-----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, VEYXy8MMYAk5vezxiM+w7daEW7BH3w581hEtM3uXHx0bIzMJNQjpdG2fzp9s2Fmq rhiKNxfYvcWF3B2Za1K0Fw== 0001047469-99-011857.txt : 19990330 0001047469-99-011857.hdr.sgml : 19990330 ACCESSION NUMBER: 0001047469-99-011857 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 99575423 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, 1998 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 11, 1999 (based upon the closing reported sale price of the Common Stock at that date on the New York Stock Exchange) held by non-affiliates (22,769,383 shares) was approximately $646,081,243. 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 11, 1999, 25,287,614 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, 1998 furnished to the Securities and Exchange Commission (the "1998 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 20, 1999 filed with the Securities and Exchange Commission (the "1999 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 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, motorcycles 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 MOTORCYCLES PWC INTERNATIONAL - ------------------------------------- --------------- --------- ----------- --------- --------------- 1998................................. 32% 57% 1% 4% 6% 1997................................. 42% 45% N/A 7% 6% 1996................................. 43% 37% N/A 16% 4%
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 256,000 units for the season ended March 31, 1998. 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 North America annually had increased to approximately 140,000 units. Polaris entered the ATV market in 1985, Arctic Cat entered in 1995 and Bombardier entered in 1998. In 1985, the number of three- and four-wheel ATVs sold in North America peaked at approximately 650,000 units per year, then dropped dramatically to a low of 148,000 in 1989. 1 Polaris estimates that the industry grew 19% with approximately 520,000 ATVs sold worldwide during the calendar year 1998. MOTORCYCLES. Heavyweight motorcycles are over the road vehicles utilized as a mode of transportation as well as for recreational purposes. There are four segments: cruisers, touring bikes, sport bikes, and standards. Polaris entered the worldwide motorcycle market in 1998 with an initial entry product in the cruiser segment. U.S. retail cruiser sales doubled from 1993 to 1998. Polaris estimates that approximately 152,000 cruiser motorcycles were sold in the U.S. market in 1998. Other major cruiser motorcycle manufacturers include Harley Davidson, Honda, Yamaha, Kawasaki and Suzuki. PERSONAL WATERCRAFT. PWC are sit-down versions of water scooter vehicles, and designed for use on lakes, rivers, oceans and bays. PWC are used primarily for recreational purposes and are designed for one, two, three or four passengers. Polaris entered the PWC market in 1992. After many years of rapid growth, the number of PWC sold peaked at approximately 225,000 units in 1996. Polaris estimates that worldwide industry retail sales for PWC were approximately 160,000 units for the season ended September 30, 1998. Other major PWC manufacturers are Bombardier, Yamaha, Kawasaki and Arctic Cat. PRODUCTS 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 fourteen models includes general purpose, sport and four-wheel drive utility models, with 1999 suggested retail prices ranging from approximately $3,000 to $7,500. 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 also markets a full line of ATV accessories such as winches, mowers, blades, cargo racks, utility trailers, sprayers, seeders, tires, oils, lubricants and parts. Polaris' ATVs feature the totally automatic Polaris variable transmission, which requires no manual shifting, and a MacPherson strut front suspension, which enhances control and stability. Polaris' ATVs include two cycle and four cycle engines and both shaft and concentric chain drive. In 1998, Polaris introduced a diesel powered ATV and in early 1999 Polaris introduced its first manual transmission ATV. 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 sustained consistent growth. For the year ended December 31, 1998, North American sales of ATVs and related PG&A accounted for approximately 57% of Polaris' sales. SNOWMOBILES. Polaris produces a full line of snowmobiles, consisting of thirty-three models, ranging from utility and economy models to performance and competition models, with 1999 suggested United States retail prices ranging from approximately $3,000 to $8,500. Polaris snowmobiles are sold principally in the United States, Canada and Europe. Polaris believes it 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, covers, tow hitches, hand warmers, specialized instrumentation, reverse gear, electric start, special traction products, cargo racks, oils, lubricants, and parts. 2 For the year ended December 31, 1998, North American sales of snowmobiles and related PG&A accounted for approximately 32% of Polaris' sales. MOTORCYCLES. In 1998, Polaris began manufacturing an American-made V-twin cruiser motorcycle, the "Victory V92C." Design and assembly of the engine is in Polaris' Osceola, Wisconsin facility and final assembly is 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 is $12,995. For the year ended December 31, 1998, sales of Victory motorcycles and related PG&A accounted for approximately 1% of Polaris' sales. PERSONAL WATERCRAFT. In 1992, Polaris introduced the SL650 personal watercraft, Polaris' first entry into this product category. Polaris' 1999 line of PWC consists of six models across the touring, performance and racing segments and includes the industry's first four passenger PWC. Management believes that its models had the industry's first three-cylinder engines developed specifically for PWC. The 1999 suggested retail prices for Polaris' PWC range from approximately $5,900 to $9,500. For the year ended December 31, 1998, North American sales of PWC and related PG&A accounted for approximately 4% 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 44 distributors in 116 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 within a few years. For the year ended December 31, 1998, 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. Polaris also markets replacement parts and accessories. MANUFACTURING OPERATIONS Polaris' products are assembled at its original manufacturing facility in Roseau, Minnesota and since 1994 at its facility in Spirit Lake, Iowa. Since snowmobiles, ATVs, motorcycles and PWC incorporate similar technology, substantially the same equipment and personnel are employed in their production. Polaris 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, hulls, tracks, tires and instruments, and certain other component parts are purchased from third party vendors. Polaris manufactures a number of other components for its snowmobiles, ATVs, motorcycles, and PWC. Raw materials or standard parts are readily available from multiple sources for the components manufactured by Polaris. Polaris' work force is familiar with the use, operation and maintenance of the product, since many employees' own snowmobiles, ATVs, motorcycles and PWC. In 1991, Polaris acquired a manufacturing facility in Osceola, Wisconsin to manufacture component parts previously produced by third party suppliers. In 1998, the Victory motorcycle began production at Polaris' Spirit Lake, Iowa facility. The production includes welding, finish painting, and final assembly. Certain operations, including engine assembly, seat manufacturing, and the bending of frame tubes are conducted at the Osceola, Wisconsin facility. 3 In 1998, Polaris completed construction of a 58,000 square foot plastic injection molding facility adjacent to the Roseau, Minnesota facility. This is a vertical integration project for Polaris in the manufacture of snowmobile hoods and certain large plastic molded parts on ATVs. Pursuant to informal agreements between Polaris and Fuji Heavy Industries Ltd. ("Fuji"), Fuji 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. Fuji develops such engines to the specific requirements of Polaris. Polaris believes its relationship with Fuji to be excellent. If, however, Fuji terminated its informal relationship, interruption in the supply of engines would adversely affect Polaris' production pending the continued development of substitute supply arrangements. Since 1995, Polaris has been designing and producing its own engines for selected models of PWC, snowmobiles and, most recently, Victory motorcycles. Polaris 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 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. A contract carrier ships Polaris' products from its manufacturing facilities. PRODUCTION SCHEDULING Polaris products are produced and delivered throughout the year. Delivery of snowmobiles to consumers begins in autumn and continues during the winter season. Orders for each year's production of snowmobiles are placed in the spring. Orders for ATVs are placed twice a year, spring and fall, and orders for PWC are placed in autumn after meetings with dealers and distributors. Units are built to order each year. In addition, non-refundable deposits made by consumers to dealers in the spring for snowmobiles assist in production planning. The budgeted volume of units to be produced each year is substantially sold to dealers and distributors prior to production. Retail sales activity at the dealer level is monitored by Polaris for each of snowmobiles, ATVs, motorcycles and PWC. In 1998, motorcycle production began based on orders placed after the initial Victory dealer meeting held in January 1998. Currently, Polaris has orders for all units being manufactured. In the future, orders for motorcycles will be placed in the autumn after meeting with Victory dealers. 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 1993, Polaris has had the ability to manufacture ATVs year round. Motorcycle manufacturing began in July 1998 and will continue year round. SALES AND MARKETING Polaris products are sold through a network of over 2,000 dealers in North America and 44 distributors in 116 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 international operations. 4 Many dealers and distributors of Polaris snowmobiles also distribute Polaris' ATVs and PWC. At the end of 1998, approximately 700 dealerships were located in areas of the United States where snowmobiles are not regularly sold. Unlike its primary competitors, which market their ATV products principally through their affiliated motorcycle dealers, Polaris also sells its ATVs and PWC through lawn and garden, boat and marine, and farm implement dealers. Victory motorcycles are distributed directly through authorized Victory dealers. Polaris has a high quality dealer network in North America for its other product lines from which most of the current 250 Victory dealers were selected. Polaris expects to develop a Victory dealer network of approximately 500 to 600 dealers over the next three to four years. Dealers and distributors sell Polaris' products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products, required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. Polaris believes that a sufficient number of qualified dealers and distributors exists in all areas to permit orderly transition whenever necessary. In 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 beginning in February 1999 provides other financial services to dealers, distributors and retail customers such as retail financing and extended service contracts. Under the partnership agreement, Polaris has a 50% equity interest in Polaris Acceptance and guarantees 50% of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TDF. At December 31, 1998, Polaris' contingent liability with respect to the guarantee was approximately $139.0 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, PWC and motorcycles 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. 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 3 of Notes to Consolidated Financial Statements. Polaris has historically not directly financed the purchase of its products by consumers. In February 1999, Polaris made consumer financing available through its Polaris Acceptance joint venture. Polaris will not guarantee the debt or be required to repurchase products related to the retail financing programs but will share in the losses of the program through its 50% equity interest in Polaris Acceptance. 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. Polaris also co-sponsors a car on the NASCAR auto racing circuit. Each season, Polaris produces a promotional film for each of its products, which is available to dealers for use in the showroom or at special promotions. Polaris also provides product brochures, leaflets, posters, dealer signs, and miscellaneous other promotional items for use by dealers. 5 ENGINEERING, RESEARCH AND DEVELOPMENT, AND NEW PRODUCT INTRODUCTION Polaris employs approximately 325 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, long travel rear suspension for snowmobiles, direct drive of the snowmobile track, the use of liquid cooling in snowmobile engines and brakes, the use of hydraulic brakes in snowmobiles, the three cylinder engine in snowmobiles and PWC, the adaptation of the MacPherson strut front suspension, "on demand" four-wheel drive systems and the Concentric Drive System for use in ATVs, the application of a forced air cooled variable power transmission system to ATVs, and the diesel fuel powered ATV. Polaris utilizes internal combustion engine testing facilities to design and optimize engine configurations for its products. Polaris utilizes specialized facilities for matching engine, exhaust system and clutch performance parameters in its products to achieve desired fuel consumption, power output, noise level and other objectives. Polaris' engineering department is equipped to make small quantities of new product prototypes for testing by Polaris' testing teams and for the planning of manufacturing procedures. In addition, Polaris maintains numerous test facilities where each of the products is extensively tested under actual use conditions. Polaris expended for research and development approximately $28.4 million for 1998, $26.7 million for 1997, and $28.3 million for 1996, 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 and marketing resources which are substantially greater than those of Polaris. Polaris products are competitively priced and management believes Polaris' sales and marketing support programs for dealers are comparable to those provided by its competitors. Polaris' products compete with many other recreational products for the discretionary spending of consumers, and, to a lesser extent, with other vehicles designed for utility applications. 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 Polaris products. State approved trails and recreational areas for snowmobile and ATV use have been developed in response to environmental and safety concerns. Some states may pass legislation and local ordinances or regulations have been and may from time to time be considered which restrict the use of PWC to specified hours and locations. Polaris is unable to predict the outcome of such actions or the possible effect on its PWC business. Polaris has supported laws and regulations pertaining to safety and noise abatement 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. Polaris continues to monitor these 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. 6 In September 1986, the staff of the Consumer Products Safety Commission ("CPSC") ATV Task Force issued a report on regulatory options for ATVs with recommendations for ATV marketing activities and warning labels. In February 1987, the CPSC formally requested that the Justice Department initiate an enforcement action against the ATV industry seeking a voluntary recall of all three-wheel ATVs and four-wheel ATVs sold with the intention that they be used by children under 16, as well as a requirement that ATV purchasers receive "hands-on" training. Except for 1,700 three-wheel models initially produced, Polaris manufactures only four-wheel ATVs and six-wheel off-road vehicle products. Polaris has always placed warning labels on its ATVs stating that they are designed for use only by persons of a specified minimum age, 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, which was confirmed in a ten-year Consent Decree in April 1988. In April 1998, the Consent Decree with the CPSC expired. Polaris has filed with the CPSC a Voluntary Action Plan under which Polaris undertook to continue various activities including age recommendations, dealer monitoring for ascertaining dealer compliance with safety obligations including age recommendations and training requirements, warning labels, point of purchase materials, hands on training and an information education effort. Polaris conditions its ATV warranties described below under "Warranty" on completion of the mandatory "hands on" consumer training program. In December 1998, the CPSC issued a resolution commending Polaris and certain other industry members for their ATV Action Plans The Company does not believe that the Polaris Voluntary Action Plan will have a material adverse effect on Polaris. Nevertheless, there can be no assurance that future recommendations or regulatory actions by the CPSC, the Justice Department or individual states would not have an adverse effect on the Company. Polaris will continue to attempt to assure that its dealers are in compliance with their safety obligations. Polaris has notified its dealers that it will terminate or not renew any dealer it determines has violated such safety obligations. To date, it has terminated or not renewed at least eight dealers for such reasons. In May 1998, the National Transportation Safety Board ("NTSB") issued a report regarding PWC safety and made various recommendations regarding PWC. Prior to May 1998, Polaris was working and continues to work with the Coast Guard to develop standards and to evaluate PWC safety matters, including the NTSB recommendations. Polaris PWC have always complied with industry standards relevant to PWCs. California has adopted regulations setting maximum emission standards for ATVs and the federal Environmental Protection Agency ("EPA") has indicated its intent to establish emission standards for non-road engines, including ATVs and snowmobiles. The EPA already has required PWC manufacturers to gradually reduce their emission by 75% between 1999 and 2006. For the State of California, the California Air Resources Board has accelerated this scheduled emission reduction by requiring that manufacturers meet the EPA 2006 level in 2001 and required that manufacturers meet further emission reductions by 2004 and 2008. Conventional two-stroke cycle engines cannot meet these more restrictive emission requirements. In 1997, Polaris signed an agreement with Outboard Marine Corporation ("OMC") licensing the Ficht fuel injection technology. During 1998, Polaris introduced the new Genesis PWC model utilizing the Ficht technology which complies with the EPA 2006 emission requirements. This technology may be used in other Polaris vehicles to meet emission standards in the future, particularly in Polaris vehicles with two-cycle engines. Polaris is unable to predict the ultimate impact of the adopted or proposed regulations on Polaris and its operations. Victory motorcycles are subject to federal and state emissions, vehicle safety and other standards. Polaris believes that its motorcycles comply fully with all such applicable standards and related regulations. 7 PRODUCT LIABILITY Polaris' product liability insurance limits and coverages have been adversely affected by the general decline in the availability of liability insurance. As a result of the high cost of premiums, and in view of the historically small amount of claims paid by Polaris, Polaris was self-insured from June 1985 to June 1996. In June 1996 Polaris purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceed a self-insured retention. Product liability claims are made against Polaris from time to time. Since its inception in 1981 through December 31, 1998, Polaris has paid an aggregate of approximately $4.2 million in product liability claims and accrued $7.4 million at December 31, 1998 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 8 of Notes to Consolidated Financial Statements. WARRANTY Polaris provides a limited warranty for ATVs for a period of six months and for its snowmobiles, motorcycles and PWC for a period of one year. 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. Despite such variations in employment levels, employee turnover has not been high. During 1998, Polaris employed an average of approximately 3,050 persons. Approximately 900 of its employees are salaried. Polaris considers its relations with its personnel to be excellent. Polaris' employees have not been represented by a union since July 1982. YEAR 2000 COMPLIANCE During 1998, Polaris has continued its company-wide program to prepare the Company's computer systems for Year 2000 compliance. In order for a computer system to by Year 2000 compliant, its time sensitive software must recognize a date using "00" as the year 2000 rather than 1900. Polaris' project is divided into two major areas: internal information systems and embedded manufacturing systems/third-party suppliers. Polaris has implemented a plan to make its critical internal information systems Year 2000 compliant by the end of 1998 and to make its remaining internal information systems Year 2000 compliant by mid-1999. As of December 31, 1998, approximately 90% of the programming requirements for the 8 Company's manufacturing systems were complete and 70% of the programming requirements for the sales, distribution and finance systems had been completed. Manufacturing mission critical applications are all currently in the test phase. The remaining systems are being tested when the programming modifications are completed, with testing expected to continue throughout 1999. Polaris has completed inventories of equipment and machines with embedded systems that are used at each of the facilities. Polaris is in the process of assessing whether the critical equipment will be Year 2000 compliant through simulations and testing of the equipment as well as Year 2000 compliance letters from vendors. Polaris has identified its critical suppliers and sent them questionnaires to address their Year 2000 plans and progress. Polaris has received responses from approximately 75% of these suppliers and is in the process of tabulating the results. The cost of the Year 2000 initiatives (which are expensed as incurred) are not expected to be material to Polaris' financial position. The total cost is estimated to be approximately $1.5 million of which approximately $0.8 million has been incurred to date. Polaris has begun a comprehensive analysis of the operational issues and costs that would most likely result from failure by the Company or third parties to achieve Year 2000 compliance on a timely basis. Although Polaris has not yet identified the most likely worst case scenario, the risk would be primarily delivery timing to customers in January 2000. Polaris believes it will have sufficient time to recover, although some delayed deliveries may result in cancellations of customer orders. Polaris is in the process of developing contingency plans to protect the business from Year 2000 related interruptions and anticipates their completion by the third quarter of 1999. The costs of the project and the date when Polaris believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no guarantee these estimates will be achieved and actual results could differ materially from those anticipated. 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. 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, beginning 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. In 1998, Polaris completed construction and began operating a 58,000 square foot plastic injection molding facility adjacent to the Roseau, Minnesota facility. This is a vertical integration project for Polaris in the manufacture of snowmobile hoods and certain large plastic molded parts on ATVs. Polaris makes ongoing capital investments in its facilities. 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. In 1997, Polaris completed construction of a 250,000 square foot state of the art parts, garments and accessories distribution center on 50 acres in Vermillion, South Dakota. 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 9 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 pursuant to a lease that will terminate in 2002. Polaris also leases an additional 24,000 square feet of office space in Minneapolis, Minnesota, 42,000 square feet of office and warehouse space in Winnipeg, Manitoba, and 10,000 square feet of warehouse space in Spirit Lake, Iowa. Polaris does not anticipate any difficulty in securing alternate facilities on competitive terms, if necessary, upon the termination of any of its leases. ITEM 3. LEGAL PROCEEDINGS Injection Research Specialists ("IRS") commenced an action in 1990 against Polaris and Fuji Heavy Industries, Ltd. ("Fuji"), one of Polaris' engine suppliers, in Colorado Federal Court alleging various claims relating to electronic fuel injection systems for snowmobiles. In October 1998, following the entry of judgement against Polaris for $34.0 million (before pre-and post-judgment interest) and affirmance thereof by the Federal Court of Appeals, IRS, Polaris and Fuji entered into a confidential settlement agreement to settle all outstanding claims between the parties. The resulting provision for litigation loss of $61.4 million has been reflected as non-operating expense in the accompanying consolidated statement of operations for the year ended December 31, 1998. The related payment to IRS was made during the fourth quarter in connection with entering into the confidential settlement agreement. Polaris no longer uses any of the technology in dispute. Polaris pro forma results adjusted to exclude the provision for litigation loss are as follows:
FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Income before taxes................................................... $ 109,771 $ 102,162 Provision for income taxes............................................ 39,147 36,779 ---------- ---------- Net Income............................................................ $ 70,624 $ 65,383 Diluted Net Income Per Share.......................................... $ 2.72 $ 2.45
In addition to the aforementioned matter, 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. 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. 10 EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names of the executive officers of the Company as of March 3, 1999, 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. 56 Chairman and Chief Executive Officer Thomas C. Tiller 37 President and Chief Operating Officer Charles A. Baxter 51 Vice President--Engineering and General Manager Engines Jeffrey A. Bjorkman 39 Vice President--Manufacturing John B. Corness 44 Vice President--Human Resources Michael W. Malone 40 Vice President--Finance, Chief Financial Officer and Secretary Thomas H. Ruschhaupt 50 Vice President--Sales and Services Ed Skomoroh 61 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. Tiller was named President and Chief Operating Officer of the Company in July 1998. Prior to joining Polaris, Mr. Tiller was employed by General Electric Company in various management positions for fifteen years. Mr. Baxter has been Vice President--Engineering of the Company since December 1994 and held that position with PICC or its predecessor since 1981. Prior thereto, since 1970, Mr. Baxter was employed as Director of Engineering of the Polaris E-Z-GO Division of Textron. Mr. 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. Corness has been Vice President--Human Resources of the Company since January 1999. Prior to joining Polaris, Mr. Corness was employed by General Electric Company in various human resource positions for nine years. Before that time, Mr. Corness held various human resource positions with Maple Leaf Foods and Transalta Utilities. Mr. Malone has been Vice President--Finance, Chief Financial Officer and Secretary of the Company since January 1997. Mr. Malone was Vice President and Treasurer of the Company from December 1994 to January 1997 and was Chief Financial Officer and Treasurer of PICC from January 1993 to December 1994. Prior thereto and since 1986, he was Assistant Treasurer of PICC or its predecessor. Mr. Malone joined Polaris in 1984 after four years with Arthur Andersen LLP. 11 Mr. Ruschhaupt has been Vice President--Sales and Service of the Company since March 1998. Prior to joining Polaris, Mr. Ruschhaupt was employed by Goodyear Tire and Rubber Corporation in various management positions for twenty years. Mr. 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. 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 1998 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 1998 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 1998 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information under the caption "Management's Discussion and Analysis--Inflation and Exchange Rates" and Note 1 to the financial statements of the Registrant, included in the Company's 1998 Annual Report, are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Registrant, included in the Company's 1998 Annual Report, are incorporated herein by reference: Consolidated Balance Sheets December 31, 1998 and 1997. Consolidated Statements of Operations Years Ended December 31, 1998, 1997, and 1996. Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998, 1997, and 1996. Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997, and 1996. 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 1999 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 1999 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 1999 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 1999 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 1999 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 1998 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 22, 1999, 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, 1998. (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 29, 1999. 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 29, 1999 W. Hall Wendel, Jr. Executive Officer) Vice President Finance, /s/ MICHAEL W. MALONE Chief Financial Officer - ------------------------------------ and Secretary (Principal March 29, 1999 Michael W. Malone Financial and Accounting Officer) * - ------------------------------------ Director March 29, 1999 Andris A. Baltins * - ------------------------------------ Director March 29, 1999 Raymond J. Biggs * - ------------------------------------ Director March 29, 1999 Beverly F. Dolan * - ------------------------------------ Director March 29, 1999 Robert S. Moe * - ------------------------------------ Director March 29, 1999 Gregory R. Palen * - ------------------------------------ Director March 29, 1999 Stephen G. Shank * - ------------------------------------ Director March 29, 1999 Bruce Thomson * - ------------------------------------ Director March 29, 1999 Thomas C. Tiller *By: /s/ W. HALL WENDEL, JR. March 29, 1999 ------------------------------ (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, 1998
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 for the year ended December 31, 1994. (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 effective January 1, 1997 incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (e) Fourth Amendment to Credit Agreement by and between the Company and First Bank incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. (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 for the year ended December 31, 1995. (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 for the year ended December 31, 1995. (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 for the year ended December 31, 1995. (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 (the "Credit Agreement") 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 for the year ended December 31, 1994.
16
EXHIBIT NUMBER DESCRIPTION - ------------ ---------------------------------------------------------------------- (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 for the year ended December 31, 1994. (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 for the year ended December 31, 1996. (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 for the year ended December 31, 1996. (s) Employment Agreement between the Company and Thomas Tiller incorporated by reference to Exhibit 10(s) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998. (t) Fifth Amendment to Credit Agreement by and between the Company and U.S. Bank National Association et al. dated August 24, 1998. (u) Sixth Amendment to Credit Agreement by and between the Company and U.S. Bank National Association et al. dated December 7, 1998. 13. Portions of the Annual Report to Security Holders for the Year Ended December 31, 1998 included pursuant to Note 2 to General Instruction G. 21. Subsidiaries of Registrant 23. Consent of Arthur Andersen LLP 24. Power of Attorney 27. Financial Data Schedule
17 EX-10.T 2 EXHIBIT 10(T) FIFTH AMENDMENT TO CREDIT AGREEMENT This Fifth Amendment to Credit Agreement, dated as of August 24, 1998 ("Fifth Amendment"), is made by and between POLARIS INDUSTRIES INC., a Minnesota corporation (the "Borrower"); U.S. BANK NATIONAL ASSOCIATION, formerly known as FIRST BANK NATIONAL ASSOCIATION, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, formerly known as BANK OF AMERICA ILLINOIS and FIRST UNION NATIONAL BANK, formerly known as FIRST UNION NATIONAL BANK OF NORTH CAROLINA (collectively, the "Banks"); and U.S. 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, Third Amendment to Credit Agreement dated as of September 30, 1996 and Fourth Amendment to Credit Agreement dated as of March 31, 1997 (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 "EBIT", "EBITDA", "Revolving Commitment Amount" and "Revolving Note" in Section 1.1 of the Credit Agreement are amended to read in their entirety as follows: "EBIT": For any period of determination, the consolidated net income of the Borrower before deductions for income taxes and Interest Expense (and for fiscal year 1998, before deduction for litigation loss in connection with the litigation described in paragraph 1 of Exhibit 4.6 hereto), but after deductions for depreciation and amortization, all as determined in accordance with GAAP. "EBITDA": For any period of determination, the consolidated net income of the Borrower before deductions for income taxes, Interest Expense, depreciation and amortization (and for fiscal year 1998, before deduction for litigation loss in connection with the litigation described in paragraph 1 of Exhibit 4.6 hereto), all as determined in accordance with GAAP. "REVOLVING COMMITMENT AMOUNT": With respect to a Bank: (a) during the period commencing August 24, 1998 and ending on and including March 30, 1999, 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 MARCH 31, 1999 - ------------------------------------------------------------------------------ U.S. Bank National Association $63,000,000 Bank of America $56,000,000 First Union National Bank $56,000,000
(b) during the period beginning on March 31, 1999 and ending on March 30, 2000, 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 MARCH 31, 1999 THRU MARCH 30, 2000 - ---------------------------------------------------------------------------- U.S. Bank National Association $54,000,000 Bank of America $48,000,000 First Union National Bank $48,000,000
(c) during the period beginning on March 31, 2000 and ending on the Revolving Commitment Ending Date, the amount set opposite such Bank's -2- 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 MARCH 30, 2000 THRU THE REVOLVING COMMITMENT ENDING DATE - ----------------------------------------------------------------------------- U.S. Bank National Association $45,000,000 Bank of America $40,000,000 First Union National Bank $40,000,000
"REVOLVING NOTE": A promissory note of the Borrower in the form of Exhibit 1.1-2-5 hereto. (b) Section 6.13 of the Credit Agreement is amended to read in its entirety as follows: Section 6.13 TANGIBLE NET WORTH. The Borrower will not permit its Tangible Net Worth at any time to be less than: (a) $75,000,000 at all times through December 30, 1999; and (b) $100,000,000 at all times on and after December 31, 1999. Section 3. CONDITIONS TO EFFECTIVENESS OF FIFTH AMENDMENT. The Amendments contained in this Fifth 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 1.1-2-5 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 -3- 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 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 -4- (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. (j) Each Bank shall have received a fee equal to .20% of the increase such Bank's Revolving Commitment Amount. 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 March 31, 1997, in the aggregate principal amount of $150,000,000, 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 1.1-2-5 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. WAIVER. Pursuant to the provisions of Section 7.1(i) of the Credit Agreement the entry of judgment against the Borrower in excess of $500,000 is an Event of Default if either (i) the judgment creditor executes on such judgment or (ii) such judgment remains unpaid or undischarged for more than the longer of 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment. The Borrower has informed the Banks that it may be in violation of such Section 7.1(i) due to the entry of judgment against the Borrower in the litigation described in paragraph 1 of Exhibit 4.6 to the Credit Agreement and the subsequent ruling on the Borrower's appeal of such judgment. The Banks hereby waive the Event of Default under Section 7.1(i) of the Credit Agreement, if any, due to the entry of judgment against the Borrower in the litigation described in paragraph 1 of Exhibit 4.6 to the Credit Agreement and the subsequent ruling on the Borrower's appeal of such judgment. This waiver is limited to the express terms hereof and shall not apply to any other Default or Event of Default. This waiver is not and shall not be deemed a course of performance upon which the Borrower may rely with respect to any other Default, Event of Default or request for a waiver and the Borrower expressly waives any such claim. Section 6. EFFECT OF FIFTH AMENDMENT; REPRESENTATIONS AND WARRANTIES; NO WAIVER. The Banks, the Administrative Agent and the Borrower agree that after -5- this Fifth 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 Fifth 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 except as waived herein; (iii) there has been no change in any of the certificates or articles of incorporation, bylaws or partnership agreements of the Borrower or any 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 Fifth Amendment; (v) neither this Fifth 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 the 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 Fifth Amendment, or the performance of obligations of the Borrower herein or therein described. Section 7. INCORPORATION OF CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS BY REFERENCE; RATIFICATION OF LOAN DOCUMENTS. Except as expressly modified under this Fifth 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 Fifth Amendment. Section 8. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Fifth 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 Fifth Amendment shall control. Section 9. EXPENSES. As provided in Section 9.2 of the Credit Agreement, the Borrower agrees to pay all of the expenses, including reasonable attorneys' -6- fees and expenses, incurred by the Administrative Agent in connection with this Fifth Amendment. Section 10. COUNTERPARTS. This Fifth 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 11. GOVERNING LAW. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS FIFTH 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 -7- IN WITNESS WHEREOF, the parties hereto have caused this Fifth 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 U.S. BANK NATIONAL ASSOCIATION, as Administrative Agent and a Bank By /s/ Carleton L. Olmanson ------------------------------------ Name Carleton L. Olmanson ------------------------------------ Title SVP ------------------------------------ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Documentation Agent and a Bank By /s/ R. Guy Stapleton ------------------------------------ Name R. Guy Stapleton ------------------------------------ Title Managing Director ------------------------------------ FIRST UNION NATIONAL BANK, as a Documentation Agent and a Bank By /s/ Brian Mulvaney ------------------------------------ Name Brian Mulvaney ------------------------------------ Title Vice President ------------------------------------ S-1 EX-10.U 3 EXHIBIT 10(U) SIXTH AMENDMENT TO CREDIT AGREEMENT This Sixth Amendment to Credit Agreement, dated as of December 7, 1998 ("Sixth Amendment"), is made by and between POLARIS INDUSTRIES INC., a Minnesota corporation (the "Borrower"); U.S. BANK NATIONAL ASSOCIATION, formerly known as FIRST BANK NATIONAL ASSOCIATION, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, formerly known as BANK OF AMERICA ILLINOIS and FIRST UNION NATIONAL BANK, formerly known as FIRST UNION NATIONAL BANK OF NORTH CAROLINA (collectively, the "Banks"); and U.S. 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, Third Amendment to Credit Agreement dated as of September 30, 1996, Fourth Amendment to Credit Agreement dated as of March 31, 1997 and Fifth Amendment to Credit Agreement dated as of August 24, 1998 (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 to reflect the formation of a new subsidiary (the "New Subsidiary") by the Borrower, subject to the terms and conditions of the Credit Agreement, and to allow the Subsidiaries to guarantee the obligations of the Borrower under interest rate protection agreements, 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 definition of "Guarantors" in Section 1.1 of the Credit Agreement is amended to read in its 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, Polaris Sales Inc. and any Additional Guarantors. (b) Section 6.12 of the Credit Agreement is amended in its entirety to read 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; (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; and (v) the guarantee by the Subsidiaries of the Borrower's obligations under interest rate protection agreements. (c) Exhibit 4.19 is deleted from the Credit Agreement and new Exhibit 4.19-6, in the form of Exhibit 4.19-6 attached hereto, is added to the Credit Agreement. Section 3. CONDITIONS TO EFFECTIVENESS OF SIXTH AMENDMENT. The Amendments contained in this Sixth 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 (except the New Subsidiary); (b) 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 by the Borrower, and authorizing the formation of the New Subsidiary and the transfer of -2- certain assets of the Borrower thereto, 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 (except the New Subsidiary), 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 (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 (except the New Subsidiary) 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 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 with a counterpart for each Bank, a copy of the corporate resolution of the New Subsidiary authorizing the execution, delivery and performance of its Guaranty, certified as of the date of execution thereof by the Secretary or an Assistant Secretary of the New Subsidiary. (h) The Agent shall have received with a counterpart for each Bank, an incumbency certificate showing the names and titles and bearing the signatures of the officers of the New Subsidiary authorized to execute the Guaranty, certified as of the date of execution thereof by the Secretary or an Assistant Secretary of the New Subsidiary. (i) A copy of the Articles of Incorporation of the New Subsidiary, with all amendments thereto, certified by the appropriate governmental -3- official of the jurisdiction of its incorporation as of a date not more than 15 days prior to the date of this Sixth Amendment. (j) A certificate of good standing for the New Subsidiary in the jurisdiction of its incorporation certified by the appropriate governmental official as of a date not more than 15 days prior to the date of this Sixth Amendment. (k) A copy of the bylaws of the New Subsidiary certified as of the date of this Sixth Amendment by the Secretary or an Assistant Secretary of the New Subsidiary. (l) The Agent shall have received with a counterpart for each Bank, the Guaranty of the New Subsidiary duly executed by an authorized officer of the same. (m) 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 (n) 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. 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 SIXTH AMENDMENT; REPRESENTATIONS AND WARRANTIES; NO WAIVER. The Banks, the Administrative Agent and the Borrower agree that after this Sixth 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 Sixth 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 except as waived herein; (iii) there has been no change in any of the certificates or articles of incorporation, bylaws or partnership agreements of the Borrower or any Guarantor since the Closing Date or (if later) the date such -4- Guarantor became a Guarantor; (iv) the Borrower has the power and legal right and authority to enter into this Sixth Amendment; (v) neither this Sixth 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 the 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 Sixth 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 Sixth 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 Sixth Amendment. Section 7. MERGER AND INTEGRATION, SUPERSEDING EFFECT. This Sixth 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 Sixth 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 Sixth Amendment. Section 9. COUNTERPARTS. This Sixth 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 SIXTH AMENDMENT SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. -5- IN WITNESS WHEREOF, the parties hereto have caused this Sixth 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 U.S. BANK NATIONAL ASSOCIATION, as Administrative Agent and a Bank By /s/ David Shapiro ------------------------------------ Name David Shapiro ------------------------------------ Title Assistant Vice President ----------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Documentation Agent and a Bank By /s/ Gretchen Spoo ------------------------------------ Name Gretchen Spoo ------------------------------------ Title Vice President ----------------------------------- FIRST UNION NATIONAL BANK, as a Documentation Agent and a Bank By /s/ C. Jeffrey Staton ------------------------------------ Name C. Jeffrey Staton ------------------------------------ Title SVP ----------------------------------- S-1 EX-13 4 EXHIBIT 13 FINANCIAL DATA IN THOUSANDS, EXCEPT PER SHARE AND PER UNIT DATA The selected financial data presented below are qualified in their entirety by, and should be read in conjunction with, the Consolidated Financial Statements and Notes thereto and other financial and statistical information referenced elsewhere herein, including the information referenced under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Sales data Total dollars $ 1,175,520 $ 1,048,296 $ 1,191,901 $ 1,113,852 % change from prior year 12% (12%) 7% 35% Sales mix by product (%) Snowmobiles 32% 42% 43% 46% All-terrain vehicles 57% 45% 37% 33% Personal watercraft 4% 7% 16% 16% Motorcycles 1% -- -- -- International 6% 6% 4% 5% Gross profit data Total dollars $ 278,287 $ 262,538 $ 263,816 $ 247,993 % of sales 24% 25% 22% 22% Operating expense data Amortization of intangibles and noncash compensation $ 8,703 $ 5,887 $ 5,325 $ 5,616 Conversion costs -- -- -- -- Other operating expenses 169,478 163,549 161,074 140,719 % of sales 14% 16% 14% 13% Actual, adjusted,(1) and pro forma data(2) Net income $ 70,624(1) $ 65,383 $ 62,293 $ 60,776 Diluted net income per share $ 2.72(1) $ 2.45 $ 2.24 $ 2.19 CASH FLOW DATA Cash flow from operating activities $ 121,385 $ 102,308 $ 89,581 $ 77,749 Purchase of property and equipment 61,532 36,798 45,336 47,154 Repurchase and retirement of common stock 37,728 39,903 13,587 -- Cash dividends to shareholders 18,582 16,958 16,390 116,639 Cash dividends per share $ 0.72 $ 0.64 $ 0.60 $ 4.27 Cash distributions declared to partners -- -- -- -- Cash distributions declared per unit -- -- -- -- BALANCE SHEET DATA (AT END OF YEAR) Cash and cash equivalents $ 1,466 $ 1,233 $ 5,812 $ 3,501 Current assets 183,840 217,458 193,405 175,271 Total assets 378,697 384,746 351,717 314,436 Current liabilities 204,964 191,111 161,387 155,722 Borrowings under credit agreement 20,500 24,400 35,000 40,200 Shareholders' equity/Partners' capital 153,233 169,235 155,330 118,514 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1994 - --------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Sales data Total dollars $ 826,286 % change from prior year 56% Sales mix by product (%) Snowmobiles 52% All-terrain vehicles 30% Personal watercraft 14% Motorcycles -- International 4% Gross profit data Total dollars $ 196,783 % of sales 24% Operating expense data Amortization of intangibles and noncash compensation $ 14,321 Conversion costs 12,315 Other operating expenses 94,485 % of sales 11% Actual, adjusted,(1) and pro forma data(2) Net income $ 54,703 Diluted net income per share $ 1.98 CASH FLOW DATA Cash flow from operating activities $ 111,542 Purchase of property and equipment 32,656 Repurchase and retirement of common stock -- Cash dividends to shareholders -- Cash dividends per share -- Cash distributions declared to partners 50,942 Cash distributions declared per unit $ 1.68 BALANCE SHEET DATA (AT END OF YEAR) Cash and cash equivalents $ 62,881 Current assets 206,489 Total assets 331,166 Current liabilities 161,457 Borrowings under credit agreement -- Shareholders' equity/Partners' capital 169,709 - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
(1) IN 1998, POLARIS ENTERED INTO A SETTLEMENT AGREEMENT RELATED TO A TRADE SECRET INFRINGEMENT CLAIM BROUGHT BY INJECTION RESEARCH SPECIALISTS, INC. THE ONE-TIME PROVISION FOR LITIGATION LOSS OF $61.4 MILLION, OR $1.53 PER DILUTED SHARE, HAS BEEN EXCLUDED FROM THE 1998 FINANCIAL DATA PRESENTED. (2) THE COMPARABILITY OF THE INFORMATION REFLECTED IN THE SELECTED FINANCIAL DATA IS MATERIALLY AFFECTED BY THE CONVERSION FROM A MASTER LIMITED PARTNERSHIP TO A CORPORATION ON DECEMBER 22, 1994, WHICH RESULTED IN THE COMPANY RECORDING A NET DEFERRED TAX ASSET OF $65.0 MILLION, CONVERSION EXPENSES OF $12.3 MILLION AND A CORRESPONDING NET INCREASE IN 1994 NET INCOME. PRO FORMA DATA IS PRESENTED TO ASSIST IN COMPARING THE CONTINUING RESULTS OF OPERATIONS OF THE COMPANY EXCLUSIVE OF THE CONVERSION COSTS AND AS IF THE COMPANY WAS A TAXABLE CORPORATION FOR EACH PERIOD PRESENTED. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion pertains to the results of operations and financial position of the Company for each of the three years in the period ended December 31, 1998, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein. RESULTS OF OPERATIONS 1998 VS. 1997 Sales increased to $1.176 billion in 1998, representing a 12 percent increase from $1.048 billion in 1997. The increase in sales was primarily due to higher all-terrain vehicle (ATV) sales, partially offset by a decline in snowmobile sales. In 1998, Polaris achieved its ninth consecutive year of increased ATV sales. North American sales of ATVs and related parts, garments and accessories (PG&A) of $673.9 million in 1998 were 42 percent higher than $473.2 million in 1997. The increased sales reflect the continued strong growth of the industry as consumers find new and expanded uses for the product. Additionally, management believes that Polaris increased its market share of ATV sales as the result of continued expansion of the popular Sportsman line of ATVs and other new model introductions. The average per unit sales price increased six percent for ATVs in 1998 as the sales mix continued to move to new, higher performance models. Sales of ATVs and related PG&A comprised 57 percent of total Company sales in 1998 compared to 45 percent in 1997. North American sales of snowmobiles and related PG&A of $374.4 million in 1998 were 16 percent lower than $443.0 million in 1997. The decline is due to lower snowmobile production levels in 1998 in response to poor snow conditions, warmer than normal temperatures in North America, and higher dealer inventories at the end of the 1997-1998 selling season. Sales of snowmobiles and related PG&A comprised of 32 percent of total Company sales in 1998 compared to 42 percent in 1997. North American sales of personal watercraft (PWC) and related PG&A of $50.4 million in 1998 were 31 percent lower than $73.4 million in 1997. The decrease is attributable to significantly lower production levels of PWC in 1998 to compensate for the increased dealer inventory remaining from the prior season reflecting the reduction of industry growth. Sales of PWC and related PG&A comprised four percent of total Company sales in 1998 compared to seven percent in 1997. North American sales of Victory motorcycles and related PG&A were $9.9 million in 1998. Victory shipments to our dealers began in July 1998. Sales of Victory motorcycles and related PG&A comprised one percent of total Company sales in 1998, the initial year of production. International sales of snowmobiles, ATVs, PWC, and related PG&A of $61.7 million in 1998 were five percent higher than $58.7 million in 1997. The increase in international sales was primarily due to an increase in ATV shipments. Polaris continues to focus on international markets as an opportunity for future growth. International sales comprised six percent of total Company sales in 1998, the same as 1997. Gross profit increased to $278.3 million in 1998, representing a six percent increase over $262.5 million gross profit in 1997. However, the gross profit margin percentage of 23.7 percent in 1998 decreased from 25.0 percent in 1997. The decrease in gross profit margin percentage is primarily a result of the (a) mix impact of the substantial increase in sales of ATVs, which have a lower margin than snowmobiles, (b) negative impact of the Canadian dollar exchange rate when compared to the prior year, (c) initial production rollout of the Victory motorcycles, and (d) reduced pricing on 1998 model ATVs implemented in the Fall of 1997. These negative factors have been partially offset by the continued improvement in overall product quality, which has resulted in a decrease in warranty expenses. Polaris has continued to invest in new product development, innovation, and product diversification. Research and development expenses were $28.4 million (2.4 percent of sales) in 1998 and $26.7 million (2.5 percent of sales) in 1997. In addition, Polaris incurred tooling expenditures for new products of $2.8 million in 1998 and $19.3 million in 1997. In 1998, 73 percent of sales came from products introduced in the past three years. Operating expenses in 1998 increased five percent to $178.2 million from $169.4 million in 1997. Expressed as a percentage of sales, operating expenses decreased to 15.2 percent in 1998 from 16.2 percent in 1997. These decreases are primarily attributable to the leveraging effect of higher sales and reduced level of promotional and advertising costs related to assisting dealers in selling their PWC and snowmobile inventories partially offset by a planned increase in advertising expenditures. Nonoperating expense (income) in 1998 includes a $61.4 million provision for litigation loss related to the settlement of the Injection Research Specialists litigation. This is a one-time charge that should not effect the ongoing operations of the Company. The remaining improvement in nonoperating expense (income) in 1998 from 1997 primarily reflects the positive financial impact of the Company's equity in the income of Polaris Acceptance. The provision for income taxes was reduced to a rate of 35.5 percent of pretax income beginning in the third quarter of 1998 from 36.0 percent in prior periods as a result of certain tax planning strategies. Net income in 1998 was $31.0 million, a decrease from $65.4 million in 1997, primarily as a result of the litigation settlement. Net income as a result of sales was 2.6 percent in 1998, a decrease from 6.2 percent in 1997. Net income per diluted share decreased to $1.19 in 1998 from $2.45 in 1997. Net income adjusted to exclude the litigation settlement increased eight percent to $70.6 million in 1998 from $65.4 million in 1997. Adjusted net income as a percent of sales decreased to 6.0 percent in 1998 from 6.2 percent in 1997. Adjusted net income per diluted share increased 11 percent to $2.72 in 1998 from $2.45 in 1997. 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 PWC, and to a lesser extent, lower snowmobile sales. The Company's ATV product line posted its eighth consecutive year of increased retail sales. North American sales of snowmobiles and related 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. 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 reflect the continued growth of the industry and Polaris' ability to provide the consumer with a quality product at a competitive price. 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 of $73.4 million in 1997 were 61 percent lower than $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. 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. 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 of 25.0 percent in 1997 increased 13 percent from 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) change in sales mix with less sales of the lower margin PWC product when compared to 1996. 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. LIQUIDITY AND CAPITAL RESOURCES Polaris' primary sources of funds have been cash provided by operating activities, a $175 million bank line of credit and a dealer floor plan financing program. Polaris' primary uses of funds have been for cash dividends to shareholders, repurchase and retirement of common stock, capital investments, payment of litigation expenses and new product development. During 1998, Polaris generated net cash from operating activities of $121.4 million, which was utilized to fund capital expenditures of $61.5 million, cash dividends of $18.6 million and the repurchase of common stock of $37.7 million. During 1997, Polaris generated net cash from operating activities of $102.3 million which was utilized to fund capital expenditures of $36.8 million, 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 capitalized expenditures of $36.8 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. The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris has an unsecured bank line of credit arrangement maturing on March 31, 2000, under which it may borrow up to $175 million until March 31, 1999 and $150 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, 5.95 percent at December 31, 1998, based on LIBOR or "prime" rates. At December 31, 1998, Polaris had total borrowings under the line of credit of $20.5 million compared to $24.4 million at December 31, 1997. In addition, at December 31, 1998, Polaris had letters of credit outstanding of $7.8 million related to purchase obligations for raw materials. During 1996, the Polaris Board of Directors authorized the repurchase of up to 1.0 million shares of the company's common stock. During 1997, the Board of Directors expanded the share repurchase program, authorizing the cumulative repurchase of up to 3.0 million shares. On May 21, 1998, the Board of Directors expanded the share repurchase program, authorizing the cumulative repurchase of up to 5.0 million shares. During 1998, Polaris paid $37.7 million to repurchase and retire 1,090,500 shares. Polaris has 1,932,600 shares available to repurchase under its current Board authorization as of December 31, 1998. In February 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with a wholly owned subsidiary of Transamerica Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris's dealers and distributors and beginning in 1999 will provide other financial services to dealers, distributors and retail customers of Polaris including retail credit, leasing and extended service contracts. Under the partnership agreement, Polaris' subsidiary has a 50 percent equity interest in Polaris Acceptance and guarantees 50 percent of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TDF. At December 31, 1998, Polaris' contingent liability with respect to the guarantee was approximately $139.0 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 Polaris products. Substantially all of the sales of snowmobiles, ATVs, motorcycles and PWC (but not parts, garments and accessories) are financed under these arrangements whereby Polaris receives payment within a few days of shipment of the product. The amounts financed by distributors and dealers under these arrangements at December 31, 1998 and 1997, were approximately $384.0 million and $289.0 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 annual maximum of 15 percent of the average amount outstanding during the prior calendar year. Polaris' financial exposure under these agreements is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. However, an adverse change in retail sales could cause this situation to change and thereby require Polaris to repurchase 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 and distribution capacity include: (a) tooling expenditures for new product development across all product lines of $24.8 million during 1998, (b) An investment of $9.7 million since late 1996 for the construction of a 250,000 square foot state-of-the-art parts, garments and accessories distribution center in Vermillion, South Dakota which was operational by mid-1997, and (c) in 1998, Polaris completed construction and began operating a new 58,000 square foot injection molding facility in Roseau, MN, which required an investment of $11.2 million. Polaris anticipates that capital expenditures, including tooling, for 1999 will range from $65 million to $75 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 1999. At this time, management is not aware of any factors that would have a materially adverse impact on cash flow beyond 1999. Injection Research Specialists ("IRS") commenced an action in 1990 against Polaris and Fuji Heavy Industries, Ltd. ("Fuji"), one of Polaris' engine suppliers, in Colorado Federal Court alleging various claims relating to electronic fuel injection systems for snowmobiles. In October 1998, following the entry of judgment against Polaris for $34.0 million (before pre- and post-judgement interest) and affirmance thereof by the Federal Court of Appeals, IRS, Polaris and Fuji entered into a confidential settlement agreement to settle all outstanding claims between the parties. The resulting provision for litigation loss of $61.4 million has been reflected as non-operating expense in the accompanying consolidated statement of operations for the year ended December 31, 1998. The related payment to IRS was made during the fourth quarter 1998 in connection with entering into the confidential settlement agreement. Polaris no longer uses any of the technology in dispute. Polaris proforma results adjusted to exclude the provision for litigation loss are as follows:
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 - -------------------------------------------------------------- Adjusted income before income taxes $ 109,771 $ 102,162 Provision for income taxes 39,147 36,779 - -------------------------------------------------------------- Adjusted net income $ 70,624 $ 65,383 - -------------------------------------------------------------- Adjusted net income per diluted share $ 2.72 $ 2.45 - --------------------------------------------------------------
YEAR 2000 During 1998, Polaris has continued with its company-wide program to prepare the company's computer systems for Year 2000 compliance. 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' project is divided into two major areas: internal information systems and embedded manufacturing system/third party suppliers. Polaris has implemented a plan to make its internal information systems Year 2000 compliant by mid-1999. As of December 31, 1998, approximately 90 percent of the programming requirements for the company's manufacturing systems were complete and 70 percent of the programming requirements for the sales, distribution and finance systems had been completed. Manufacturing mission critical applications are all currently in the test phase. The remaining systems are being tested when the programming modifications are completed, with testing expected to continue throughout 1999. Polaris has completed inventories of equipment and machines with embedded systems that are used at each of the facilities. Polaris is in the process of assessing whether the critical equipment will be Year 2000 compliant through simulations and testing of the equipment as well as Year 2000 compliance letters from vendors. Polaris has identified its critical suppliers and sent them questionnaires to address their Year 2000 plans and progress. Polaris has received responses from approximately 75 percent of these suppliers and is in the process of tabulating the results. The cost of the Year 2000 initiatives (which are expensed as incurred) are not expected to be material to Polaris' financial position. The total cost is estimated to be approximately $1.5 million of which approximately $0.8 million was incurred by December 31, 1998. Polaris has begun a comprehensive analysis of the operational issues and costs that would most likely result from failure by the company or third parties to achieve Year 2000 compliance on a timely basis. Although Polaris has not yet identified the most likely worst case scenario, the risk would be primarily delivery timing to customers in January 2000. Polaris believes it will have sufficient time to recover, although some delayed deliveries may result in cancellations of customer orders. Polaris is in the process of developing contingency plans to protect the business from Year 2000 related interruptions and anticipates their completion by the third quarter of 1999. The costs of the project and the date when Polaris believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no guarantee these estimates will be achieved and actual results could differ materially from those anticipated. 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 1998, purchases totaling 14 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 1998 and 1997 were positively impacted by the Japanese yen exchange rate fluctuation when compared to the prior year. However, the dollar has recently weakened in relation to the yen and in view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the yen-dollar exchange rate will have a negative impact on cost of sales during 1999 when compared to 1998. Polaris operates in Canada through a wholly owned subsidiary. Sales of the Canadian subsidiary comprised 12 percent of total Company sales in 1998. Polaris utilizes foreign exchange hedging contracts to manage its exposure to the Canadian dollar. Since the U.S. dollar strengthened in relation to the Canadian dollar in 1998 on average, Polaris had a negative financial impact on its gross margins when compared to the same periods in 1997. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates a negative impact on net income during 1999 when compared to the same periods in 1998. 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, 1998, Polaris had open Japanese yen foreign exchange hedging contracts with notional amounts totaling $51.0 million U.S. dollars, which mature throughout 1999. Since October 1995, Polaris has been manufacturing its own engines for selected models of PWC and snowmobiles at its Osceola, Wisconsin facility. In addition, earlier in 1995, Polaris entered into an agreement with Fuji Heavy Industries Ltd. to form Robin Manufacturing U.S.A., Inc. ("Robin"). Under the terms of the agreement, Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Potential advantages to Polaris of 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. 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 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. CONSOLIDATED BALANCE SHEETS IN THOUSANDS, EXCEPT PER SHARE DATA
DECEMBER 31, 1998 1997 - --------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,466 $ 1,233 Trade receivables 43,035 42,593 Inventories 107,436 139,544 Prepaid expenses and other 2,903 5,088 Deferred tax assets 29,000 29,000 - --------------------------------------------------------------------------------- Total current assets 183,840 217,458 - --------------------------------------------------------------------------------- DEFERRED TAX ASSETS 21,000 26,000 - --------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT Land, buildings and improvements 37,226 31,367 Equipment and tooling 192,255 153,005 - --------------------------------------------------------------------------------- 229,481 184,372 Less-accumulated depreciation (105,227) (86,352) - --------------------------------------------------------------------------------- Total property and equipment 124,254 98,020 - --------------------------------------------------------------------------------- INVESTMENTS IN AFFILIATES 26,636 19,767 INTANGIBLE ASSETS, NET 22,967 23,501 - --------------------------------------------------------------------------------- $ 378,697 $ 384,746 - --------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS.
DECEMBER 31, 1998 1997 - ---------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 77,258 $ 61,027 Accrued expenses: Compensation 41,664 40,240 Warranties 37,921 35,594 Other 41,110 38,033 Income taxes payable 7,011 16,217 - ---------------------------------------------------------------------------------------------------- Total current liabilities 204,964 191,111 - ---------------------------------------------------------------------------------------------------- BORROWINGS UNDER CREDIT AGREEMENT 20,500 24,400 - ---------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 1, 3, 5, 7 AND 8) 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, 25,355 and 26,014 shares issued and outstanding 253 260 Additional paid-in capital 48,622 72,955 Deferred compensation (6,726) (3,133) Compensation payable in common stock 6,844 7,346 Retained earnings 104,240 91,807 - ---------------------------------------------------------------------------------------------------- Total shareholders' equity 153,233 169,235 - ---------------------------------------------------------------------------------------------------- $ 378,697 $ 384,746 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE SHEETS. CONSOLIDATED STATEMENTS OF OPERATIONS IN THOUSANDS, EXCEPT PER SHARE DATA
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Sales $ 1,175,520 $ 1,048,296 $ 1,191,901 Cost of Sales 897,233 785,758 928,085 - ---------------------------------------------------------------------------------------------------------- Gross profit 278,287 262,538 263,816 - ---------------------------------------------------------------------------------------------------------- Gross profit percent 23.7% 25.0% 22.1% - ---------------------------------------------------------------------------------------------------------- Operating Expenses Selling and marketing 118,688 112,978 112,146 Research and development 28,387 26,722 28,270 General and administrative 31,106 29,736 25,983 - ---------------------------------------------------------------------------------------------------------- Total operating expenses 178,181 169,436 166,399 - ---------------------------------------------------------------------------------------------------------- Operating income 100,106 93,102 97,417 Nonoperating Expense (income) Interest expense 2,959 2,829 4,339 Equity in (income) of affiliates (7,819) (6,718) (3,107) Other expense (income), net (4,805) (5,171) (1,148) Provision for litigation loss (Note 2) 61,409 -- -- - ---------------------------------------------------------------------------------------------------------- Income before income taxes 48,362 102,162 97,333 Provision for income taxes 17,347 36,779 35,040 - ---------------------------------------------------------------------------------------------------------- Net income $ 31,015 $ 65,383 $ 62,293 - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Basic Net Income Per Share 1.20 2.45 2.24 Diluted Net Income Per Share $ 1.19 $ 2.45 $ 2.24 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY IN THOUSANDS
Compensation Retained Additional Payable in Earnings Preferred Common Paid-in Deferred Common (Accumulated Stock Stock Capital Compensation Stock Deficit) Total - ---------------------------------------------------------------------------------------------------------------------------------- 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 First Rights conversion to stock -- 1 1,841 -- (1,864) -- (22) Employee stock compensation -- 3 11,543 (3,593) 1,362 -- 9,315 Dividends -- -- -- -- -- (18,582) (18,582) Repurchase and retirement of common shares -- (11) (37,717) -- -- -- (37,728) Net income -- -- -- -- -- 31,015 31,015 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 $ -- $ 253 $ 48,622 $ (6,726) $ 6,844 $ 104,240 $ 153,233 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. CONSOLIDATED STATEMENTS OF CASH FLOWS IN THOUSANDS
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 31,015 $ 65,383 $ 62,293 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 36,192 33,168 31,053 Noncash compensation 7,808 5,010 4,550 Equity in (income) of affiliates (7,819) (6,718) (3,107) Deferred income taxes 5,000 -- -- Changes in current operating items Trade receivables (443) (6,435) 4,244 Inventories 32,108 (16,633) (18,278) Accounts payable 16,231 10,513 (6,874) Accrued expenses 6,828 11,551 16,568 Income taxes payable (9,206) 7,660 (4,029) Other 3,671 (1,191) 3,161 - ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 121,385 102,308 89,581 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (61,532) (36,798) (45,336) Investments in and advances to affiliates (9,112) (16,627) (10,998) Distributions and repayments from affiliates 9,702 13,999 4,241 - ------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (60,942) (39,426) (52,093) - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under credit agreement 338,200 290,100 276,900 Repayments under credit agreement (342,100) (300,700) (282,100) Repurchase and retirement of common shares (37,728) (39,903) (13,587) Cash dividends to shareholders (18,582) (16,958) (16,390) - ------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (60,210) (67,461) (35,177) - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 233 (4,579) 2,311 CASH AND CASH EQUIVALENTS Beginning 1,233 5,812 3,501 - ------------------------------------------------------------------------------------------------------------- Ending $ 1,466 $ 1,233 $ 5,812 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the year $ 24,731 $ 25,838 $ 31,673 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Income taxes paid during the year $ 21,475 $ 29,007 $ 39,069 - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 subsidiaries. BASIS OF PRESENTATION: All significant intercompany transactions and balances have been eliminated in consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. INTERNATIONAL OPERATIONS: The following data relates to Polaris' international operations (in thousands of United States dollars):
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 - -------------------------------------------------------------- Canadian Subsidiary: Sales $ 142,502 $ 154,318 $ 166,471 Operating income 2,992 6,399 6,024 Identifiable assets 18,902 20,279 21,703 - -------------------------------------------------------------- Other export sales $ 61,669 $ 58,739 $ 49,134
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, 1998 1997 - ---------------------------------------------------------------- Raw materials and purchased components $ 32,235 $ 17,614 Service parts, garments and accessories 41,085 45,619 Finished goods 34,116 76,311 - ---------------------------------------------------------------- $ 107,436 $ 139,544 - ---------------------------------------------------------------- - ----------------------------------------------------------------
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 $11.6 million at December 31, 1998, and $10.7 million at December 31, 1997, 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 determine if hedge accounting is appropriate are (1) the designation of a hedge to an underlying exposure, (2) whether overall risk is reduced and (3) whether 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, 1998, Polaris had open Japanese yen foreign exchange contracts with notional amounts totaling U.S. $51.0 million which mature throughout 1999. 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 3), have not been material. Polaris provides for estimated sales promotion expenses at the time of sale to the dealer or distributor customer. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAJOR SUPPLIER: During 1998, 1997, and 1996, purchases of engines and related components totaling 12, 16 and 22 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. NEW ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board issued Statement of Financial Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No.131) in June 1997. Polaris is a single operating segment business and is not impacted by SFAS No. 131. The Financial Accounting Standards Board issued Statement of Financial Standards No.133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.133) in June 1998. Polaris is not required to adopt SFAS No. 133 until January 1, 2000. However, Polaris does not believe the adoption of SFAS No. 133 will have a material effect on its Financial Statements. NOTE 2 LITIGATION SETTLEMENT Injection Research Specialists ("IRS") commenced an action in 1990 against Polaris and Fuji Heavy Industries, Ltd. ("Fuji") one of Polaris' engine suppliers, in Colorado Federal Court alleging various claims relating to electronic fuel injection systems for snowmobiles. In October 1998, following a judgment against Polaris for $34.0 million (before pre- and post-judgement interest) and affirmance thereof by the Federal Court of Appeals, IRS, Polaris and Fuji entered into a confidential settlement agreement to settle all outstanding claims between the parties. The resulting provision for litigation loss of $61.4 million has been reflected as non-operating expense in the accompanying statement of operations for the year ended December 31, 1998. The net income impact of the litigation loss was $39.6 million or $1.53 per diluted share. Adjusted net income excluding the IRS litigation provision was $70.6 million or $2.72 per diluted share. The related payment to IRS was made in the fourth quarter 1998 in connection with entering into the confidential settlement agreement. Polaris utilized its existing bank line of credit arrangement to fund the payment. Polaris no longer uses any of the technology in dispute. NOTE 3 FINANCING BANK FINANCING: Polaris is a party to an unsecured bank line of credit arrangement under which it may borrow up to $175 million until March 31, 1999 and up to $150 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):
1998 1997 - ---------------------------------------------------------------------------------------------------------------- Total borrowings at December 31 $ 20,500 $ 24,400 Average outstanding borrowings during year $ 48,410 $ 47,950 Maximum outstanding borrowings during year $ 77,000 $ 80,000 Interest rate at December 31 5.95% 6.76%
LETTERS OF CREDIT: At December 31, 1998, Polaris had open letters of credit totaling approximately $7.8 million. The amounts outstanding are reduced as inventory purchases pertaining to the contracts are received. CUSTOMER FINANCING PROGRAM: Certain finance companies, including Polaris Acceptance, an affiliate (Note 7), provide floor plan financing to distributors and dealers on the purchase of Polaris products. The amount financed by distributors and dealers under these arrangements at December 31, 1998, was approximately $384 million. 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 4 INCOME TAX MATTERS Components of Polaris' provision for income taxes are as follows (in thousands):
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 - -------------------------------------------------------------- Current Federal $ 10,362 $ 31,575 $ 30,063 State 739 2,255 2,233 Foreign 1,246 2,949 2,744 Deferred 5,000 -- -- - -------------------------------------------------------------- Total $ 17,347 $ 36,779 $ 35,040 - -------------------------------------------------------------- - --------------------------------------------------------------
Reconciliations of the Federal statutory income tax rate to the effective tax rate are as follows:
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 - ----------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.5 2.5 2.6 Other permanent differences (1.6) (1.5) (1.6) - ----------------------------------------------------------------------------- Effective income tax rate 35.9% 36.0% 36.0% - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
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, 1998 1997 1996 - ------------------------------------------------------------------- Current deferred tax assets: Inventories $ 4,100 $ 4,000 $ 3,000 Accrued expenses 24,700 24,000 19,300 Compensation payable in common stock 200 1,000 2,700 - ------------------------------------------------------------------- Total current 29,000 29,000 25,000 - ------------------------------------------------------------------- Noncurrent deferred tax assets: Cost in excess of net assets of business acquired 25,200 27,600 30,000 Property and equipment (4,900) (2,000) (1,000) Compensation payable in common stock 700 400 1,000 - ------------------------------------------------------------------- Total noncurrent 21,000 26,000 30,000 - ------------------------------------------------------------------- Total $ 50,000 $ 55,000 $ 55,000 - ------------------------------------------------------------------- - -------------------------------------------------------------------
NOTE 5 STOCK-BASED COMPENSATION Polaris maintains a stock option plan (Option Plan) under which incentive and nonqualified stock options for a maximum of 2,350,000 shares of common stock may be issued to certain employees. Options granted to date generally vest three years from the award date and expire after tenyears. Polaris maintains a restricted stock plan (Restricted Plan) under which a maximum of 800,000 shares of common stock may be awarded as an incentive to certain employees with no cash payments required from the recipient. The restrictions on awards granted to date lapse after a three to four year period if Polaris achieves certain performance measures. 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 has historically maintained a plan in which rights to receive shares of common stock (First Rights) are issued to management (Management Plan) and other employees (Employee Plan). First Rights are converted to common stock with no cash payments required from the recipient. At December 31, 1998, 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, 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 391,830 $ 30.66 61,795 260,250 171,005 -- Granted 142,980 $ 25.75 64,915 -- -- -- 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 Granted 691,590 $ 40.15 147,765 -- -- 173,206 Exercised/ Converted (33,425) $ 29.00 -- (87,750) -- -- Forfeited (76,183) $ 30.94 (28,605) (1,500) -- -- - --------------------------------------------------------------------------------------------- Outstanding as of December 31, 1998 1,077,725 $ 36.17 243,035 8,250 -- 343,206 - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- Exercisable/ Vested as of December 31, 1998 180,815 $ 29.00 -- -- -- 343,206 - --------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------
Shares outstanding under the Option Plan have exercise prices ranging from $25.75 to $49.45 and a weighted average remaining contractual life of 8.6 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 has been authorized under this plan and 20,529 have been earned as of December 31, 1998. Polaris, which accounts for all stock based compensation plans under APB Opinion No. 25, and recorded compensation costs of $7.8 million, $5.0 million, and $4.6 million in 1998, 1997 and 1996, respectively. Had compensation costs for these plans been recorded at fair value consistent with the methodology prescribed by SFAS No. 123 "Accounting for Stock-Based Compensation," Polaris' net income and net income per share would have been reduced to the following pro forma amounts:
1998 1997 1996 - ---------------------------------------------------------------- Net Income (in thousands) As Reported $ 31,015 $ 65,383 $ 62,293 Pro Forma 29,336 64,346 61,475 Diluted Net Income Per Share As Reported $ 1.19 $ 2.45 $ 2.24 Pro Forma 1.13 2.41 2.21
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:
1998 1997 1996 - -------------------------------------------------------------------- Risk free interest rate 5.6% 6.6% 6.8% Expected life 7 years 7 years 7 years Expected volatility 14% 23% 27% Expected dividend yield 2.0% 2.5% 1.8%
The weighted average fair values at the grant dates of First Rights and shares awarded under the above plans are as follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Option Plan $ 5.57 $ 7.45 $ 12.16 Restricted Plan $ 34.89 $ 25.75 $ 33.75 Employee Plan -- -- $ 23.75 ESOP $ 39.19 $ 30.56 --
NOTE 6 SHAREHOLDERS' EQUITY STOCK REPURCHASE PROGRAM: The Polaris Board of Directors has authorized the cumulative repurchase of up to 5,000,000 shares of the Company's common stock. During 1998, Polaris paid $37.7 million to repurchase and retire 1,090,500 shares. Cumulative repurchases through December 31, 1998 are 3,067,400 shares for $91.2 million. NET INCOME PER SHARE: Polaris calculates net income per share in accordance with Statement of Financial Accounting Standards 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 compute the dilutive effect of outstanding stock options. A reconciliation of these amounts is as follows (in thousands, except per share data):
1998 1997 1996 - ------------------------------------------------------------------------ Net income available to common shareholders $ 31,015 $ 65,383 $ 62,293 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Weighted average number of common shares outstanding 25,709 26,403 27,338 First Rights 21 139 458 Director Plan 17 12 5 ESOP 170 170 -- - ------------------------------------------------------------------------ Common shares outstanding-- basic 25,917 26,724 27,801 - ------------------------------------------------------------------------ Dilutive effect of Option Plan 69 15 14 - ------------------------------------------------------------------------ Common and potential common shares outstanding-- diluted 25,986 26,739 27,815 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Basic net income per share $ 1.20 $ 2.45 $ 2.24 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Diluted net income per share $ 1.19 $ 2.45 $ 2.24 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------
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 7 INVESTMENTS IN AFFILIATES In February 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with a wholly owned subsidiary of Transamerica Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris' dealers and distributors and will in the future provide other financial services to dealers, distributors and retail customers of Polaris. Under the partnership agreement, Polaris' subsidiary has a 50 percent equity interest in Polaris Acceptance and guarantees 50 percent of the outstanding indebtedness of Polaris Acceptance under a credit agreement between Polaris Acceptance and TDF. At December 31, 1998, Polaris' contingent liability with respect to the guarantee was approximately $139.0 million. In February 1995, Polaris entered into an agreement with Fuji Heavy Industries Ltd. to form Robin Manufacturing, U.S.A. (Robin). Under the agreement, Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. 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 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, 1998 1997 - ------------------------------------------------------------------------------ Revenues $ 64,996 $ 67,228 Cost of goods sold, interest and operating expenses 48,945 53,620 - ------------------------------------------------------------------------------ Net income before income taxes $ 16,051 $ 13,608 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Finance Receivables, net $ 323,728 $ 231,137 Other assets 17,288 18,424 - ------------------------------------------------------------------------------ $ 341,016 $ 249,561 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Note Payable $ 278,439 $ 184,835 Other Liabilities 12,084 14,125 Shareholders' equity and Partners' capital 50,493 50,601 - ------------------------------------------------------------------------------ $ 341,016 $ 249,561 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
NOTE 8 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: 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. LEASES: Polaris leases buildings and equipment under noncancelable operating leases. Total rent expense under all lease agreements was $2.5 million, $2.8 million and $2.9 million, for 1998, 1997 and 1996, respectively. Future minimum payments, exclusive of other costs, required under noncancelable operating leases at December 31, 1998, total $2.2 million cumulatively through 2003. NOTE 9 QUARTERLY FINANCIAL DATA (Unaudited) (In thousands, except per share data)
Diluted Net Gross Net Income Sales Profit Income Per Share - ----------------------------------------------------------------- 1998: First Quarter $ 210,001 $ 46,804 $ 8,361 $ .32 Second Quarter 274,711 64,209 14,484 .55 Third Quarter 359,861 86,430 (14,504) (.56) Fourth Quarter 330,947 80,844 22,674 .88 - ---------------------------------------------------- Totals $1,175,520 $ 278,287 $ 31,015 $ 1.19 - ----------------------------------------------------------------- - ----------------------------------------------------------------- 1997: First Quarter $ 224,634 $ 49,492 $ 12,019 $ .44 Second Quarter 248,888 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 - ----------------------------------------------------------------- - -----------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO POLARIS INDUSTRIES INC.: We have audited the accompanying consolidated balance sheets of Polaris Industries Inc. (a Minnesota corporation) and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP MINNEAPOLIS, MINNESOTA JANUARY 29, 1999 Polaris Industries Inc. 1225 Highway 169 North Minneapolis, MN 55441 INVESTOR INFORMATION INDEPENDENT AUDITORS Arthur Andersen LLP Minneapolis, MN FORM 10-K The Form 10-K annual report to the Securities and Exchange Commission is available without charge to shareholders upon written request to: Investor Relations Polaris Industries Inc. 1225 Highway 169 North Minneapolis, MN 55441-5078 ANNUAL SHAREHOLDERS' MEETING The meeting will be held at 9:00 a.m., Thursday, May 20, 1999 at the Radisson Hotel and Conference Center, 3131 Campus Drive, Plymouth, MN. A proxy statement will be mailed on or about March 29, 1999 to each shareholder of record on March 22, 1999. SUMMARY OF TRADING
YEAR ENDED DECEMBER 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Quarter High Low High Low - ---------------------------------------------------------------------------------------------------------------- First $ 38.00 $ 27.81 $ 26.25 $ 22.75 Second 39.00 33.00 32.56 22.25 Third 38.19 30.31 32.50 28.50 Fourth 39.19 24.75 33.25 28.75
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 1998 1997 - ---------------------------------------------------------------------------------------------------------------- First $ .18 $ .16 Second .18 .16 Third .18 .16 Fourth .18 .16 - ---------------------------------------------------------------------------------------------------------------- Total $ .72 $ .64 - ----------------------------------------------------------------------------------------------------------------
Shareholders of record of the Company's common stock on February 26, 1999: 3,306. Share price on February 26, 1999: $28.25. [LOGO] EX-21 5 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
COMPANY ORGANIZATION SHARES OUTSTANDING % OF OWNERSHIP - --------- ------------ ------------------ -------------- Polaris Industries Inc. Delaware Corporation 100 100% Polaris Real Estate Corporation of Iowa, Delaware Corporation 1,000 100% (1) Inc. Polaris Real Estate Corporation Delaware Corporation 1,000 100% (2) Polaris Acceptance Inc. Minnesota Corporation 1 100% Polaris Industries Export Ltd. Barbados Corporation 1,000 100% Polaris Industries Ltd. Manitoba Corporation 101 100% (3) Polaris Sales Inc. Minnesota Corporation 100 100% (4)
- ----------------------- (1), (2), (3) and (4) 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 33-57503. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Minneapolis, Minnesota March 29, 1999 EX-24 7 EXHIBIT 24 POWER OF ATTORNEY (FORM 10-K) KNOW ALL MEN BY THESE PRESENTS, that POLARIS INDUSTRIES INC., a Minnesota corporation (the "Company"), and each of the undersigned directors of the Company, hereby constitutes and appoints W. Hall Wendel, Jr. and 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, 1998 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 21st day of January, 1999. 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 21st day of January, 1999. /s/ W. Hall Wendel, Jr. /s/ Thomas C. Tiller - --------------------------------- --------------------------------- W. Hall Wendel, Jr. Thomas C. Tiller /s/ Bruce A. Thomson /s/ Stephen G. Shank - --------------------------------- --------------------------------- Bruce A. Thomson Stephen G. Shank /s/ Andris A. Baltins /s/ Gregory R. Palen - --------------------------------- --------------------------------- Andris A. Baltins Gregory R. Palen /s/ Beverly F. Dolan /s/ Robert S. Moe - --------------------------------- --------------------------------- Beverly F. Dolan Robert S. Moe /s/ Raymond J. Biggs - --------------------------------- Raymond J. Biggs D I R E C T O R S 2 EX-27 8 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF POLARIS INDUSTRIES INC. AS OF DECEMBER 31, 1998, AND THE RELATED STATEMENTS OF OPERATIONS, SHAREHOLDERS EQUITY AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1,466 0 43,035 0 107,436 183,840 229,481 105,227 378,697 204,964 20,500 0 0 253 152,980 378,697 1,175,520 1,175,520 897,233 897,233 178,181 0 2,959 48,362 17,347 31,015 0 0 0 31,015 1.20 1.19
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