES; NO WAIVER. The Banks, the Administrative Agent and the Borrower agree that after this Fourth Amendment becomes effective, the Credit Agreement, as hereby amended, shall remain in full force and effect. The Borrower represents and warrants that on and as of the date hereof and after giving effect to this Fourth Amendment: (i) all of the representations and warranties contained in the Credit Agreement are correct and complete in all material respects as of the date hereof, as though made on and as of such date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true and correct as of such earlier date; (ii) there will exist no Default or Event of Default on such date; (iii) there has been no change in any of the certificates or articles of incorporation, bylaws or partnership agreements of the Borrower or any 5 Guarantor since the Closing Date or (if later) the date such Guarantor became a Guarantor; (iv) the Borrower has the power and legal right and authority to enter into this Fourth Amendment; (v) neither this Fourth Amendment, nor the agreements contained herein or therein contravene or constitute a default under any agreement, instrument or indenture to which the Borrower is a party or signatory or a provision of the Borrower's articles of incorporation or, to the best of Borrower's knowledge, any other agreement or requirement of law; and (vi) no consent, approval or authorization of or registration or declaration with any Person, including but not limited to any governmental authority, is required in connection with the execution and delivery by the Borrower of this Fourth Amendment, or the performance of obligations of the Borrower herein or therein described. Section 6. INCORPORATION OF CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS BY REFERENCE; RATIFICATION OF LOAN DOCUMENTS. Except as expressly modified under this Fourth Amendment, all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under the Credit Agreement, the Revolving Notes and any and all other documents and agreements entered into with respect to the obligations under the Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower. All references in the Credit Agreement to "this Agreement," "herein," "hereof," and similar references, and all references in the other Loan Documents to the "Credit Agreement," shall be deemed to refer to the Credit Agreement, as amended by this Fourth Amendment. Section 7. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Fourth Amendment, from and after the date hereof, embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes and has merged into it all prior oral and written agreements on the same subjects by and between the parties hereto with the effect that this Fourth Amendment shall control. Section 8. EXPENSES. As provided in Section 9.2 of the Credit Agreement, the Borrower agrees to pay all of the expenses, including reasonable attorneys' fees and expenses, incurred by the Administrative Agent in connection with this Fourth Amendment. Section 9. COUNTERPARTS. This Fourth Amendment may be executed in any number of counterparts, and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original but all such counterparts together shall constitute but one and the same instrument. Section 10. GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS FOURTH AMENDMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK 6 IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment to Credit Agreement to be executed as of the date and year first above written. POLARIS INDUSTRIES INC., a Minnesota corporation By: /s/ Michael Malone ----------------------------------------- Michael Malone, Vice President FIRST BANK NATIONAL ASSOCIATION, as Administrative Agent and a Bank By: /s/ David Shapiro ----------------------------------------- Name: David Shapiro --------------------------------------- Title: Commercial Banking Officer --------------------------------------- BANK OF AMERICA ILLINOIS, as a Documentation Agent and a Bank By: /s/ R. Guy Stapleton ----------------------------------------- Name: R. Guy Stapleton ---------------------------------------- Title: Managing Director --------------------------------------- FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as a Documentation Agent and a Bank By: /s/ Thomas M. Cambern ----------------------------------------- Name: Thomas M. Cambern ---------------------------------------- Title: Vice President --------------------------------------- S-1 EX-13 4 EXHIBIT 13 SELECTED FINANCIAL DATA POLARIS INDUSTRIES INC. IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA The selected financial data presented below are qualified in their entirety by, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto and other financial and statistical information referenced elsewhere herein, including the information referenced under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Years Ended December 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Sales data Total dollars $1,048,296 $1,191,901 $1,113,852 $826,286 $528,011 % change from prior year (12%) 7% 35% 56% 38% Sales mix by product (%) Snowmobiles 42% 43% 46% 52% 59% ATVs 45% 37% 33% 30% 27% PWC 7% 16% 16% 14% 9% International 6% 4% 5% 4% 5% Gross profit data Total dollars $262,538 $ 263,816 $ 247,993 $196,783 $141,387 % of sales 25% 22% 22% 24% 27% Operating expense data Amortization of intangibles and noncash compensation $ 5,887 $ 5,325 $ 5,616 $ 14,321 $ 13,466 Conversion costs - - - 12,315 - Other operating expenses 163,549 161,074 140,719 94,485 74,694 % of sales 16% 14% 13% 11% 14% Actual and pro forma data* Net income $ 65,383 $ 62,293 $ 60,776 $ 54,703 $ 33,027 Basic and diluted net income per share $ 2.45 $ 2.24 $ 2.19 $ 1.98 $ 1.21 CASH FLOW DATA Cash flow from operating activities $ 102,308 $ 89,581 $ 77,749 $111,542 $ 78,503 Purchase of property and equipment 36,798 45,336 47,154 32,656 18,946 Repurchase and retirement of common stock 39,903 13,587 - - - Cash dividends to shareholders 16,958 16,390 116,639 - - Cash dividends per share $ 0.64 $ 0.60 $ 4.27 - - Cash distributions declared to partners - - - - 50,942 47,217 Cash distributions declared per unit - - - $ 1.68 $ 1.67 BALANCE SHEET DATA (at end of year) Cash and cash equivalents $ 1,233 $ 5,812 $ 3,501 $ 62,881 $ 33,798 Current assets 217,458 193,405 175,271 206,489 109,748 Total assets 384,746 351,717 314,436 331,166 180,548 Current liabilities 191,111 161,387 155,722 161,457 98,055 Borrowings under credit agreement 24,400 35,000 40,200 - - Shareholders' equity/ Partners' capital 169,235 155,330 118,514 169,709 82,493 - ---------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1992 1991 1990 1989 1988 - ---------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Sales data Total dollars $ 383,818 $ 297,677 $296,147 $242,618 $171,497 % change from prior year 29% 1% 22% 41% 24% Sales mix by product (%) Snowmobiles 63% 69% 74% 74% 77% ATVs 25% 25% 19% 19% 17% PWC 7% - - - - International 5% 6% 7% 7% 6% Gross profit data Total dollars $ 112,322 $ 94,120 $ 93,845 $ 80,384 $ 54,728 % of sales 29% 32% 32% 33% 32% Operating expense data Amortization of intangibles and noncash compensation $ 11,997 $ 13,108 $ 12,116 $ 15,717 $ 8,645 Conversion costs - - - - - Other operating expenses 59,634 49,294 50,917 38,366 27,620 % of sales 16% 17% 17% 16% 16% Actual and pro forma data* Net income $ 24,602 $ 20,727 $ 20,465 $ 16,657 $ 11,538 Basic and diluted net income per share $ 0.91 $ 0.81 $ 0.79 $ 0.65 $ 0.47 CASH FLOW DATA Cash flow from operating activities $ 55,316 $ 46,642 $ 54,782 $ 44,447 $ 37,542 Purchase of property and equipment 12,295 15,988 7,158 7,065 2,724 Repurchase and retirement of common stock - - - - - Cash dividends to shareholders - - - - - Cash dividends per share - - - - - Cash distributions declared to partners 44,507 42,581 42,582 32,514 17,722 Cash distributions declared per unit $ 1.67 $ 1.67 $ 1.67 $ 1.51 $ 0.80 BALANCE SHEET DATA (at end of year) Cash and cash equivalents $ 19,094 $ 20,098 $ 32,025 $ 27,886 $ 15,599 Current assets 74,999 59,200 66,893 60,344 36,377 Total assets 146,681 135,509 138,704 137,628 118,070 Current liabilities 69,054 52,646 46,602 38,875 20,665 Borrowings under credit agreement - - - - - Shareholders' equity/ Partners' capital 77,627 82,863 92,102 98,753 97,405 - ----------------------------------------------------------------------------------------------------------------
* THE COMPARABILITY OF THE INFORMATION REFLECTED IN THE SELECTED FINANCIAL DATA IS MATERIALLY AFFECTED BY THE CONVERSION FROM A MASTER LIMITED PARTNERSHIP TO A CORPORATION ON DECEMBER 22, 1994, WHICH RESULTED IN THE COMPANY RECORDING A NET DEFERRED TAX ASSET OF $65.0 MILLION, CONVERSION EXPENSES OF $12.3 MILLION AND A CORRESPONDING NET INCREASE IN 1994 NET INCOME. 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. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS POLARIS INDUSTRIES INC. 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, 1997, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein. RESULTS OF OPERATIONS 1997 vs. 1996 Sales decreased to $1.048 billion in 1997, representing a 12 percent decrease from $1.192 billion in 1996. The decrease in sales was primarily due to lower personal watercraft (PWC) and, to a lesser extent, lower snowmobile sales. The Company's all-terrain vehicle (ATV) product line posted its eighth consecutive year of increased sales. North American sales of snowmobiles and related parts, garments and accessories (PG&A) of $443.0 million in 1997 were 13 percent lower than $506.5 million in 1996. The decline is due to lower snowmobile production levels driven by a second consecutive year of relatively flat industry growth. This lower production has enabled Polaris to assist dealers in managing their field inventory levels. North American sales of snowmobiles and related PG&A comprised 42 percent of total Company sales in 1997 compared to 43 percent in 1996. North American sales of ATVs and related PG&A of $473.2 million in 1997 were six percent higher than $445.9 million in 1996. The increased sales reflects the continued growth of the industry and Polaris' ability to provide the consumer with a quality product at a competitive price. North American sales of ATVs and related PG&A comprised 45 percent of total Company sales in 1997 compared to 37 percent in 1996. North American sales of PWC and related PG&A were $73.4 million in 1997 as compared to $190.4 million in 1996. The decrease is attributable to significantly lower production levels of PWC in 1997 to compensate for the increased dealer inventory remaining from the prior season reflecting the reduction of industry growth. North American sales of PWC and related PG&A comprised seven percent of total Company sales in 1997 compared to 16 percent in 1996. International sales of snowmobiles, ATVs, PWC, and related PG&A of $58.7 million in 1997 were 20 percent higher than $49.1 million in 1996. The increase in international sales was across all product lines. Polaris continues to focus on international markets as an opportunity for future growth. International sales comprised six percent of total Company sales in 1997 compared to four percent in 1996. Gross profit of $262.5 million decreased slightly in 1997 from $263.8 million in 1996. However, the gross profit margin percentage was 25.0 percent in 1997 as compared to 22.1 percent in 1996. The increase in gross profit margin percentage is primarily a result of (a) continued cost reduction efforts, including expanded domestic engine production, (b) reduced warranty costs, (c) decreases in costs of certain purchased components due to the strengthening of the U.S. dollar in relation to the Japanese yen when compared to 1996, and (d) a change in sales mix with less sales of the lower margin PWC product compared to 1996. Polaris has continued to invest in new product development, innovation and product diversification. During 1997, Polaris reclassified its research and development costs as a component of operating expenses in the consolidated statements of operations for each period presented. Previously, research and development costs were reported as a component of cost of sales. Research and development expenses were $26.7 million (2.5 percent of sales) in 1997 and $28.3 million (2.4 percent of sales) in 1996. In addition, Polaris incurred tooling expenditures for new products of $19.3 million in 1997 and $18.0 million in 1996. In 1997, more than 76 percent of sales came from products introduced in the past three years. Operating expenses in 1997 increased two percent to $169.4 million from $166.4 million in 1996. Expressed as a percentage of sales, operating expenses increased to 16.2 percent in 1997 from 14.0 percent in 1996. These increases are primarily attributable to the higher level of promotional and advertising costs related to assisting dealers in selling their remaining snowmobile and PWC inventory. The improvement in nonoperating expense (income) in 1997 from 1996 primarily reflects (a) the positive impact of the Canadian dollar exchange rate hedging activity, (b) the positive financial impact of the Company's equity in the income of Polaris Acceptance, and (c) lower interest expense resulting from lower average outstanding borrowings in 1997 as compared to 1996. The provision for income taxes has been recorded at a rate of 36.0 percent of pretax income for each of 1997 and 1996. Net income increased five percent to $65.4 million in 1997 from $62.3 million in 1996. Net income as a percent of sales increased to 6.2 percent in 1997 from 5.2 percent in 1996. Net income per basic and diluted share increased nine percent to $2.45 in 1997 from $2.24 in 1996. 1996 vs. 1995 Sales increased to $1.192 billion in 1996, representing a seven percent increase over $1.114 billion of sales in 1995. The increase in sales was primarily attributable to the continuing popularity and broadening of the Company's ATV product line. North American sales of snowmobiles and related PG&A of $506.5 million in 1996 were two percent lower than $514.8 million in 1995 as the market absorbed an extraordinary growth rate over the prior two years. New model introductions during 1996 were highlighted by the award-winning 700 RMK. Sales of snowmobiles and related PG&A comprised 43 percent of total Company sales in 1996 compared to 46 percent in 1995. North American sales of ATVs and related PG&A of $445.9 million in 1996 were 22 percent higher than $366.6 million in 1995 primarily because of the continued growth in the utility and sports-enthusiast markets. Retail ATV sales rose to the highest level in Polaris' history and management believes that the Company is second in U.S. ATV market share. The average per unit sales price increased by six percent in 1996, principally through the sale of new, higher-performance models that have a higher selling price than economy models. The Company introduced several new models in 1996, including the Xplorer 500 and Scrambler 500. Sales of ATVs and related PG&A comprised 37 percent of total Company sales in 1996 compared to 33 percent in 1995. North American sales of PWC and related PG&A of $190.4 million in 1996 were five percent higher than $181.1 million in 1995. Weaker consumer demand led to a leveling of the PWC market after several years 11 MANAGEMENT'S DISCUSSION AND ANALYSIS POLARIS INDUSTRIES INC. OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of unusually high demand. Sales of PWC and related PG&A comprised 16 percent of total Company sales in each of 1996 and 1995. International sales of snowmobiles, ATVs, PWC and related PG&A of $49.1 million in 1996 were four percent lower than $51.4 million in 1995. International sales comprised four percent of total Company sales in 1996 compared to five percent in 1995. Gross profit increased to $263.8 million in 1996, representing a six percent increase over 1995 gross profit of $248.0 million. The gross profit margin percentage decreased to 22.1 percent in 1996 from 22.3 percent in 1995. This decrease in gross profit margin percentage is primarily a result of (a) an increase in warranty expense, principally for snowmobiles, as a result of rapid technological innovation and introduction of new high performance models; partially offset by (b) decreases in raw material purchase prices for engines and certain other component parts because of the strengthening of the U.S. dollar in relation to the Japanese yen when compared to the 1995 period. Operating expenses increased $20.0 million (14 percent) in 1996 over 1995 and operating expenses as a percent of sales increased to 14.0 percent in 1996 from 13.1 percent in 1995. These increases are due primarily to an increased level of promotional and advertising costs targeted to assist dealers in retailing PWC units late in the 1996 selling season. Nonoperating expense decreased $2.8 million in 1996 compared to 1995 as a result of (a) income recorded in 1996 from the Company's investment in Polaris Acceptance, offset by (b) interest expense incurred in 1996 from borrowings under the bank line of credit arrangement used to fund the payment of special cash distributions totaling $104.9 million during 1995. The provision for income taxes in 1996 has been recorded at a rate of 36.0 percent of pretax income compared to 38.5 percent for 1995. This change reflects the settlement reached with the Canadian income tax authorities regarding a claim for additional income taxes payable by the Company's Canadian subsidiary for tax years 1987 through 1991. Net income increased two percent to $62.3 million in 1996 from $60.8 million in 1995. Net income as a percent of sales was 5.2 percent in 1996 compared to 5.5 percent in 1995. Net income per share increased two percent to $2.24 in 1996 from $2.19 in 1995. LIQUIDITY AND CAPITAL RESOURCES Polaris' primary sources of funds have been cash provided by operating activities, a $150 million bank line of credit and a dealer floor plan financing program. Polaris' primary uses of funds have been for cash dividends and distributions to shareholders and partners, repurchase and retirement of common stock, capital investments and new product development. During 1997, Polaris generated net cash from operating activities of $102.3 million, which was utilized to fund capital expenditures of $36.8 million, net investments in affiliates of $2.6 million, cash dividends of $17.0 million and the repurchase of common stock of $39.9 million. During 1996, Polaris generated net cash from operating activities of $89.6 million which was utilized to fund capital expenditures of $45.3 million, net investments in affiliates of $6.8 million, cash dividends of $16.4 million, and the repurchase of common stock of $13.6 million. During 1995, Polaris generated net cash from operating activities of $77.7 million, which was utilized to fund regular cash dividends and special cash distributions to shareholders of $116.6 million, a final cash distribution to partners of $12.7 million and capital expenditures of $47.2 million. The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris is a party to an unsecured bank line of credit arrangement maturing on March 31, 2000 under which it may borrow up to $150 million until March 31, 1998 and up to $125 million thereafter until maturity. The arrangement provides borrowing for working capital needs and the repurchase and retirement of common stock. Borrowings under the line of credit bear interest, 6.76 percent at December 31, 1997, based on LIBOR or "prime" rates. At December 31, 1997, Polaris had total borrowings under the line of credit of $24.4 million compared to $35.0 million at December 31, 1996. In addition, at December 31, 1997, Polaris had letters of credit outstanding of $7.1 million related to purchase obligations for raw materials. During 1996, the Polaris Board of Directors authorized the repurchase of up to one million shares of Polaris common stock. On January 23, 1997, the Board of Directors expanded the share repurchase program, authorizing the cumulative repurchase of up to three million shares. During 1997, Polaris paid $39.9 million to repurchase and retire 1,455,900 shares. During 1996, Polaris paid $13.6 million to repurchase and retire 521,000 shares. Polaris has 1,023,100 shares available to repurchase under this authorization as of December 31, 1997. In February 1996, a wholly-owned subsidiary of Polaris entered into a partnership agreement with Transamerica Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris dealers and distributors and may in the future provide other financial services to dealers, distributors and retail customers of Polaris. Under the partnership agreement, Polaris' subsidiary had a 25 percent equity interest in Polaris Acceptance throughout 1996. In January 1997, Polaris exercised its option to increase its equity interest in Polaris Acceptance to 50 percent for an additional investment of approximately $10.4 million. Polaris guarantees 50 percent of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TDF. At December 31, 1997, Polaris' contingent liability with respect to the guarantee was approximately $92.0 million. Polaris has arrangements with certain finance companies, including Polaris Acceptance, to provide floor plan financing for its distributors and dealers. These arrangements provide liquidity by financing distributor and dealer purchases of snowmobiles, ATVs and PWC without the use of Polaris' working capital. Substantially all of the sales of snowmobiles, ATVs and PWC (but not PG&A) are financed under these arrangements whereby Polaris receives payment within a few days of shipment of the product. The amount financed by distributors and dealers under these arrangements at December 31, 1997 and 1996, was approximately $289.0 million and $327.0 million, respectively. Polaris participates in the cost of dealer and distributor financing up to certain limits. Polaris has agreed to repurchase products repossessed by the finance companies to an 12 MANAGEMENT'S DISCUSSION AND ANALYSIS POLARIS INDUSTRIES INC. OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 for repurchases 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 require Polaris to repurchase financed units. Polaris has made significant capital investments to increase production capacity, quality, and efficiency, and for new product development and diversification. Improvements in manufacturing capacity, distribution capacity and vertical integration include (a) an investment of $9.1 million since late 1996 for the construction of a 250,000 square foot parts, garments and accessories distribution center in Vermillion, South Dakota which was operational in mid-1997, (b) the purchase of a 90,000 square foot building adjacent to Polaris' Osceola, Wisconsin facility in 1995 to house the manufacturing of Polaris designed and built domestic engines, and (c) the construction of a new 58,000 square foot injection molding facility in Roseau, MN that began in 1997 and is expected to be operational in mid-1998. Polaris anticipates that capital expenditures, including tooling, for 1998 will range from $60 million to $70 million. Management believes that existing cash balances, cash flows to be generated from operating activities and available borrowing capacity under the line of credit arrangement will be sufficient to fund operations, regular dividends, share repurchases, and capital expenditure requirements for 1998. At this time, management is not aware of any factors that would have a materially adverse impact on cash flow beyond 1998. Injection Research Specialists commenced an action in 1998 against Polaris in Colorado Federal Court alleging various claims relating to electronic fuel injection systems for snowmobiles. In April 1997, a judgment was entered in favor of Injection Research Specialists, before interest, for $24.0 million in compensatory damages and $10.0 million in punitive damages against Polaris, and $15.0 million in compensatory damages and $8 million in punitive damages against Fuji Heavy Industries, Ltd. ("Fuji"), one of Polaris' engine suppliers. The judgment against Fuji was subsequently reduced on post trial motions to $11.6 million in compensatory damages and no punitive damages. Polaris has appealed the judgment against Polaris and has been advised that Fuji has also appealed the judgment against it. Depending upon the conclusion of the appeal, Polaris may require additional reserves associated with this litigation. In 1997, Polaris evaluated its computer system year 2000 compliance issues and began a conversion process to address necessary changes. In order for a computer system to be year 2000 compliant, its time sensitive software must recognize a date using "00" as the year 2000 rather than the year 1900. Polaris has implemented a plan to make its computer systems critical to managing its business year 2000 compliant by the end of 1998 and to make its remaining computer systems year 2000 compliant by the end of 1999. Expenses incurred by Polaris in 1997 to address year 2000 compliance issues were immaterial and Polaris does not expect the level of expenses to be incurred under its conversion program during the next two years to have a material effect on its financial results of operations. 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 1997, purchases totaling 17 percent of Polaris' cost of sales were from Japanese yen denominated suppliers. The strengthening of the U.S. dollar in relation to the Japanese yen since late 1995 has resulted in lower raw material purchase prices. Polaris' cost of sales in 1997 and 1996 were 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 Japanese yen-U.S. dollar exchange rate will continue to have a positive impact on cost of sales during 1998 when compared to the same periods in 1997. Polaris operates in Canada through a wholly-owned subsidiary. Sales of the Canadian subsidiary comprised 15 percent of total Company sales in 1997. Polaris utilizes foreign exchange hedging contracts to manage its exposure to the Canadian dollar. Although the U.S. dollar in relation to the Canadian dollar strengthened in 1997 on average, Polaris experienced a positive financial impact on nonoperating expenses as a result of favorable hedging activity. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the Canadian dollar currency fluctuation will have a negative impact on net income during 1998 when compared to the same periods in 1997. In the past, Polaris has been a party to, and in the future may enter into, foreign exchange hedging contracts for both the Japanese yen and the Canadian dollar to minimize the impact of exchange rate fluctuations within each year. At December 31, 1997, Polaris had open Japanese yen foreign exchange hedging contracts with notional amounts totaling $81.5 million U.S. dollars, and open Canadian dollar foreign exchange contracts with notional amounts totaling $108.4 million U.S. dollars which mature throughout 1998. Since October 1995, Polaris has been manufacturing its own engines for selected models of personal watercraft and snowmobiles at its Osceola, Wisconsin facility. In addition, earlier in 1995, Polaris entered into an agreement with Fuji to form Robin Manufacturing U.S.A., Inc. ("Robin"). Under the terms of the agreement, Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Potential advantages to Polaris of these additional sources of engines include reduced foreign exchange risk, lower shipping costs and less dependence in the future on a single supplier for engines. Forward-looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. There are certain important factors that could cause results to differ materially from those anticipated by some of the statements made herein. Investors are cautioned that all forward-looking statements involve risks and uncertainty. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: product offerings and pricing strategies by competitors; warranty expenses; foreign currency exchange rate fluctuations; environmental and product safety regulatory activity; effects of weather; uninsured product liability claims; and overall economic conditions, including inflation and consumer confidence and spending. 13 CONSOLIDATED BALANCE SHEETS POLARIS INDUSTRIES INC. IN THOUSANDS, EXCEPT PER SHARE DATA
December 31, 1997 1996 - ------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 1,233 $ 5,812 Trade receivables 42,593 36,158 Inventories 139,544 122,911 Prepaid expenses and other 5,088 3,524 Deferred tax assets 29,000 25,000 - ------------------------------------------------------------------------------- Total current assets 217,458 193,405 - ------------------------------------------------------------------------------- Deferred Tax Assets 26,000 30,000 - ------------------------------------------------------------------------------- Property and Equipment Land, buildings and improvements 31,367 23,973 Equipment and tooling 153,005 138,879 - ------------------------------------------------------------------------------- 184,372 162,852 Less-accumulated depreciation (86,352) (69,339) - ------------------------------------------------------------------------------- Total property and equipment 98,020 93,513 - ------------------------------------------------------------------------------- Investments in Affiliates 19,767 10,421 Intangible Assets, net 23,501 24,378 - ------------------------------------------------------------------------------- $384,746 $351,717 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. 14 CONSOLIDATED BALANCE SHEETS POLARIS INDUSTRIES INC. IN THOUSANDS, EXCEPT PER SHARE DATA
December 31, 1997 1996 - ------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 61,027 $ 50,514 Accrued expenses: Compensation 40,240 38,685 Warranties 35,594 32,919 Other 38,033 30,712 Income taxes payable 16,217 8,557 - ------------------------------------------------------------------- Total current liabilities 191,111 161,387 - ------------------------------------------------------------------- BORROWINGS UNDER CREDIT AGREEMENT 24,400 35,000 - ------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 1, 2, 4, 6 AND 7) SHAREHOLDERS' EQUITY Preferred stock $0.01 par value, 20,000 shares authorized, no shares issued and outstanding - - Common stock $0.01 par value, 80,000 shares authorized, 26,014 and 27,011 shares issued and outstanding 260 270 Additional paid-in capital 72,955 102,946 Deferred compensation (3,133) (978) Compensation payable in common stock 7,346 9,710 Retained earnings 91,807 43,382 - ------------------------------------------------------------------- Total shareholders' equity 169,235 155,330 - ------------------------------------------------------------------- $384,746 $351,717 - ------------------------------------------------------------------- - -------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. 15 CONSOLIDATED STATEMENTS OF OPERATIONS POLARIS INDUSTRIES INC. IN THOUSANDS, EXCEPT PER SHARE DATA
For the Years Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Sales $1,048,296 $1,191,901 $1,113,852 Cost of Sales 785,758 928,085 865,859 - -------------------------------------------------------------------------------- Gross profit 262,538 263,816 247,993 Gross profit percent 25.0% 22.1% 22.3% - -------------------------------------------------------------------------------- Operating Expenses 169,436 166,399 146,335 - -------------------------------------------------------------------------------- Operating income 93,102 97,417 101,658 Nonoperating Expense (income) Interest expense 2,829 4,339 1,708 Equity in (income) loss of affiliates (6,718) (3,107) 243 Other expense (income), net (5,171) (1,148) 894 - -------------------------------------------------------------------------------- Income before income taxes 102,162 97,333 98,813 Provision for income taxes 36,779 35,040 38,037 - -------------------------------------------------------------------------------- Net income $ 65,383 $ 62,293 $ 60,776 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Basic and Diluted Net Income Per Share $ 2.45 $ 2.24 $ 2.19 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. 16 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY POLARIS INDUSTRIES INC. IN THOUSANDS
COMPEN- SATION RETAINED ADDITIONAL DEFERRED PAYABLE IN EARNINGS PREFERRED COMMON PAID-IN COMPEN- COMMON (ACCUMULATED STOCK STOCK CAPITAL SATION STOCK DEFICIT) TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 $ - $181 $103,935 $ - $12,251 $53,342 $169,709 First Rights conversion to stock - 1 5,520 - (5,586) - (65) Employee stock compensation - - - - 4,753 - 4,753 Dividends and distributions - - - - - (116,639) (116,639) Stock split - 91 (111) - - - (20) Net income - - - - - 60,776 60,776 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 - 273 109,344 - 11,418 (2,521) 118,514 First Rights conversion to stock - 2 5,717 - (5,769) - (50) Employee stock compensation - 1 1,466 (978) 4,061 - 4,550 Dividends - - - - - (16,390) (16,390) Repurchase and retirement of common shares - (6) (13,581) - - - (13,587) Net income - - - - - 62,293 62,293 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 - 270 102,946 (978) 9,710 43,382 155,330 First Rights conversion to stock - 3 7,164 - (7,210) - (43) Employee stock compensation - 2 2,733 (2,155) 4,846 - 5,426 Dividends - - - - - (16,958) (16,958) Repurchase and retirement of common shares - (15) (39,888) - - - (39,903) Net income - - - - - 65,383 65,383 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 $ - $260 $ 72,955 $(3,133) $ 7,346 $ 91,807 $169,235 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. 17 CONSOLIDATED STATEMENTS OF CASH FLOWS POLARIS INDUSTRIES INC. IN THOUSANDS
For the Years Ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 65,383 $ 62,293 $ 60,776 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 33,168 31,053 23,223 Noncash compensation 5,010 4,550 4,753 Equity in (income) loss of affiliates (6,718) (3,107) 243 Deferred income taxes - - 10,000 Changes in current operating items Trade receivables (6,435) 4,244 (10,702) Inventories (16,633) (18,278) (15,919) Accounts payable 10,513 (6,874) (1,544) Accrued expenses 11,551 16,568 11,114 Income taxes payable 7,660 (4,029) (2,569) Other (1,191) 3,161 (1,626) - ------------------------------------------------------------------------------- Net cash provided by operating activities 102,308 89,581 77,749 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (36,798) (45,336) (47,154) Investments in and advances to affiliates (16,627) (10,998) (800) Distributions and repayments from affiliates 13,999 4,241 - - ------------------------------------------------------------------------------- Net cash used for investing activities (39,426) (52,093) (47,954) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit agreement 290,100 276,900 249,700 Repayments under credit agreement (300,700) (282,100) (209,500) Repurchase and retirement of common shares (39,903) (13,587) - Cash dividends to shareholders (16,958) (16,390) (116,639) Cash distributions to partners - - (12,736) - ------------------------------------------------------------------------------- Net cash used for financing activities (67,461) (35,177) (89,175) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents (4,579) 2,311 (59,380) CASH AND CASH EQUIVALENTS Beginning 5,812 3,501 62,881 - ------------------------------------------------------------------------------- Ending $ 1,233 $ 5,812 $ 3,501 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the year $ 25,838 $ 31,673 $ 24,341 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Income taxes paid during the year $ 29,007 $ 39,069 $ 31,183 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POLARIS INDUSTRIES INC. NOTE 1 ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Polaris Industries Inc. ("Polaris" or the "Company") is engaged in a single industry segment consisting of the design, engineering, manufacturing and marketing of innovative, high-quality, high-performance motorized products for recreation and utility use, including snowmobiles, all-terrain vehicles, motorcycles and personal watercraft. Polaris products, together with related parts, garments and accessories, are sold worldwide through a network of dealers, distributors and its Canadian subsidiary. BASIS OF PRESENTATION: All significant intercompany transactions and balances have been eliminated in consolidation. Certain amounts previously reported in the 1996 and 1995 consolidated financial statements have been reclassified to conform to the 1997 presentation. These reclassifications had no effect on previously reported net income or shareholders' equity. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. FOREIGN OPERATIONS: The following data relates to Polaris' foreign operations (in thousands of United States dollars):
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 - -------------------------------------------------------------------- Canadian Subsidiary: Sales $154,318 $166,471 $172,459 Operating income 6,399 6,024 6,224 Identifiable assets 20,279 21,703 29,580 - -------------------------------------------------------------------- Other export sales $ 58,739 $ 49,134 $ 51,385
CASH EQUIVALENTS: Polaris considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Such investments have consisted principally of commercial paper and money market mutual funds. FAIR VALUE OF FINANCIAL INSTRUMENTS: Except as noted, the carrying value of all financial instruments approximates their fair value. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out method) or market. The major components of inventories are as follows (in thousands):
DECEMBER 31, 1997 1996 - -------------------------------------------------------------------- Raw materials and purchased components $ 17,614 $ 24,469 Service parts, garments and accessories 45,619 45,809 Finished goods 76,311 52,633 - -------------------------------------------------------------------- $139,544 $122,911 - -------------------------------------------------------------------- - --------------------------------------------------------------------
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful life of the respective assets, ranging from 10-20 years for buildings and improvements and from 1-7 years for equipment and tooling. Fully depreciated tooling is eliminated from the accounting records annually. INTANGIBLE ASSETS: Intangible assets are stated net of accumulated amortization totaling $10,657,000 at December 31, 1997, and $9,781,000 at December 31, 1996, and consist principally of cost in excess of the net assets of the business acquired which is amortized on a straight-line basis over 40 years. Other intangible assets are amortized using the straight-line method over their estimated useful lives ranging from 5 to 17 years. Polaris periodically assesses the amortization period and recoverability of the carrying amount of its intangible assets to determine potential impairment based upon expected future cash flows from the related business. To date, management has determined that no such impairment exists. PRODUCT WARRANTIES: Polaris provides for estimated warranty costs at the time of sale to the dealer or distributor customer and for other costs associated with specific items at the time their existence and amounts are determinable. FOREIGN CURRENCY: Polaris' Canadian subsidiary uses the United States dollar as its functional currency. Canadian assets and liabilities are translated at the foreign exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average foreign exchange rate in effect. Translation and exchange gains and losses are reflected in the results of operations. Polaris enters into foreign exchange contracts to manage currency exposures of its purchase commitments denominated in foreign currencies and transfers of funds from its Canadian subsidiary. Polaris does not use any financial contract for trading purposes. These contracts are accounted for as hedges, thus market value gains and losses are recognized at the time of purchase or transfer of funds, respectively. The criteria to 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POLARIS INDUSTRIES INC. determine if hedge accounting is appropriate are (1) the designation of a hedge to an underlying exposure, (2) whether or not overall risk is reduced and (3) if there is a correlation between the value of the foreign exchange contract and the underlying exposure. Gains and losses related to purchase commitments are recorded as adjustments to cost of sales while gains and losses related to transfers of funds are recorded as other expense (income) on the accompanying statements of operations. At December 31, 1997, Polaris had open Japanese yen foreign exchange contracts with notional amounts totaling $81,543,000 United States dollars, and open Canadian dollar foreign exchange contracts with notional amounts totaling $108,420,000 United States dollars which mature throughout 1998. 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 at the time of sale to the dealer or distributor customer. OPERATING EXPENSES: Significant components of operating expenses are as follows (in thousands):
1997 1996 1995 - ------------------------------------------------------------------------- Selling and Marketing $112,978 $112,146 $ 99,483 General and Administrative 29,736 25,983 26,981 Research and Development 26,722 28,270 19,871 - ------------------------------------------------------------------------- Total Operating Expenses $169,436 $166,399 $146,335 - ------------------------------------------------------------------------- - -------------------------------------------------------------------------
MAJOR SUPPLIER: During 1997, 1996, and 1995, purchases of engines and related components totaling 16, 22 and 26 percent, respectively, of Polaris' cost of sales were from a single Japanese supplier. Polaris has agreed with the supplier to share the impact of fluctuations in the exchange rate between the United States dollar and the Japanese yen. NOTE 2 FINANCING BANK FINANCING: Polaris is a party to an unsecured bank line of credit arrangement maturing on March 31, 2000 under which it may borrow up to $150 million until March 31, 1998 and up to $125 million thereafter until maturity. Interest is charged at rates based on LIBOR or "prime" and the agreement expires on March 31, 2000, at which time the outstanding balance is due. The following summarizes activity under Polaris' credit arrangement (in thousands):
1997 1996 - --------------------------------------------------------------------- Total borrowings at December 31 $24,400 $ 35,000 Average outstanding borrowings during year $47,950 $ 72,760 Maximum outstanding borrowings during year $80,000 $112,000 Interest rate at December 31 6.76% 6.04%
LETTERS OF CREDIT: At December 31, 1997, Polaris had open letters of credit totaling approximately $7,109,000. The amounts outstanding are reduced as inventory purchases pertaining to the contracts are received. CUSTOMER FINANCING PROGRAM: Certain finance companies, including Polaris Acceptance, an affiliate (Note 6), provide floor plan financing to distributors and dealers on the purchase of Polaris products. The amount financed by distributors and dealers under these arrangements at December 31, 1997, was approximately $289,000,000. Polaris has agreed to repurchase products repossessed by the finance companies up to an annual maximum of 15 percent of the average amounts outstanding during the prior calendar year. Polaris' financial exposure under these arrangements is limited to the difference between the amount paid to the finance companies for repurchases and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements during the periods presented. As a part of its marketing program, Polaris contributes to the cost of dealer and distributor financing up to certain limits and subject to certain conditions. Such expenditures are included with operating expenses in the accompanying statements of operations. NOTE 3 INCOME TAXES Polaris utilizes the liability method of accounting for income taxes whereby deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. The net deferred tax asset consists of the following (in thousands):
DECEMBER 31, 1997 1996 - ------------------------------------------------------------- Current deferred tax assets: Inventories $ 4,000 $ 3,000 Accrued expenses 24,000 19,300 Compensation payable in common stock 1,000 2,700 - ------------------------------------------------------------- Total current 29,000 25,000 - ------------------------------------------------------------- Noncurrent deferred tax assets: Cost in excess of net assets of business acquired 27,600 30,000 Property and equipment (2,000) (1,000) Compensation payable in common stock 400 1,000 - ------------------------------------------------------------- Total noncurrent 26,000 30,000 - ------------------------------------------------------------- Total $55,000 $55,000 - ------------------------------------------------------------- - -------------------------------------------------------------
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POLARIS INDUSTRIES INC. Components of Polaris' provision for income taxes are as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------- Current Federal $31,575 $30,063 $23,113 State 2,255 2,233 1,665 Foreign 2,949 2,744 3,259 Deferred - - 10,000 - ------------------------------------------------------------------- Total $36,779 $35,040 $38,037 - ------------------------------------------------------------------- - -------------------------------------------------------------------
Reconciliations of the Federal statutory income tax rate to the effective tax rate are as follows:
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.5 2.6 2.6 Other permanent differences (1.5) (1.6) 0.9 - ------------------------------------------------------------------- Effective income tax rate 36.0% 36.0% 38.5% - ------------------------------------------------------------------- - -------------------------------------------------------------------
NOTE 4 STOCK-BASED COMPENSATION Polaris maintains a stock option plan (Option Plan) under which incentive and nonqualified stock options for a maximum of 1,350,000 shares of common stock may be issued to certain employees. The exercise price for shares awarded under this plan is equal to the market price of Polaris common stock at the date of the award. Options vest three years from the award date and expire after ten years. Polaris maintains a restricted stock plan (Restricted Plan) under which a maximum of 500,000 shares of common stock may be awarded as an incentive to certain employees with no cash payments required from the recipient. The restrictions lapse after a three to four year period if certain performance measures are achieved by Polaris. In 1997, Polaris adopted a qualified non-leveraged Employee Stock Ownership Plan (ESOP) under which a maximum of 1,250,000 shares of common stock can be awarded. Shares vest immediately and require no cash payments from the recipient. Substantially all employees are eligible to participate in the ESOP. Polaris also maintains a plan in which rights to receive shares of common stock (First Rights) are issued to management (Management Plan) and other employees (Employee Plan). The Management Plan provides for vesting up to three years from the award date and has a maximum of 2,225,000 shares reserved, while First Rights awarded under the Employee Plan vest immediately with a maximum of 1,350,000 shares reserved. First Rights are converted to common stock with no cash payments required from the recipient. At December 31, 1997, no additional rights are available to be granted under the Management Plan or the Employee Plan. The following summarizes share activity in the above plans, and the weighted average exercise price for the Option Plan:
Restricted Management Employee Option Plan Plan Plan Plan ESOP ---------------------------------------------------------------------------------- Weighted Average Exercise Shares Price Shares Shares Shares Shares - --------------------------------------------------------------------------------------------------------------------- Outstanding as of December 31, 1994 - - - 323,250 145,500 - Granted 254,550 $29.00 - 34,500 153,000 - Converted - - - (15,000) (145,500) - Forfeited - - - (25,500) - - - --------------------------------------------------------------------------------------------------------------------- Outstanding as of December 31, 1995 254,550 $29.00 - 317,250 153,000 - Granted 136,830 $33.75 61,795 - 171,005 - Converted - - - (57,000) (153,000) - Forfeited - - - - - - - --------------------------------------------------------------------------------------------------------------------- Outstanding as of December 31, 1996 391,380 $30.66 61,795 260,250 171,005 - Granted 142,980 $25.75 64,915 - - 170,000 Converted - - - (147,750) (171,005) - Forfeited (38,617) $29.50 (2,835) (15,000) - - - --------------------------------------------------------------------------------------------------------------------- Outstanding as of December 31, 1997 495,743 $29.33 123,875 97,500 - 170,000 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Exercisable/Vested as of December 31, 1997 - - - - - 170,000 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
Shares outstanding under the Option Plan have exercise prices ranging from $25.75 to $33.75 and a weighted average remaining contractual life of 8.1 years. In 1995, Polaris approved a nonqualified deferred compensation plan (Director Plan) under which directors who are not Polaris officers or employees can elect to receive common stock equivalents in lieu of director's fees, which will be converted into common stock when board service ends. A maximum of 75,000 shares of common stock have been authorized under this plan and 14,831 have been earned as of December 31, 1997. Polaris accounts for all stock-based compensation plans under APB Opinion No. 25, under which compensation costs of $5,010,000, $4,550,000, and $4,753,000 were recorded in 1997, 1996 and 1995, respectively. Had compensation costs for these plans been recorded at fair value consistent with the methodology prescribed by the Statement 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POLARIS INDUSTRIES INC. of Financial Accounting Standards ("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:
1997 1996 1995 - ------------------------------------------------------------------- Net Income (in thousands) As Reported $65,383 $62,293 $60,776 Pro Forma 64,346 61,475 60,404 - ------------------------------------------------------------------- Net Income Per Share As Reported $2.45 $2.24 $2.19 Pro Forma 2.41 2.21 2.17 - ------------------------------------------------------------------- - -------------------------------------------------------------------
The fair value of each award under the Option Plan is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to estimate the fair value of options:
1997 1996 1995 - ------------------------------------------------------------------- Risk free interest rate 6.6% 6.8% 6.5% Expected life 7 years 7 years 7 years Expected volatility 23% 27% 32% Expected dividend yield 2.5% 1.8% 2.1%
The weighted average fair values at the grant dates of First Rights and shares awarded under the above plans are as follows:
Option Restricted Management Employee Plan Plan Plan Plan ESOP - ----------------------------------------------------------------------- 1995 $10.69 - $29.21 $29.38 - 1996 $12.16 $33.75 - $23.75 - 1997 $ 7.45 $25.75 - - $30.56
NOTE 5 SHAREHOLDERS' EQUITY STOCK REPURCHASE PROGRAM: During 1996, the Polaris Board of Directors authorized the repurchase of up to 1,000,000 shares of Polaris' common stock. On January 23, 1997, the Board of Directors expanded the share repurchase program, authorizing the cumulative repurchase of up to 3,000,000 shares. During 1997, Polaris paid $39,903,000 to repurchase and retire 1,455,900 shares. During 1996, Polaris paid $13,587,000 to repurchase and retire 521,000 shares. Cumulative repurchases through December 31, 1997 are 1,976,900 shares for $53,490,000. NET INCOME PER SHARE: Net income per share during 1997, 1996, and 1995 was calculated based on the weighted average number of common and common equivalent shares outstanding. Polaris adopted SFAS No. 128 "Earnings per share" effective December 31, 1997. As a result, all prior periods presented have been restated to conform to the provisions of SFAS No. 128, which requires the presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each year, including shares earned under the First Rights plan, the Director Plan and the ESOP. Diluted earnings per share is computed under the treasury stock method and is calculated to reflect the dilutive effect of the Option Plan. A reconciliation of these amounts is as follows (in thousands, except per share data):
1997 1996 1995 - ------------------------------------------------------------------- Net income available to common shareholders $65,383 $62,293 $60,776 - ------------------------------------------------------------------- Weighted average number of common shares outstanding 26,403 27,338 27,297 First Rights 139 458 494 Director Plan 12 5 1 ESOP 170 - - - ------------------------------------------------------------------- Common shares outstanding--basic 26,724 27,801 27,792 - ------------------------------------------------------------------- Dilutive effect of Option Plan 15 14 - - ------------------------------------------------------------------- Common and potential common shares outstanding--diluted 26,739 27,815 27,792 - ------------------------------------------------------------------- - ------------------------------------------------------------------- Basic and diluted net income per share $2.45 $2.24 $2.19 - ------------------------------------------------------------------- - -------------------------------------------------------------------
Polaris also has shares issued under the Restricted Plan which will not be included in the above calculations until certain performance criteria are met. STOCK PURCHASE PLAN: In 1997, Polaris adopted an Employee Stock Purchase Plan (Purchase Plan). A total of 750,000 shares of common stock are reserved for this plan. The Purchase Plan permits eligible employees to purchase common stock at 85 percent of the average market price each month. NOTE 6 INVESTMENTS IN AFFILIATES In February 1996, a wholly-owned subsidiary of Polaris entered into a partnership agreement with Transamerica Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris' dealers and distributors and may in the future provide other financial services to dealers, distributors and retail customers of Polaris. Under the partnership agreement, Polaris' subsidiary had a 25 percent equity interest in Polaris Acceptance throughout 1996. In January 1997, Polaris exercised its option to increase its equity interest in Polaris Acceptance to 50 percent for an additional investment of approximately $10,445,000. Polaris guarantees 50 percent of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TDF. At December 31, 1997, Polaris' contingent liability with respect to the guarantee was approximately $92,000,000. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS POLARIS INDUSTRIES INC. In February, 1995, Polaris entered into an agreement with Fuji Heavy Industries Ltd. ("Fuji") to form Robin Manufacturing, U.S.A. ("Robin"). Under the agreement, Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Polaris' investments in joint ventures are accounted for under the equity method. Polaris' allocable share of the income of Polaris Acceptance and Robin has been included as a component of nonoperating expense (income) in the accompanying consolidated statements of operations. Polaris Acceptance is a partnership and the payment of income taxes is the responsibility of each of the partners. Robin is a corporation responsible for the payment of its own income taxes. Summarized combined financial information for the joint ventures is presented as follows (in thousands):
DECEMBER 31, 1997 1996 - ----------------------------------------------------------------- Revenues $ 67,228 $ 65,572 Cost of goods sold, interest and operating expenses 53,620 53,615 - ----------------------------------------------------------------- Net income before income taxes $ 13,608 $ 11,957 - ----------------------------------------------------------------- - ----------------------------------------------------------------- DECEMBER 31, 1997 1996 - ----------------------------------------------------------------- Finance Receivables, net $231,137 $255,701 Other assets 18,424 15,545 - ----------------------------------------------------------------- $249,561 $271,246 - ----------------------------------------------------------------- - ----------------------------------------------------------------- Note Payable $184,835 $213,713 Other liabilities 14,125 14,454 Shareholders' equity and Partners' capital 50,601 43,079 - ----------------------------------------------------------------- $249,561 $271,246 - ----------------------------------------------------------------- - -----------------------------------------------------------------
NOTE 7 COMMITMENTS AND CONTINGENCIES PRODUCT LIABILITY: Polaris is subject to product liability claims in the normal course of business and prior to June 1996 elected not to purchase insurance for product liability losses. Effective June 1996, Polaris purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceed a self insured retention. The estimated costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. LITIGATION: Injection Research Specialists commenced an action in 1990 against Polaris in Colorado Federal Court alleging various claims relating to electronic fuel injection systems for snowmobiles. In April 1997, a judgment was entered in favor of Injection Research Specialists, before interest, for $24,000,000 in compensatory damages and $10,000,000 in punitive damages against Polaris, and $15,000,000 in compensatory damages and $8,000,000 in punitive damages against Fuji, one of Polaris' engine suppliers. The judgment against Fuji was subsequently reduced on post trial motions to $11,600,000 in compensatory damages and no punitive damages. Polaris has appealed the judgment against Polaris and has been advised that Fuji has also appealed the judgment against it. Depending upon the conclusion of the appeal, Polaris may require additional reserves associated with this litigation on its financial statements. 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 $2,779,000, $2,889,000, and $2,212,000 for 1997, 1996 and 1995, respectively. Future minimum payments, exclusive of other costs, required under noncancelable operating leases at December 31, 1997, total $2,630,000 cumulatively through 2002. NOTE 8 QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share data)
Basic and Diluted Gross Net Net Income Sales Profit Income Per Share - ------------------------------------------------------------------------------ 1997: First Quarter $ 224,634 $ 49,492 $12,019 $ .44 Second Quarter 249,888 60,258 13,294 .49 Third Quarter 293,428 78,568 21,640 .82 Fourth Quarter 280,346 74,220 18,430 .70 - ----------------------------------------------------------------- Totals $1,048,296 $262,538 $65,383 $2.45 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 1996: First Quarter $ 278,041 $ 56,908 $13,298 $ .48 Second Quarter 317,053 69,768 16,286 .58 Third Quarter 299,135 67,570 15,872 .57 Fourth Quarter 297,672 69,570 16,837 .61 - ----------------------------------------------------------------- Totals $1,191,901 $263,816 $62,293 $2.24 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS POLARIS INDUSTRIES INC. 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of Polaris' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Polaris Industries Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP MINNEAPOLIS, MINNESOTA JANUARY 30, 1998 BOARD OF DIRECTORS ANDRIS A. BALTINS (A, C) STEPHEN G. SHANK (A*) MEMBER OF THE LAW FIRM OF PRESIDENT AND CHIEF EXECUTIVE OFFICER KAPLAN, STRANGIS AND KAPLAN, P.A. OF LEARNING VENTURES, INC. FORMER CHAIRMAN AND CHIEF EXECUTIVE RAYMOND J. BIGGS (S) OFFICER OF TONKA CORPORATION CHAIRMAN EMERITUS HUNTINGTON BANCSHARES OF MICHIGAN W. HALL WENDEL, JR. (E*) CHAIRMAN AND CHIEF EXECUTIVE OFFICER BEVERLY F. DOLAN (C*, S*) OF POLARIS INDUSTRIES INC. RETIRED CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF TEXTRON INC. KENNETH D. LARSON (E) (A) Audit Committee Member PRESIDENT AND CHIEF OPERATING OFFICER (C) Compensation Committee Member OF POLARIS INDUSTRIES INC. (E) Executive Committee Member (S) Stock Award Compensation ROBERT S. MOE (C, E) Committee Member RETIRED EXECUTIVE VICE PRESIDENT AND * Committee Chairman TREASURER OF POLARIS INDUSTRIES INC. GREGORY R. PALEN (A) CHIEF EXECUTIVE OFFICER OF SPECTRO ALLOYS AND PALEN/KIMBALL COMPANY CORPORATE OFFICERS GENERAL MANAGERS W. HALL WENDEL, JR. MITCHELL D. JOHNSON CHAIRMAN AND CHIEF EXECUTIVE OFFICER GENERAL MANAGER, ALL-TERRAIN VEHICLES KENNETH D. LARSON BENNETT J. MORGAN PRESIDENT AND CHIEF OPERATING OFFICER GENERAL MANAGER, PARTS, GARMENTS AND ACCESSORIES CHARLES A. BAXTER VICE PRESIDENT -- ENGINEERING AND ROBERT R. NYGAARD GENERAL MANAGER, ENGINES GENERAL MANAGER, SNOWMOBILES JEFFREY A. BJORKMAN MATTHEW D. PARKS VICE PRESIDENT -- MANUFACTURING GENERAL MANAGER, MOTORCYCLES MICHAEL W. MALONE CLAUDE PICARD VICE PRESIDENT -- FINANCE, GENERAL MANAGER, PERSONAL WATERCRAFT CHIEF FINANCIAL OFFICER AND SECRETARY THOMAS H. RUSCHHAUPT VICE PRESIDENT -- SALES AND SERVICE ED SKOMOROH VICE PRESIDENT -- MARKETING 24 [LOGO] Polaris Industries Inc. 1225 Highway 169 North Minneapolis, Minnesota 55441 INVESTOR INFORMATION INDEPENDENT AUDITORS Arthur Andersen LLP Minneapolis, MN DIVIDENDS Communications concerning transfer requirements, address changes, dividends and lost certificates, as well as requests for Dividend Reinvestment Plan enrollment information should be addressed to: Norwest Bank Minnesota, N.A. 161 North Concord Exchange South St. Paul, MN 55075-0738 1-800-468-9716 Shareowner@aol.com FORM 10-K The form 10-K annual report to the Securities Exchange Commission is available without charge to shareholders upon written request to: Investor Relations Polaris Industries Inc. 1225 Highway 169 North Minneapolis, MN 55441-5078 SUMMARY OF TRADING
Year Ended December 31, 1997 1996 ------------------------------------------- Quarter HIGH LOW High Low - ------------------------------------------------------------ First $26.25 $22.75 $31.50 $28.88 Second 32.56 22.25 35.75 31.00 Third 32.50 28.50 33.50 22.63 Fourth 33.25 28.75 23.88 19.13
STOCK EXCHANGES Shares of common stock of Polaris Industries Inc. trade on the New York Stock Exchange and on the Pacific Stock Exchange under the symbol PII. CASH DISTRIBUTIONS AND DIVIDENDS DECLARED
Quarter 1997 1996 - ---------------------------------------- First $.16 $.15 Second .16 .15 Third .16 .15 Fourth .16 .15 - ---------------------------------------- Total $.64 $.60 - ---------------------------------------- - ----------------------------------------
Shareholders of record of the Company's common stock on March 2, 1998 3,963. Share price on March 2, 1998 $32.50. - - Printed on recycled paper containing at least 10% post-consumer fiber. - - 1998 Polaris Industries Inc. Printed in the USA. EX-21 5 SUBSIDIARIES CHART SUBSIDIARIES OF THE REGISTRANT
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Company Organization Shares % of Outstanding Ownership - -------------------------------------------------------------------------------- Polaris Industries Delaware 100 100% Inc. Corporation - -------------------------------------------------------------------------------- Polaris Real Estate Delaware Corporation 1,000 100% (1) Corporation of Iowa, Inc. - -------------------------------------------------------------------------------- Polaris Real Estate Delaware Corporation 1,000 100% (2) Corporation - -------------------------------------------------------------------------------- Polaris Acceptance Minnesota Corporation 1 100% Inc. - -------------------------------------------------------------------------------- Polaris Industries Barbados Corporation 1,000 100% Export Ltd. - -------------------------------------------------------------------------------- Polaris Industries Manitoba Corporation 101 100% (3) Ltd. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1), (2), and (3) Owned 100% by Polaris Industries Inc., a Delaware corporation. EX-23 6 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements File Nos. 33-60157, 333-05463, 333-21007 and 33-57053. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Minneapolis, Minnesota, March 25, 1998 EX-24 7 POWER OF ATTORNEY/SUBSIDIARIES CHART POWER OF ATTORNEY (FORM 10-K) KNOW ALL MEN BY THESE PRESENTS, that POLARIS INDUSTRIES INC., a Minnesota corporation (the "Company"), and each of the undersigned directors of the Company, hereby constitutes and appoints W. Hall Wendel, Jr. and Michael W. Malone and each of them (with full power to each of them to act alone) its/his true and lawful attorney-in-fact and agent, for it/him and on its/his behalf and in its/his name, place and stead, in any and all capacities to sign, execute, affix its/his seal thereto and file the Annual Report on Form 10-K for the year ended December 31, 1997 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 22nd day of January 1998. POLARIS INDUSTRIES INC. By /s/ W. Hall Wendel, Jr. ------------------------------- W. Hall Wendel, Jr. Chief Executive Officer The undersigned, directors of POLARIS INDUSTRIES INC., have hereunto set their hands as of the 22nd day of January 1998. /s/ W. Hall Wendel, Jr. /s/ Stephen G. Shank - ------------------------------- --------------------------------- W. Hall Wendel, Jr. Stephen G. Shank /s/ Beverly F. Dolan /s/ Gregory R. Palen - ------------------------------- --------------------------------- Beverly F. Dolan Gregory R. Palen /s/ Robert S. Moe /s/ Andris A. Baltins - ------------------------------- --------------------------------- Robert S. Moe Andris A. Baltins /s/ Kenneth D. Larson /s/ Raymond F. Biggs - ------------------------------- --------------------------------- Kenneth D. Larson Raymond F. Biggs D I R E C T O R S 2 EX-27.(A) 8 EXHIBIT 27(A)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF POLARIS INDUSTRIES INC. AS OF DECEMBER 31, 1997, AND RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY, AND CASH FLOWS FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,233 0 42,593 0 139,544 217,458 184,372 86,352 384,746 191,111 24,400 0 0 260 168,975 384,746 1,048,296 1,048,296 785,758 785,758 169,436 0 2,829 102,162 36,779 65,383 0 0 0 65,383 2.45 2.45
EX-27.(B) 9 EXHIBIT 27(B)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF POLARIS INDUSTRIES INC. AS OF SEPTEMBER 30, 1997, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS' EQUITY, AND CASH FLOWS FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 5,404 0 43,777 0 163,531 242,048 185,567 93,865 411,078 211,698 40,000 0 0 262 159,118 411,078 767,950 767,950 598,667 598,667 102,049 0 2,484 73,364 26,411 46,953 0 0 0 46,953 1.75 1.75
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