-----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, WpcLaiIw60M/t4sfc/L+GLgNAUTNLeQj8zXcXI6B/iZfdxvVSk0hJRGM7c13bmi1 TR2nCk1vikrX7IFphYJtUQ== 0001047469-98-031344.txt : 19980817 0001047469-98-031344.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031344 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE SROS: PCX 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-Q SEC ACT: SEC FILE NUMBER: 001-11411 FILM NUMBER: 98687527 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-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 --------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ______________________ Commission File Number 1-11411 ---------------------------------- Polaris Industries Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1790959 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 1225 Highway 169 North, Minneapolis, MN 55441 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (612)542-0500 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 7, 1998, 25,927,038 shares of Common Stock of the issuer were outstanding. POLARIS INDUSTRIES INC. FORM 10-Q For Quarter Period Ended June 30, 1998 TABLE OF CONTENTS
Page ---- Part I. FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 5 Consolidated Statement of Shareholders' Equity . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Cash Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . 14 Inflation and Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . 15 Part II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 1 - Legal Proceedings Item 2 - Changes in Securities Item 3 - Defaults upon Senior Securities Item 4 - Submission of Matters to a Vote of Security Holders Item 5 - Other Information Item 6 - Exhibits and Reports on Form 8-K SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2 POLARIS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (In Thousands)
JUNE 30, 1998 DECEMBER 31, 1997 ------------- ----------------- (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents $6,750 $1,233 Trade receivables 18,589 42,593 Inventories 161,549 139,544 Prepaid expenses and other 4,211 5,088 Deferred tax assets 26,000 29,000 -------- -------- Total current assets 217,099 217,458 -------- -------- Deferred Tax Assets 25,000 26,000 Property and Equipment, net 114,783 98,020 Investments in Affiliates 19,415 19,767 Intangible Assets, net 23,063 23,501 -------- -------- Total Assets 399,360 384,746 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable 95,531 61,027 Accrued expenses 87,799 113,867 Income taxes payable 22,382 16,217 -------- -------- Total current liabilities 205,712 191,111 Borrowings under credit agreement 20,000 24,400 -------- -------- Total Liabilities 225,712 215,511 Commitments and Contingencies (Notes 4, 6, 7) Shareholders' Equity: Common stock 260 260 Additional paid-in capital 71,308 72,955 Deferred compensation (6,670) (3,133) Compensation payable in common stock 3,474 7,346 Retained earnings 105,276 91,807 -------- -------- Total shareholders' equity 173,648 169,235 -------- -------- Total Liabilities and Shareholders' Equity $399,360 $384,746 -------- -------- -------- --------
See Notes to Consolidated Financial Statements 3 POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data) UNAUDITED
Second Quarter For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Sales $274,711 $249,888 $484,712 $474,522 Cost of Sales 210,502 189,630 373,699 364,772 -------- -------- -------- -------- Gross Profit 64,209 60,258 111,013 109,750 Operating Expenses 43,092 41,816 78,271 73,663 -------- -------- -------- -------- Operating Income 21,117 18,442 32,742 36,087 Nonoperating Expense (Income) Interest Income 820 1,110 1,299 1,854 Equity in income of affiliates (1,607) (1,484) (3,156) (2,870) Other expense (income), net (727) (1,956) (1,096) (2,448) -------- -------- -------- -------- Income before income taxes 22,631 20,772 35,695 39,551 Provision for income taxes 8,147 7,478 12,850 14,238 -------- -------- -------- -------- Net income $14,484 $13,294 $22,845 $25,313 -------- -------- -------- -------- -------- -------- -------- -------- Basic and Diluted Net Income Per Share $0.55 $0.49 $0.87 $0.93 -------- -------- -------- -------- -------- -------- -------- --------
See Notes to Consolidated Financial Statements 4 POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) UNAUDITED
For the Six Months Ended June 30, ---------------------------- 1998 1997 ---- ---- Cash Flows From Operating Activities Net income $ 22,845 $ 25,313 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,555 17,326 Noncash compensation 4,498 3,181 Equity in income of affiliates (3,156) (2,870) Deferred income taxes 4,000 0 Changes in current operating items- Trade receivables 24,004 5,544 Inventories (22,005) (27,653) Accounts payable 34,504 25,384 Accrued expenses (26,068) (9,179) Income taxes payable 6,165 7,844 Other, net 1,206 451 --------- --------- Net cash provided by operating expenses 63,548 45,341 --------- --------- Cash Flows From Investing Activities: Purchase of property and equipment (33,880) (14,682) Investments in affiliates, net 3,508 (6,717) --------- --------- Net cash used for investing activities (30,372) (21,399) --------- --------- Cash Flows from Financing Activities: Borrowings under credit agreement 143,900 149,500 Repayments under credit agreement (148,300) (137,500) Repurchase and retirement of common shares (13,883) (27,263) Cash dividends to shareholders (9,376) (8,594) --------- --------- Net cash provided by financing activities (27,659) (23,857) --------- --------- Increase in cash and cash equivalents 5,517 85 Cash and Cash Equivalents, Beginning 1,233 5,812 --------- --------- Cash and Cash Equivalents, Ending $ 6,750 $ 5,897 --------- --------- --------- ---------
See Notes to Consolidated Financial Statements 5 POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In Thousands) UNAUDITED
Compensation Common Additional Deferred Payable in Retained Stock Paid-In Capital Compensation Common Stock Earnings Total ------ --------------- ------------ ------------ --------- ----- Balance, December 31, 1997 $260 $ 72,955 (3,133) $ 7,346 $ 91,807 $169,235 Employee stock compensation 3 10,392 (3,537) (2,009) 0 4,849 First Rights conversion to stock 1 1,841 0 (1,863) 0 (21) Cash dividends declared 0 0 0 0 (9,376) (9,376) Repurchase and retirement of common shares (4) (13,880) 0 0 0 (13,884) Net Income 0 0 0 0 22,845 22,845 ---- -------- ------- ------- -------- -------- Balance, June 30, 1998 $260 $ 71,308 ($6,670) $ 3,474 $105,276 $173,648 ---- -------- ------- ------- -------- -------- ---- -------- ------- ------- -------- --------
See Notes to Consolidated Financial Statements 6 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 POLARIS INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and, therefore, do not include all information and disclosures of results of operations, financial position and changes in cash flow in conformity with generally accepted accounting principles for complete financial statements. Accordingly, such statements should be read in conjunction with the Company's annual report on Form 10-K for the year ended December 31, 1997, previously filed with the Securities and Exchange Commission. In the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Due to the seasonality of the snowmobile, all terrain vehicle (ATV) and personal watercraft (PWC) business, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year. NOTE 2. INVENTORIES The major components of inventories are as follows (in thousands):
June 30, 1998 December 31, 1997 ------------- ----------------- Raw Materials $ 32,918 $ 17,614 Service Parts 46,909 45,619 Finished Goods 81,722 76,311 -------- -------- $161,549 $139,544 -------- -------- -------- --------
NOTE 3. FINANCING AGREEMENT Polaris has an unsecured bank line of credit arrangement with maximum available borrowings of $125.0 million. Interest is charged at rates based on LIBOR or prime (5.94% at June 30, 1998) and the agreement expires on March 31, 2000, at which time the balance is due. As of June 30, 1998, total borrowings under this credit arrangement were $20.0 million and have been classified as long-term in the accompanying consolidated balance sheets. 7 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 NOTE 4. INVESTMENTS IN AFFILIATES A wholly owned subsidiary of Polaris and Transamerica Distribution Finance (TDF) are partners in Polaris Acceptance. Polaris Acceptance provides floor plan financing to dealer and distributor customers of Polaris, and may in the future provide other financial services to dealers, distributors and retail customers of Polaris. Polaris has guaranteed 50 percent of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TDF. At June 30, 1998, Polaris' contingent liability with respect to the guarantee was approximately $117.2 million. Polaris is a partner with Fuji Heavy Industries Ltd. in Robin Manufacturing, U.S.A. (Robin). Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Investments in affiliates 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. NOTE 5. SHAREHOLDERS' EQUITY On May 21, 1998, the Polaris Board of Directors approved an expansion of the existing share repurchase program to 5,000,000 shares of the Company's outstanding common stock. During the first six months of 1998, Polaris paid $13.9 million to repurchase and retire 408,200 shares of its common stock with cash on hand and borrowings under its line of credit. Polaris has 2,614,900 remaining shares available to repurchase under this authorization as of June 30, 1998. The Polaris Board of Directors declared a regular cash dividend of $0.18 per share payable to holders of record on May 1, 1998, which was paid on or about May 15, 1998. On July 16, 1998, the Polaris Board of Directors declared a regular cash dividend of $0.18 per share payable on or about August 17, 1998, to holders of record on July 31, 1998. 8 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 Net income per share for the periods ended June 30, 1998 and 1997 was calculated based on the weighted average number of common and potential common shares outstanding. Polaris adopted SFAS No. 128 Earnings per share effective December 31, 1997. As a result, the prior period presented has 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 are computed under the treasury stock method and are calculated to reflect the dilutive effect of the Option Plan. A reconciliation of these amounts is as follows (in thousands, except per share data):
For Three Months For Six Months Ended June 30, Ended June 30, -------------- -------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Income available to common shareholders $14,484 $13,294 $22,845 $25,313 Weighted average number of common shares outstanding 25,932 26,561 25,966 26,737 First Rights 10 98 31 181 Director Plan 16 11 16 10 ESOP 170 170 170 170 ------- ------- ------- ------- Common shares outstanding - basic 26,128 26,840 26,183 27,098 ------- ------- ------- ------- ------- ------- ------- ------- Dilutive effect of Option Plan 78 3 63 2 ------- ------- ------- ------- Common and potential common shares outstanding - diluted 26,206 26,843 26,246 27,100 ------- ------- ------- ------- ------- ------- ------- ------- Basic and diluted net income per share $ 0.55 $ 0.49 $ 0.87 $ 0.93 ------- ------- ------- ------- ------- ------- ------- -------
9 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 NOTE 6. COMMITMENTS AND CONTINGENCIES 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 exceeds a self-insured retention. The estimated costs resulting from any losses are charged to expense when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. 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 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 on its financial statements. In addition to the aforementioned matter, Polaris is a defendant in lawsuits and subject to claims arising in the normal course of business. In the opinion of management, it is not probable that any legal proceedings pending against or involving Polaris will have a material adverse effect on Polaris' financial position or results of operations. NOTE 7. FOREIGN CURRENCY CONTRACTS Polaris' Canadian subsidiary uses the United States dollar as its functional currency. Canadian assets and liabilities are translated at the foreign exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average foreign exchange rate in effect. Translation and exchange gains and losses are reflected in the results of operations. Polaris enters into foreign exchange contracts to manage currency exposures of its purchase commitments denominated in foreign currencies and transfers of funds from its Canadian subsidiary. Polaris does not use any financial contract for trading purposes. These contracts are accounted for as hedges thus market value gains and losses are recognized at the time of purchase or transfer of funds, respectively. The criteria to determine if hedge accounting is appropriate are (1) the designation of a hedge to an underlying exposure, (2) whether 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 10 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 to transfers of funds are recorded as other expense (income) on the accompanying statement of operations. At June 30, 1998, Polaris had open Japanese yen foreign exchange contracts with notional amounts totaling $36.8 million United States dollars, and open Canadian dollar foreign exchange contracts with notional amounts totaling $61.6 million United States dollars which mature throughout the remainder of 1998. NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS SFAS 131 The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131) in June 1997. SFAS No. 131 requires that public business enterprises report information about operating segments in annual financial statements and requires selected information in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers and is effective for fiscal years beginning after December 15, 1997. Polaris is currently evaluating the impact of SFAS No. 131, which may effect disclosures in its 1998 annual financial statements. SFAS 133 The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) in June 1998. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Polaris will be required to adopt SFAS No. 133 no later than January 1, 2000. Polaris has not quantified the impacts of adopting SFAS No. 133 on the financial statements and has not determined the timing of adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and other comprehensive income. 11 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion pertains to the results of operations and financial position of Polaris Industries Inc., a Minnesota corporation ("Polaris" or the "Company") for the quarters ended June 30, 1998 and 1997. Due to the seasonality of the snowmobile, all terrain vehicle (ATV) and personal watercraft (PWC) business, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year. RESULTS OF OPERATIONS Sales were $274.7 million in the second quarter of 1998, representing a ten percent increase from $249.9 million in sales for the same period in 1997. North American sales of snowmobiles and related Parts, Garments and Accessories ("PG&A") of $101.0 million for second quarter 1998 were 16 percent higher than $87.3 million for the comparable period in 1997. The increase is related to a return to a normal historical trend of the seasonality of production and shipments of snowmobiles in 1998. North American sales of ATV's and related PG&A of $148.8 million for second quarter 1998 were 15 percent higher than $128.9 million for the comparable period in 1997. The increase is related to increased unit sales reflecting the continuing growth in the ATV industry. North American sales of PWC and related PG&A of $11.1 million for the second quarter 1998 were significantly lower than $23.1 million for the comparable period in 1997. The decrease is related to the Company's previously announced decision to lower PWC production in response to the industry wide softening in consumer demand. Sales of Victory motorcycle related PG&A totaled $1.5 million for the second quarter 1998. Victory motorcycle production and shipments began in early July 1998. International sales of snowmobiles, ATV's, PWC and related PG&A of $12.3 million for the second quarter 1998 were 16 percent higher than $10.6 million for the comparable period in 1997 primarily as a result of increased shipments of ATV units. Sales increased to $484.7 million for the year-to-date period ended June 30, 1998, representing a two percent increase from $474.5 million sales for the same period in 1997. The sales increase was led by strong ATV demand and earlier snowmobile shipments partially offset by lower PWC production. 12 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 Gross profit of $64.2 million in the second quarter of 1998 represents a seven percent increase from gross profit of $60.3 million for the same period in 1997. Gross profit of $111.0 million in the year-to-date period ended June 30, 1998 represents a one percent increase from gross profit of $109.8 million for the same period in 1997. These increases in gross profit dollars resulted primarily from higher sales volume in the current period. The gross profit margin percentage decreased to 23.4 percent for the second quarter of 1998 from 24.1 percent for the comparable 1997 period and to 22.9 percent for the year-to-date period ended June 30, 1998, as compared to 23.1 percent for the year-to-date period in 1997. These slight declines in gross profit margin percentage are primarily due to a) reduced pricing on the 1998 model ATVs implemented in the fall of 1997 and b) the negative impact of the Canadian dollar exchange rate when compared to the prior year periods, partially offset by c) reduced warranty costs and d) lower sales of lower margin PWC product. Operating expenses in the second quarter of 1998 increased three percent to $43.1 million from the comparable 1997 period, but as a percentage of sales, decreased to 15.7 percent for the second quarter of 1998 compared to 16.7 percent for the same period in 1997. The lower level of operating expenses as a percentage of sales for the second quarter 1998 are related to lower promotional spending to assist retail PWC sales in 1998 partially offset by a planned increase in advertising expenditures. Operating expenses in the year-to-date period ended June 30, 1998 increased six percent to $78.3 million from the comparable 1997 period and as a percentage of sales increased to 16.1 percent for the six months ended June 30, 1998 compared to 15.5 percent for the same period in 1997. The higher level of operating expenses for the year to date period are related to a planned increase in advertising expenditures during 1998 across all product lines and start up expenses for Victory motorcycles partially offset by the lower PWC promotional spending. The decline in nonoperating expense (income) in the second quarter and year-to-date period of 1998 from the comparable period in 1997 is attributable to the impact of favorable 1997 Canadian dollar exchange rate hedging activity. CASH DIVIDENDS On April 16, 1998, the Polaris Board of Directors declared a regular cash dividend of $0.18 per share payable to holders of record on May 1, 1998, which was paid on or about May 15, 1998. On July 16, 1998, the Polaris Board of Directors declared a regular cash dividend of $0.18 per share payable on or about August 17, 1998, to holders of record on July 31, 1998. 13 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 LIQUIDITY AND CAPITAL RESOURCES The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris maintains an unsecured bank line of credit arrangement maturing on March 31, 2000 under which it may borrow up to $125.0 million. Interest is charged at rates based on LIBOR or "prime". At June 30, 1998, Polaris had borrowings under its bank line of credit arrangement of $20.0 million and cash and cash equivalents of $6.8 million, compared to $24.4 million in borrowings and cash and cash equivalents of $1.2 million at December 31, 1997. During the second quarter, the Polaris Board of Directors approved an expansion of the existing share repurchase program to 5,000,000 shares of the Company's outstanding common stock. During the first six months of 1998, Polaris paid $13.9 million to repurchase and retire 408,200 shares of its common stock with cash on hand and borrowings under its line of credit arrangement. Polaris has 2,614,900 remaining shares available to repurchase under this authorization as of June 30, 1998. Management believes that existing cash balances and bank borrowings, cash flow 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 requirements for 1998. At this time, management is not aware of any factors that would have a material adverse impact on cash flow beyond 1998. 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 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 on its financial statements. YEAR 2000 Polaris has evaluated its computer system year 2000 compliance issues and has begun 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 the business year 2000 compliant by the end of 1998 and to make its remaining computer systems year 2000 compliant by the end of 1999. Polaris does not expect the level of expenses to be incurred under its conversion program to have a material effect on its financial results of operations. 14 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 INFLATION AND EXCHANGE RATES Polaris does not believe that inflation has had a material impact on the results of its recent operations. However, the changing relationships of the U.S. dollar to the Japanese yen and Canadian dollar have had a material impact from time to time. In 1997, purchases totaling 17 percent of Polaris' cost of sales were from 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 the second quarter June 30, 1998 was positively impacted by the Japanese yen-U.S. dollar exchange rate fluctuation when compared to the same period in 1997. 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 the remaining periods of 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 June 30, 1998, Polaris had open Japanese yen and Canadian dollar foreign exchange hedging contracts, which mature throughout 1998. Certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These "forward-looking statements" can generally be identified as such because the context of the statement will include words such as the Company or management "believes", "anticipates", "expects", "estimates" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking. Shareholders, potential investors and others are cautioned that all forward-looking statements involve risks and uncertainty that could cause results to differ materially from those anticipated by some of the statements made herein. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: product offerings and pricing strategies by competitors; future conduct of litigation and the judicial appeals processes; warranty expenses; foreign currency exchange rate fluctuations; environmental and product safety regulatory activity; effects of weather; uninsured product liability claims; and overall economic conditions, including inflation and consumer confidence and spending. 15 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 POLARIS INDUSTRIES INC. PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on May 21, 1998. Proxies for matters to be voted upon at the Annual Meeting were solicited Pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. The following matters were voted upon at the Annual Meeting: 1. To elect the following nominees as Class I Directors for a new term of Three years and until their successors are duly elected and qualified:
Votes For Withheld Authority --------- ------------------ Andris A. Baltins 22,091,577 276,176 Kenneth D. Larson 22,101,497 266,246
The terms of the following Directors continued after the meeting: W. Hall Wendel, Jr., Gregory R. Palen, Stephen G. Shank, Raymond J. Biggs, Beverly F. Dolan and Robert S. Moe. 2. To amend the Polaris Industries Inc. 1995 Restricted Stock Plan:
Voted For Voted Against Abstained Broker Non-Vote 21,676,371 451,116 240,256 0
3. To amend the Polaris Industries Inc. 1996 Restricted Stock Plan:
Voted For Voted Against Abstained Broker Non-Vote 21,328,236 801,736 237,771 0
16 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 ITEM 5 - OTHER INFORMATION The Securities and Exchange Commission has amended its rule 14a-5, which governs the use by the company of its discretionary voting authority with respect to certain shareholder proposals. Pursuant to this amendment, the Company's proxy card for its 1999 Annual Meeting of Shareholders may confer discretionary authority on any matter as to which the Company does not receive notice by February 12, 1999. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 10(s) - Employment Agreement between the Company and Thomas Tiller Exhibit 27 - Financial Data Schedule (b) REPORTS ON FORM 8-K None 17 FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 1998 POLARIS INDUSTRIES INC. SIGNATURES Pursuant to the requirements 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. POLARIS INDUSTRIES INC. (Registrant) Date: August 14, 1998 /s/ W. Hall Wendel, Jr. ----------------------------- W. Hall Wendel, Jr. Chairman of the Board And Chief Executive Officer Date: August 14, 1998 /s/ Michael W. Malone ----------------------------- Michael W. Malone Vice President Finance Chief Financial Officer Treasurer and Secretary (Principal Financial and Chief Accounting Officer) 18 EX-10 2 EXHIBIT 10(S) [POLARIS LETTERHEAD] Exhibit 10(s) April 1, 1998 Mr. Thomas C. Tiller 19 Bear Brook Court Clifton Park, NY 12065 Dear Tom: On behalf of the Board of Directors of Polaris Industries Inc. ("Polaris"), I am pleased to offer you the position of President and Chief Operating Officer of Polaris. This letter will confirm the terms of your employment with Polaris. I. TITLE AND POSITION. President and Chief Operating Officer of Polaris reporting to W. Hall Wendel, Jr., Chairman of the Board of Directors and Chief Executive Officer of Polaris. It is expected that you will be elected to the Board of Directors of Polaris as soon as practicable after you begin employment with Polaris. It is currently anticipated that you will become Chief Executive Officer of Polaris on the date of Polaris' 1999 Annual Meeting of Shareholders or, at the discretion of the Board of Directors of Polaris, at such earlier or later date as mutually acceptable to the Board and you. II. DATE OF EMPLOYMENT. July 8, 1998. III. BASE SALARY. $375,000 per year; reviewed annually by the Compensation Committee of the Board of Directors and Mr. Wendel. When you become Chief Executive Officer of Polaris, your annual base salary would be increased to $450,000 per year. Mr. Thomas C. Tiller April 1, 1998 Page 2 IV. CASH INCENTIVE COMPENSATION. You will be a "A" level executive under Polaris' bonus/profit sharing arrangements. The Compensation Committee of the Board of Directors of Polaris determines the actual amount of bonus/profit sharing awards to "A" level executives. However, the target payout for you as the President and Chief Operating Officer and/or Chief Executive Officer will be 200% of your base salary for the years ending December 31, 1998 and 1999. The minimum payment to you under the bonus/profit sharing arrangements will be 100% of your base salary (the "Guaranteed Bonus Amount") for the years ending December 31, 1998 and 1999. Bonus/profit sharing awards for any year are paid in cash during the first quarter of the following year. V. STOCK-BASED INCENTIVE COMPENSATION. You will be an eligible participant under the Polaris Industries Inc. 1995 Stock Option Plan (as the same may be amended from time to time, the "Stock Option Plan") and the Polaris Industries Inc. Restricted Stock Plan (as the same may be amended from time to time, the "Restricted Stock Plan"). The Stock Option Plan and the Restricted Stock Plan are administered by the Stock Award Compensation Committee of the Board of Directors. A. STOCK OPTIONS. On the date upon which you begin employment with Polaris, you will be granted a stock option to purchase up to 175,000 shares of Polaris' common stock at an exercise price per share equal to the fair market value (as defined in the Stock Option Plan) of a share of Polaris common stock on the date of grant. Polaris annually makes grants of stock options to its employees. As a Polaris employee, you will receive an additional stock option to purchase 50,000 shares of Polaris' common stock at an exercise price equal to the fair market value (as defined in the Stock Option Plan) of such shares on the date of grant at the same time that Polaris makes it annual awards of stock options to employees in each of 1999, 2000, 2001 and 2002. The stock options referred to above will be issued under the Stock Option Plan and will be subject to the provisions, terms and conditions of the Stock Option Plan and Polaris' standard form of stock option agreement as the same may be amended from time to time. A copy of Polaris' current form of stock option agreement is enclosed for your reference as Annex A. Additionally, you will receive a stock option to purchase up to 250,000 shares of Polaris common stock at an exercise price equal to 135% of the fair market value of such shares on the date you begin employment with Polaris (the "Target Price"). This stock option will be granted under the Stock Option Plan and subject to the provisions, terms and conditions of the Stock Option Plan and Polaris' standard form of stock option agreement, except that (i) it will become exercisable ("vest") on the date upon which the fair market value of Polaris shares meets or exceeds the Target Price, and (ii) if not then vested, it will terminate on the fifth anniversary of Mr. Thomas C. Tiller April 1, 1998 Page 3 your date of employment. Once vested, this stock option will expire on the tenth anniversary of the date of its grant, absent earlier expiration due to termination of your employment in accordance with the terms of Polaris' standard form of stock option agreement. B. RESTRICTED SHARE AWARDS. On the date upon which you begin employment with Polaris you will receive a Performance Restricted Share Award of 25,000 shares of Polaris common stock. Such restricted shares will be issued under the Restricted Stock Plan and will be subject to the provisions, terms and conditions of the Restricted Stock Plan and Polaris' standard form of performance restricted share agreement. A copy of Polaris' current form of performance restricted share agreement is enclosed for your reference as Annex B. As a Polaris employee, you will receive an additional Performance Restricted Share Award of 25,000 shares of Polaris common stock at the same time that Polaris makes its annual restricted share awards to employees in each of 1999, 2000, 2001 and 2002. VI. SUPPLEMENTAL BENEFITS AND PERQUISITES. At Polaris, you will participate in Polaris' benefit programs and receive the perquisites made available by Polaris to its executives including medical, dental, disability and life insurance coverage, financial planning and tax preparation services, 401(k) retirement savings plan and Supplemental Executive Retirement Plan participation and a country club membership. Additionally, you will have the use of Polaris' products in accordance with Polaris' guidelines. A summary of your benefits is enclosed herewith as Annex C. VII. CHANGE IN CONTROL AGREEMENT. When you begin employment with Polaris, Polaris will enter into a Change in Control Agreement with you substantially in the form enclosed herewith as Annex D. VIII. RELOCATION EXPENSES; TRANSFER ALLOWANCE. Polaris will pay or reimburse you for the costs of relocating you and your family to the Minneapolis-St. Paul metropolitan area. Relocation costs are intended to include the costs of packing and shipping of household goods, the payment of real estate commissions and legal fees associated with the sale of your current home and the purchase of a home in the Minneapolis- St. Paul metropolitan area and travel expenses for you and your immediate family. Additionally, upon beginning your employment with Polaris, you will receive a one-time relocation amount of $100,000. Mr. Thomas C. Tiller April 1, 1994 Page 4 IX. TERMINATION PROVISIONS AND PAYMENTS. A. Your employment with Polaris may be terminated by Polaris with or without "Cause" (as defined below) at any time. You may terminate your employment with Polaris for "Good Reason" (as defined below) on or before December 31, 2000 or for any reason thereafter. For purposes of this agreement, "Cause" means any of (i) repeated violations of your employment obligations (other than as a result of incapacity due to physical or mental illness) which are demonstrably willful and deliberate on your part and which are not remedied within thirty (30) days after written notice from Polaris specifying such violations; or (ii) conviction for (or plea of nolo contendere to) a felony involving moral turpitude, or dishonesty with respect to Polaris. For purposes of this agreement, "Good Reason" means any of (i) a material reduction in the scope of your authority and responsibility as an executive of Polaris (other than isolated, insubstantial actions not taken in bad faith and which are remedied by Polaris upon notice to Polaris, or as temporarily required due to your illness or injury), (ii) a reduction in your base compensation; (iii) Polaris requires your principal place of employment to be other than at its principal executive offices; or (iv) Polaris otherwise fails to perform any of its material obligations to you. B. If on or before December 31, 2000, Polaris terminates your employment without Cause or you terminate your employment with Polaris for Good Reason, Polaris will pay you: 1. Your base salary pro rata through the date of termination at the time such salary would customarily be paid; 2. An amount equal to (a) the Guaranteed Bonus Amount, if such termination is effective on or before December 31, 1999, or (b) the average cash bonus award paid to you calculated for the two previous fiscal years of Polaris if such termination is effective after December 31, 1999, in either case, pro rata through the date of termination at the time bonuses for the year of termination are customarily paid; 3. Your base salary as then in effect for a two year period beginning on the date of such termination, payable in monthly installments at the time such base salary is customarily payable; and 4. An amount equal to (a) twice the Guaranteed Bonus Amount, if such termination is effective on or before December 31, 1999, or (b) twice the average cash bonus award paid to you calculated for the two previous fiscal years of Polaris if such termination is effective after December 31, 1999, in either case, payable in two equal annual installments at the next two times that bonuses are customarily paid by Polaris. Additionally, if on or before December 31, 2000, Polaris terminates your employment without Cause or you terminate your employment with Polaris for Good Reason, Polaris will provide you with medical and dental insurance coverage substantially the same as provided to other Mr. Thomas C. Tiller April 1, 1998 Page 5 executives of Polaris for a period ending on the earlier of (a) two years from the date of the termination of your employment or (b) the date upon which you become employed by another employer. C. If at any time Polaris terminates your employment for Cause or you terminate your employment without Good Reason, Polaris will pay you your base salary pro rata through the date of termination. Additionally, if after December 31, 2000, Polaris terminates your employment with or without cause or for any reason or you terminate your employment with Polaris with or without Good Reason, Polaris will pay you your base salary pro rata through the date of termination. Additionally, if your employment is terminated pursuant to the preceding two sentences you may purchase health insurance under the then existing applicable health insurance plans of Polaris in accordance with the applicable government requirements, including COBRA. D. In the event that you have not been elected Chief Executive Officer of Polaris by the Board of Directors of Polaris on or before the date of Polaris' 1999 Annual Shareholders Meeting and, on or before August 31, 1999, you have not reached a mutually satisfactory agreement with the Board of Directors of Polaris regarding the terms and conditions under which you will become Chief Executive Officer of Polaris you may, on or before September 30, 1999 provide Polaris with thirty days' advance written notice of your termination of your employment and in the event of such termination Polaris will pay you: 1. Your base salary pro rata through the date of termination; 2. An amount equal to the Guaranteed Bonus Amount pro rata through the date of termination at the time bonuses for the year of termination are customarily paid; 3. Your base salary as then in effect for a three year period beginning on the date of such termination, payable in monthly installments at the time such base salary is customarily payable; and 4. An amount equal to three times the Guaranteed Bonus Amount, payable in three equal annual installments at the next three times bonuses are customarily paid by Polaris. Additionally, Polaris will provide you with medical and dental insurance coverage substantially the same as provided to other executives of Polaris for a period ending on the earlier of (a) two years from the date of termination of your employment or (b) the date upon which you become employed by another employer. E. In the event your employment is terminated under this Article IX before a cash bonus for any preceding fiscal year has been paid, Polaris will pay you your cash bonus for such preceding fiscal year at the time such bonuses are paid to other executives of Polaris. Mr. Thomas C. Tiller April 1, 1998 Page 6 All amounts payable under this Agreement will be net of any applicable requisite tax withholding and in lieu of any other rights or claims you may have against Polaris including under the Change in Control Agreement referred to in Article VII above, all of which such rights or claims you hereby waive. X. PROPRIETARY INFORMATION; NONCOMPETITION. PROPRIETARY INFORMATION Except with the prior written permission of Polaris, you agree that you will not, through the actual date of any termination of your employment with Polaris and for a period of 60 months thereafter, disclose or use any Proprietary Information (as defined below) of Polaris or any of its subsidiaries of which you become informed during your employment with Polaris, whether or not developed by you, except as required by your duties to Polaris or any of its subsidiaries. Proprietary Information means, as to Polaris or any of its subsidiaries, business plans, operating plans, procedures or manuals, financial statements, projections or reports, or other confidential information of the Company, excluding, however, (i) such information which is then or later becomes generally available to the public other than through you; (ii) such information which is received by you from a third party owing no obligation of confidentiality to Polaris; and (iii) such information which has been or is later disclosed by Polaris to an unrelated third party on a nonconfidential basis. Information does not lose its Proprietary Information status merely because it was known by other persons or entities or because it did not entirely originate with Polaris. Upon termination of your employment with Polaris for any reason, you agree to deliver to Polaris all materials (in whatever form or format) that include Proprietary Information. You agree and understand that the Proprietary Information and all information contained therein shall be at all times the property of Polaris. Further, upon termination of your employment for any reason, you agree to make available to any person designated by Polaris or any of its subsidiaries all information concerning pending or preceding transactions which may affect the operation of Polaris or any of its subsidiaries about which you have knowledge. NONCOMPETITION. It is mutually acknowledged that by virtue of your employment hereunder, Polaris and its subsidiaries will divulge and make accessible to you, and you will become possessed of, certain valuable and confidential information concerning the business and operations of Polaris and its subsidiaries. Without limitation it is also specifically acknowledged that great trust on the part of Polaris and its subsidiaries will reside in you because your duties will include involvement in the management, promotion and development of Polaris' operations and business. Accordingly, it is necessary to enter into the following protective agreements: (a) You agree with Polaris and for the benefit of Polaris and its subsidiaries through the actual date of termination of your employment, and for a period of two years thereafter, you will not own or have any interest in and will not, on your behalf or on the behalf of any third party, perform any services for, directly or indirectly, any person or entity (a "Polaris Competitor") which engages in a business that Polaris or any of its subsidiaries conducts or contemplates conducting in the near Mr. Thomas C. Tiller April 1, 1998 Page 7 future at the time of the termination of your employment (each, a "Competitive Activity"), except that you may own up to 1% of the outstanding securities of any corporation if such securities are registered under the Securities Exchange Act of 1934, as amended and you may provide services for businesses of Polaris Competitor that are not engaged in or provide goods or services to a Competitive Activity. (b) You agree that during your employment with Polaris and for a period of two years following the termination of such employment that you will not, either directly or indirectly, on your own behalf or in the service or on behalf of others solicit, divert or hire away, or in any manner attempt to solicit, divert or hire away any full-time employee of Polaris or any of its subsidiaries, and whether or not such employment was pursuant to a written or oral contract of employment and whether or not such employment was for a determined period or was at-will. You understand and agree that a breach by you of any of the provisions of this Agreement may cause Polaris or its subsidiaries irreparable injury and damage which cannot be compensible by receipt of money damages. You, therefore, expressly agree that Polaris and its subsidiaries shall be entitled, in addition to any other remedies legally available to it, to injunctive and/or other equitable relief to prevent a breach of this Agreement or any part hereof. Neither this Agreement nor anything contained herein shall be construed as conferring upon you or Polaris the right to your continued employment by Polaris after December 31, 2001. This Agreement is entered into in the State of Minnesota and shall be construed, interpreted and enforced according to the statutes, rules of law and court decisions of the State of Minnesota. This Agreement constitutes the entire understanding of the parties hereto and supercedes all prior understandings, whether written or oral, between the parties with respect to your employment with Polaris. Mr. Thomas C. Tiller April 1, 1998 Page 8 Please sign and return a copy of this letter indicating that you accept our offer and confirming the terms of your employment. The Board of Directors join me in welcoming you to Polaris. Very truly yours, /s/ W. Hall Wendel, Jr. W. Hall Wendel, Jr. Chairman and Chief Executive Officer Accepted and Confirmed: April 1, 1998 /s/ Thomas C. Tiller - ------------------------------- Thomas C. Tiller EX-27 3 EXHIBIT 27
5 THIS FINANCIAL DATA SCHEDULE CONTAINS THE CONSOLIDATED BALANCE SHEET OF POLARIS INDUSTRIES INC. AS OF JUNE 30, 1998, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, SHAREHOLDERS EQUITY AND CASH FLOWS FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 6,750 0 18,589 0 161,549 217,099 218,253 103,470 399,630 205,712 0 0 0 260 173,388 399,360 484,712 484,712 373,699 373,699 78,271 0 1,299 35,695 12,850 22,845 0 0 0 22,845 0.87 0.87
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