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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 1-11411
POLARIS INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1790959
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
1225 HIGHWAY 169 NORTH 55441
MINNEAPOLIS, MN (Zip Code)
(Address of principal executive offices)
(612) 542-0500
(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock of the registrant as of March 3,
1998 (based upon the closing reported sale price of the Common Stock at that
date on the New York Stock Exchange) held by non-affiliates (23,779,217 shares)
was approximately $768,365,949.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 3, 1998, 26,234,550 shares of Common Stock of the registrant
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 1997 furnished to the Securities and Exchange Commission (the
"1997 Annual Report") are incorporated by reference into Parts II and III of
this Form 10-K.
2. Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held May 21, 1998 filed with the Securities and Exchange Commission (the
"1998 Proxy Statement") are incorporated by reference into Part III of this Form
10-K.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Polaris Industries Inc. (the "Company"), a Minnesota corporation, was formed
in 1994 for the purpose of merging (the "Merger") a subsidiary of the Company
into Polaris Industries Partners L.P., a Delaware limited partnership (the
"Partnership") and merging Polaris Industries L.P., a Delaware limited
partnership, into the Partnership. The Merger took place on December 22, 1994.
Upon consummation of the Merger, each unit of Beneficial Assignment of Class A
Limited Partnership Interests of the Partnership was exchanged for one share of
common stock, $.01 par value of the Company. On December 31, 1996, the
Partnership was merged with and into Polaris Industries Inc., a Delaware
corporation (the "Operating Subsidiary"). The Company owns 100% of the Operating
Subsidiary. The term "Polaris" as used herein refers to the business and
operations of the Operating Subsidiary and its predecessors, Polaris Industries
Partners L.P. and Polaris Industries L.P.
Polaris designs, engineers and manufactures snowmobiles, all terrain
recreational and utility vehicles ("ATVs"), motorcycles and personal watercraft
("PWC") and markets them, together with related replacement parts, garments and
accessories ("PG&A") through dealers and distributors principally located in the
United States, Canada and Europe. Sales of snowmobiles, ATVs and PWC in North
America and International sales (each of which includes PG&A for these markets)
accounted for the following approximate percentages of Polaris' sales for the
periods indicated.
YEAR ENDED
DECEMBER 31 SNOWMOBILES ATVS PWC INTERNATIONAL
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1997............................................... 42% 45% 7% 6%
1996............................................... 43% 37% 16% 4%
1995............................................... 46% 33% 16% 5%
INDUSTRY BACKGROUND
SNOWMOBILES. In the early 1950s, a predecessor to Polaris produced a "gas
powered sled" which became the forerunner of the Polaris snowmobile. Snowmobiles
have been manufactured under the Polaris name since 1954.
Originally conceived as a utility vehicle for northern, rural environments,
the snowmobile gained popularity as a recreational vehicle. From the mid-1950s
through the late 1960s, over 100 producers entered the snowmobile market and
snowmobile sales reached a peak of approximately 495,000 units in 1971. The
Polaris product survived the industry decline in which snowmobile sales fell to
a low point of approximately 87,000 units in 1983 and the number of snowmobile
manufacturers serving the North American market declined to four: Yamaha,
Bombardier, Arctic Cat and Polaris. Polaris estimates that industry sales of
snowmobiles on a worldwide basis were approximately 261,000 units for the season
ended March 31, 1997.
ALL TERRAIN VEHICLES. ATVs are four-wheel vehicles with balloon style tires
designed for off road use and traversing rough terrain, swamps and marshland.
ATVs are used for recreation, in such sports as fishing and hunting, as well as
for utility purposes on farms, ranches and construction sites.
ATVs were introduced to the North American market in 1971 by Honda. Other
Japanese motorcycle manufacturers, Yamaha, Kawasaki and Suzuki, entered the
North American market in the late 1970s and early 1980s. By 1980, the number of
ATV units sold in the North American market annually had increased to
approximately 140,000 units. Polaris entered the ATV market in 1985 and Arctic
Cat entered the ATV market in 1995. In 1985, the number of three-and four-wheel
ATVs sold in North America peaked at approximately 650,000 units per year.
Polaris estimates that, since declining from that level, the industry has
stabilized and has experienced modest growth with approximately 445,000 ATVs
sold worldwide during the calendar year 1997.
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MOTORCYCLES. Heavyweight motorcycles are over the road vehicles utilized as
a mode of transportation as well as for recreational purposes. There are four
segments including cruisers, touring, sportbikes, and standards.
Polaris is entering the worldwide motorcycle market in 1998 with an initial
entry product in the cruiser segment. U.S. retail cruiser sales nearly doubled
from 1993 to 1997. Polaris estimates that approximately 128,000 cruiser
motorcycles were sold in the U.S. market in 1997. Other major cruiser motorcycle
manufacturers include Harley Davidson, Honda, Yamaha, Kawasaki, Suzuki and BMW.
PERSONAL WATERCRAFT. PWC are sit-down versions of water scooter vehicles,
and designed for use on lakes, rivers, oceans and bays. PWC are used primarily
for recreational purposes and are designed for one, two or three passengers.
Polaris entered the PWC market in 1992. After many years of rapid growth,
Polaris estimates that worldwide sales for PWC declined during calendar 1997 to
approximately 200,000 units. Other major PWC manufacturers are Bombardier,
Yamaha, Kawasaki and Arctic Cat.
PRODUCTS
SNOWMOBILES. Polaris produces a full line of snowmobiles, consisting of
thirty-one models, ranging from utility and economy models to performance and
competition models, with 1998 model suggested retail prices ranging from
approximately $3,200 to $8,500. Polaris snowmobiles are sold principally in the
United States, Canada and Europe. Polaris believes it is the worldwide market
share leader.
Polaris believes that the Polaris snowmobile has a long-standing reputation
for quality, dependability and performance. Polaris believes that it and its
predecessors were the first to develop several features for commercial use in
snowmobiles, including independent front suspension, variable transmission,
hydraulic disc brakes, liquid cooled engines and brakes and a three cylinder
engine. Polaris also markets a full line of snowmobile accessories, such as
luggage, tow hitches, hand warmers, specialized instrumentation, reverse gear,
special traction products, cargo racks, oils, lubricants, paints and parts.
For the year ended December 31, 1997, North American sales of snowmobiles
and related PG&A accounted for approximately 42% of Polaris' sales.
ALL TERRAIN VEHICLES. Polaris entered the ATV market in the spring of 1985
with both a three-wheel and a four-wheel product. Polaris currently produces
four-wheel ATVs, which provide more stability for the rider than the earlier
three-wheel versions. Polaris' line of ATVs consisting of twelve models,
includes general purpose, sport and four-wheel drive utility models, with 1998
suggested retail prices ranging from approximately $3,200 to $7,300.
In addition, Polaris has a six-wheel off-road utility vehicle and a
six-wheel drive off-road Polaris Ranger side by side utility and recreational
vehicle.
Polaris' ATV features the totally automatic Polaris variable transmission
which requires no manual shifting and a MacPherson strut front suspension, which
enhances control and stability. Polaris' ATVs include both two cycle and four
cycle engines and both shaft and chain drive. In 1997, Polaris introduced the
Concentric Drive System which combines advanced rear chain drive with front
shaft drive which Polaris believes will deliver improved performance and
handling with excellent long-term durability.
Prior to 1989, the ATV industry experienced some reduced demand arising from
publicity surrounding safety-related and environmental concerns. However,
management believes that this market has stabilized since 1989 and has begun to
resume modest growth.
For the year ended December 31, 1997, North American sales of ATVs and
related PG&A accounted for approximately 45% of Polaris' sales.
MOTORCYCLES. In 1998, Polaris will begin manufacturing an American-made
V-twin cruiser motorcycle, the "Victory V92C." Design and assembly of the engine
will occur in Polaris' Osceola, Wisconsin facility
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and final assembly will occur at Polaris' Spirit Lake, Iowa facility. The two
facilities provide sufficient capacity to handle the first few years production
of Victory motorcycles. The 1998 Victory V92C motorcycle suggested retail price
will be $12,995.
PERSONAL WATERCRAFT. In 1992, Polaris introduced the SL650 personal
watercraft, Polaris' first entry into this product category. Polaris' line of
PWC consisting of five models, includes touring, performance and racing.
Management believes that its models had the industry's first three-cylinder
engines developed specifically for PWC. The introduction of the PWC made use of
Polaris' engineering, production and distribution strengths, and also reduced
Polaris' dependence on its then existing product lines for overall sales and
earnings. The 1997 suggested retail prices for Polaris' PWC range from
approximately $5,900 to $9,400.
For the year ended December 31, 1997, North American sales of PWC and
related PG&A accounted for approximately 7% of Polaris' sales.
INTERNATIONAL. Polaris sales to customers outside of North America include
snowmobiles, ATVs, PWC, and related PG&A. Polaris currently markets its products
through 54 distributors in 113 countries. This is a growth opportunity for
Polaris in the future from a market share perspective for existing product lines
as well as the planned introduction of Victory motorcycles to the international
market by the year 2000.
For the year ended December 31, 1997, International sales accounted for 6%
of Polaris' sales.
PARTS, GARMENTS AND ACCESSORIES. Polaris produces or supplies a variety of
replacement parts and accessories for its snowmobiles, ATVs, motorcycles and
PWC. Polaris also markets a full line of recreational clothing, which includes
suits, helmets, gloves, boots, hats, sweaters and jackets for its snowmobile,
ATV, motorcycle and PWC lines. The clothing is designed to Polaris'
specifications, purchased from independent vendors and sold by Polaris through
its dealers and distributors under the Polaris brand name. Replacement parts and
accessories are also marketed by Polaris.
MANUFACTURING OPERATIONS
Polaris' products are assembled at its original manufacturing facility at
Roseau, Minnesota and since October, 1994 at its facility in Spirit Lake, Iowa.
Since snowmobiles, ATVs and PWC incorporate similar technology, substantially
the same equipment and personnel are employed in their production. Polaris
emphasizes vertical integration in its manufacturing process, which includes
machining, stamping, welding, clutch assembly and balancing, painting, cutting
and sewing, and manufacture of foam seats. Fuel tanks, hoods and hulls, tracks,
tires and instruments, and certain other component parts are purchased from
third party vendors. Polaris manufactures a number of other components for its
snowmobiles, ATVs and PWC. Raw materials or standard parts are readily available
from multiple sources for the components manufactured by Polaris. Polaris' work
force is familiar with the use, operation and maintenance of the product, since
many employees own snowmobiles, ATVs and PWC. In August of 1991, Polaris
acquired a manufacturing facility in Osceola, Wisconsin to manufacture component
parts previously produced by third party suppliers. In early 1998, the Victory
motorcycle will be in production at Polaris' Spirit Lake, Iowa facility. The
production will include welding, finish painting, and final assembly. Certain
components, including engine assembly, seat manufacturing, and the bending of
frame tubes will be manufactured at the Osceola, Wisconsin facility.
In 1997, Polaris broke ground for the construction of a 58,000 square foot
plastic injection molding facility adjacent to the Roseau, Minnesota facility.
This will be a vertical integration project for Polaris in the manufacture of
snowmobile hoods and certain large plastic molded parts on ATVs. The facility is
expected to be operational in mid-1998.
3
Pursuant to informal agreements between Polaris and Fuji Heavy Industries
Ltd. ("Fuji"), Fuji had been the exclusive manufacturer of the Polaris two-cycle
snowmobile engines since 1968. Fuji has manufactured engines for Polaris' ATV
products since their introduction in the spring of 1985 and also supplies
engines for Polaris' PWC products. Such engines are developed by Fuji to the
specific requirements of Polaris. Polaris believes its relationship with Fuji to
be excellent. If, however, its informal relationship were terminated by Fuji,
interruption in the supply of engines would adversely affect Polaris' production
pending the continued development of substitute supply arrangements.
Since October, 1995, Polaris has been designing and producing its own
engines for selected models of PWC and snowmobiles, and purchased a 90,000
square foot building adjacent to the Osceola facility to house the manufacturing
of these Polaris designed and built domestic engines. In addition, in February,
1995, Polaris entered into an agreement with Fuji to form Robin Manufacturing,
U.S.A. ("Robin"). Under the agreement, Polaris made an investment for a 40%
ownership position in Robin, which builds engines in the United States for
recreational and industrial products. Potential advantages to Polaris of these
additional sources of engines include reduced foreign exchange risk, lower
shipping costs and less dependence in the future on a single supplier for
engines.
Polaris anticipates no significant difficulties in obtaining substitute
supply arrangements for other raw materials or components for which it relies
upon limited sources of supply.
Polaris' products are shipped from its manufacturing facilities by a
contract carrier.
PRODUCTION SCHEDULING
Snowmobiles are used principally in the northern United States, Canada and
northern Europe in what is referred to as the "snow belt." Delivery of
snowmobiles to consumers begins in autumn and continues during the winter
season. Orders for each year's production of snowmobiles are placed in the
spring and orders for ATVs and PWC are placed in autumn after meetings with
dealers and distributors, and units are built to order each year. In addition,
non-refundable deposits made by consumers to dealers in the spring for
snowmobiles assist in production planning. The budgeted volume of units to be
produced each year is sold to dealers and distributors prior to production.
Sales activity at the dealer level is monitored on a monthly basis for each of
snowmobiles, ATVs and PWC. In early 1998, motorcycle production will begin based
on orders placed after the initial Victory dealer meeting held in January, 1998.
Manufacture of snowmobiles commences in the spring and continues through
late autumn or early winter. Polaris manufactures PWC during the fall, winter
and spring months. Since May 1993, Polaris has had the ability to manufacture
ATVs year round. Generally, Polaris commences ATV production in late autumn and
continues through early autumn of the following year. Initially, motorcycles
will be manufactured and assembled in the spring and summer. Long term,
manufacturing of motorcycles will commence in late autumn and continue through
early autumn of the following year.
SALES AND MARKETING
Polaris products are sold through a network of nearly 2,000 dealers in North
America and 54 distributors in 113 countries.
With the exception of Illinois, upper Michigan and eastern Wisconsin, where
Polaris sells its snowmobiles through an independent distributor, Polaris sells
its snowmobiles directly to dealers in the snowbelt regions of the United States
and Canada. Snowmobile sales in Europe and other offshore markets are handled
through independent distributors. See Note 1 of Notes to Consolidated Financial
Statements for discussion of foreign and domestic operations and export sales.
4
Most dealers and distributors of Polaris snowmobiles also distribute
Polaris' ATVs and PWC. At the end of 1997, approximately 400 dealerships were
located in the southern United States where snowmobiles are not regularly sold.
Unlike its primary competitors, which market their ATV products principally
through their affiliated motorcycle dealers, Polaris also sells its ATVs and PWC
through lawn and garden, boat and marine, and farm implement dealers.
Victory motorcycles will be distributed direct through authorized Victory
dealers. Polaris has a high quality dealer network in North America for its
other product lines from which most of the initial 200 Victory dealers will be
selected. Polaris expects to develop a Victory dealer network of approximately
500 to 600 dealers over the next three to four years.
Dealers and distributors sell Polaris' products under contractual
arrangements pursuant to which the dealer or distributor is authorized to market
specified products, required to carry certain replacement parts and perform
certain warranty and other services. Changes in dealers and distributors take
place from time to time. Polaris believes that a sufficient number of qualified
dealers and distributors exists in all areas to permit orderly transition
whenever necessary.
In February, 1996, Polaris entered into a partnership agreement with
Transamerica Distribution Finance ("TDF") to form Polaris Acceptance. Polaris
Acceptance provides floor plan financing to Polaris' dealers and distributors
and may in the future provide other financial services to dealers, distributors
and retail customers. Under the partnership agreement, Polaris had a 25% equity
interest in Polaris Acceptance throughout 1996. In January, 1997, Polaris
exercised its option to increase its equity interest in Polaris Acceptance to
50% for an additional investment of approximately $10.4 million. Additionally,
Polaris guarantees 50% of the outstanding indebtedness of Polaris Acceptance
under a credit agreement between Polaris Acceptance and TDF. At December 31,
1997, Polaris' contingent liability with respect to the guarantee was
approximately $92.0 million.
Polaris has arrangements with Polaris Acceptance, TDF, and Deutsche
Financial Services Canada Corporation, a Deutsche Bank Company, to provide floor
plan financing for its dealers and distributors. Substantially all of Polaris'
sales of snowmobiles, ATVs and PWC are financed under arrangements in which
Polaris is paid within a few days of shipment of its product. Polaris
participates in the cost of dealer and distributor financing and is required to
repurchase products from the finance companies under certain circumstances and
subject to certain limitations. Polaris has not historically recorded a sales
return allowance because it has not been required to repurchase a significant
number of units in the past. However, there can be no assurance that this will
continue to be the case. If necessary, Polaris will record a sales return
allowance at the time of sale should management anticipate material repurchases
of units financed through the finance companies. See Notes 1 and 2 of Notes to
Consolidated Financial Statements.
Polaris does not directly finance the purchase of Polaris snowmobiles, ATVs
or PWC by consumers. However, retail financing plans are offered by certain of
the dealers and Polaris has programs to make consumer financing available to its
dealers through unaffiliated third parties.
Polaris' marketing activities are designed primarily to promote and
communicate directly with consumers and secondarily to assist the selling and
marketing efforts of its dealers and distributors. From time to time Polaris
makes available discount or rebate programs or other incentives for its dealers
and distributors to remain price competitive in order to accelerate reduction of
retail inventories. Polaris advertises its products directly using print
advertising in the industry press and in user group publications, on billboards,
and, less extensively, on television and radio. Polaris also provides media
advertising and partially underwrites dealer and distributor media advertising
to a degree and on terms which vary by product and from year to year. Most
dealer and distributor advertising appears in newspapers and on radio. Each
season Polaris produces a promotional film for its snowmobiles, ATVs,
motorcycles and PWC which is available to dealers for use in the showroom or at
special promotions. Polaris also provides
5
product brochures, leaflets, posters, dealer signs, and miscellaneous other
promotional items for use by dealers.
ENGINEERING, RESEARCH AND DEVELOPMENT, AND NEW PRODUCT INTRODUCTION
Polaris employs approximately 290 persons who are engaged in the development
and testing of existing products and research and development of new products
and improved production techniques. Polaris believes that Polaris and its
predecessors were the first to develop, for commercial use, independent front
end suspension for snowmobiles, the long travel rear suspension for snowmobiles,
direct drive of the snowmobile track, the use of liquid cooling in snowmobile
engines and brakes, the use of hydraulic brakes in snowmobiles, the three
cylinder engine in snowmobiles and PWC, the adaptation of the MacPherson strut
front suspension, "on demand" four-wheel drive systems and the Concentric Drive
System for use in ATVs and the application of a forced air cooled variable power
transmission system to ATVs.
Polaris utilizes internal combustion engine testing facilities to design and
optimize engine configurations for its products. Polaris utilizes specialized
facilities for matching engine, exhaust system and clutch performance parameters
in its products to achieve desired fuel consumption, power output, noise level
and other objectives. Polaris' engineering department is equipped to make small
quantities of new product prototypes for testing by Polaris' testing teams and
for the planning of manufacturing procedures. In addition, Polaris'
manufacturing facility in Roseau, Minnesota has a proving ground where each of
the products is extensively tested under actual use conditions.
Polaris expended for research and development approximately $26.7 million
for 1997, $28.3 million for 1996 and $19.9 million for 1995, which amounts were
included as a component of operating expenses in the period incurred.
COMPETITION
The snowmobile, ATV, motorcycle and PWC markets in the United States and
Canada are highly competitive. Competition in such markets is based upon a
number of factors, including price, quality, reliability, styling, product
features and warranties. At the dealer level, competition is based on a number
of factors including sales and marketing support programs (such as financing and
cooperative advertising). Certain of Polaris' competitors are more diversified
and have financial marketing resources which are substantially greater than
those of Polaris.
Polaris snowmobiles, ATVs, motorcycles and PWC are competitively priced and
management believes Polaris' sales and marketing support programs for dealers
are comparable to those provided by its competitors. Polaris' products compete
with many other recreational products for the discretionary spending of
consumers, and, to a lesser extent, with other vehicles designed for utility
applications.
PRODUCT SAFETY AND REGULATION
Snowmobiles, ATVs, motorcycles and PWC are motorized machines which may be
operated at high speeds and in a careless or reckless manner. Accidents
involving property damage, personal injuries and deaths occur in the use of
snowmobiles, ATVs, motorcycles and PWC.
Laws and regulations have been promulgated or are under consideration in a
number of states relating to the use or manner of use of snowmobiles, ATVs and
PWC. State approved trails and recreational areas for snowmobile and ATV use
have been developed in response to environmental and safety concerns. Polaris
has supported laws and regulations pertaining to safety and noise abatement and
believes that its products would be no more adversely affected than those of its
competitors by the adoption of any pending laws or regulations.
In September 1986, the staff of the Consumer Products Safety Commission
("CPSC") ATV Task Force issued a report on regulatory options for ATVs. The Task
Force recommended that the ATV
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industry voluntarily cease marketing ATVs intended for use by children under 12
years of age. It proposed that warning labels be placed on ATVs intended for use
by children under age 14 stating that these ATVs are not recommended for use by
children under 12, and on adult-sized ATVs stating that these ATVs are not
recommended for use by children under the age of 16. Warning labels were
recommended for use on all ATVs stating that operator training is necessary to
reduce risk of injury or death.
In December 1986, in a follow-up measure to the Task Force Report, the CPSC
voted unanimously to continue efforts with the ATV industry to develop a
voluntary standard regarding the dynamic stability characteristics of ATVs. In
February 1987, the CPSC formally requested that the Justice Department initiate
an enforcement action against the ATV industry seeking a voluntary recall of all
three-wheel ATVs and four-wheel ATVs sold with the intention that they be used
by children under 16, as well as a requirement that ATV purchasers receive
"hands-on" training.
Except for 1,700 three-wheel models initially produced, Polaris manufactures
only four-wheel ATVs and six-wheel off-road vehicle products. Polaris has always
placed warning labels on its ATVs stating that they are designed for use only by
persons aged 16 or older (which warning was revised in 1987 to provide that only
adults over age 18 should operate the vehicle), that operators should always
wear approved safety helmets and that riders should complete proper training
prior to operating an ATV.
On December 30, 1987, Polaris reached an agreement with the CPSC regarding
ATV safety. The agreement called for the repurchase of all three-wheel ATVs
remaining in the hands of its distributors and dealers, the provision of
additional safety oriented point-of-purchase materials in all Polaris ATV
dealerships, and the addition of a mandatory "hands on" consumer and dealer
safety training program designed to give all Polaris ATV dealers and consumers
maximum exposure to safe riding techniques. Polaris conditions its ATV
warranties described below under "Product Liability" on completion of the
mandatory "hands on" consumer training program.
Pursuant to the agreement with the CPSC, Polaris has procedures in place for
ascertaining dealer compliance with the provisions of the CPSC consent decree,
including random "undercover" on-site inspections of dealerships to ensure
compliance with the age restriction.
Polaris continually attempts to assure that its dealers are in compliance
with the provisions of the CPSC consent decree. Polaris has notified its dealers
that it will terminate any dealer it determines to have violated the provisions
of the CPSC consent decree. To date, it has terminated or not renewed nine
dealers for such reason.
The Consent Decree with the CPSC expires in April, 1998. Discussions are
proceeding with the CPSC regarding modifications or an extension of the Consent
Decree. The Company does not believe that the agreement with the CPSC has had or
will have a material adverse effect on Polaris. Nevertheless, there can be no
assurance that future recommendations or regulatory actions by the CPSC, the
Justice Department or individual states would not have an adverse effect on the
Company. Certain state attorneys-general have asserted that the CPSC agreement
is inadequate and have indicated that they will seek stricter ATV regulation.
Polaris is unable to predict the outcome of such action or the possible effect
on its ATV business.
California has recently enacted legislation setting maximum emission
standards for ATVs and the federal government has proposed legislation setting
maximum emission standards for a number of vehicles including ATVs and
snowmobiles. Currently Polaris' two-cycle engines do not meet the California
emission requirements or those proposed under the federal legislation without
technical enhancement, which is under development. However, Polaris has
developed and sells ATVs with four-cycle engines that meet the California
emission standards. The federal government has also enacted legislation
mandating maximum emission standards for PWC beginning in 1999 with annual
reductions in permitted maximums through 2006. Currently, Polaris' two-cycle
engines for PWC would not meet the new emission requirements without technical
enhancement, which is under development. Polaris is unable to predict the
ultimate
7
impact of the enacted or proposed legislation on Polaris and its operations.
Polaris recently signed an agreement with Outboard Marine Corporation ("OMC")
licensing the Ficht fuel injection technology. This technology may be used in
Polaris vehicles to meet emission standards in the future, particularly in
Polaris vehicles with two-cycle engines. Finally, some states may pass
legislation and local ordinances have been and may from time to time be
considered and adopted which restrict the use of PWC to specified hours and
locations. Polaris is unable to predict the outcome of such actions or the
possible effect on its PWC business. However, Polaris continues to monitor these
legislative activities together with the industry associations and supports
balanced and appropriate programs that educate the customer on safe use of the
product and protect the environment.
Victory motorcycles will be subject to federal and state emissions, vehicle
safety and other standards. Polaris anticipates that its motorcycles will comply
fully with all such applicable standards and related regulations.
PRODUCT LIABILITY
Polaris' product liability insurance limits and coverages had been adversely
affected by the general decline in the availability of liability insurance. As a
result of the high cost of premiums, and in view of the historically small
amount of claims paid by Polaris, Polaris was self-insured from June 1985 to
June 1996. In June, 1996 Polaris purchased excess insurance coverage for
catastrophic product liability claims for incidents occurring subsequent to the
policy date that exceed a self-insured retention.
Product liability claims are made against Polaris from time to time. Since
its inception in 1981 through December 31, 1997, Polaris has paid an aggregate
of approximately $3.7 million in product liability claims and accrued $7.0
million at December 31, 1997, for the defense and possible payment of pending
claims. Polaris believes such accruals are adequate. Polaris does not believe
that the outcome of any pending product liability litigation will have a
material adverse effect on the operations of Polaris. However, no assurance can
be given that its historical claims record, which did not include ATVs prior to
1985, PWC prior to 1992, or motorcycles prior to 1998, will not change or that
material product liability claims against Polaris will not be made in the
future. Adverse determination of material product liability claims made against
Polaris would have a material adverse effect on Polaris' financial condition.
See Note 7 of Notes to Consolidated Financial Statements.
WARRANTY
Polaris warrants its snowmobiles, ATVs, motorcycles and PWC under a "limited
warranty" for a period of one year, six months, one year and one year,
respectively. Although Polaris employs quality control procedures, a product is
sometimes distributed which needs repair or replacement. Historically, product
recalls have been administered through Polaris' dealers and distributors and
have not had a material effect on Polaris' business.
EFFECTS OF WEATHER
Lack of snowfall in any year in any particular region of the United States
or Canada may adversely affect snowmobile retail sales in that region. Polaris
seeks to minimize this potential effect by stressing pre-season sales (see
"Production Scheduling") and shifting dealer inventories from one location to
another. However, there is no assurance that weather conditions would not have a
material effect on Polaris' sales of snowmobiles, ATVs, motorcycles or PWC.
EMPLOYMENT
Due to the seasonality of the Polaris business and certain changes in
production cycles, total employment levels vary throughout the year. During
1997, Polaris employed an average of approximately 2,900 persons. Approximately
780 of its employees are salaried. Polaris considers its relations with its
personnel to be excellent.
8
Historically, Polaris' snowmobile business has been seasonal, resulting in
significant differences in employment levels during the year. Despite such
variations in employment levels, employee turnover has not been high. With the
introduction of the ATV line in 1985, Polaris' employment levels have become
more stable. Polaris' employees have not been represented by a union since July
1982.
YEAR 2000 COMPLIANCE
In 1997, Polaris evaluated its computer system year 2000 compliance issues
and began a conversion process to address necessary changes. In order for a
computer system to be year 2000 compliant, its time sensitive software must
recognize a date using "00" as the year 2000 rather than 1900. Polaris has
implemented a plan to make its computer systems critical to managing its
business year 2000 compliant by the end of 1998 and to make its remaining
computer systems year 2000 compliant by the end of 1999. Expenses incurred by
Polaris in 1997 to address year 2000 compliance issues were immaterial and
Polaris does not expect the level of expenses to be incurred under its
conversion program during the next two years to have material impact on its
financial results of operations.
ITEM 2. PROPERTIES
Polaris owns its principal manufacturing facility in Roseau, Minnesota. The
facility consists of approximately 509,000 square feet of manufacturing space
located on approximately 100 acres. In 1991, Polaris acquired a fabricating
facility in order to bring more component parts manufacturing in-house. This
facility consists of a 190,000 square foot plant situated on 38 acres and is
located in Osceola, Wisconsin. Polaris makes ongoing capital investments in its
facilities. In August, 1994, Polaris signed a one-year lease agreement for a
223,000 square foot assembly facility located on 24 acres of land in Spirit
Lake, Iowa. Polaris exercised its option to purchase the facility during 1995.
Polaris currently uses the facility to assemble all of its PWC product line,
certain ATV models and, in 1998, its motorcycle product line. In August, 1995,
Polaris purchased a 90,000 square foot building adjacent to the Osceola facility
to house the manufacturing of Polaris designed and built domestic engines. These
investments have increased production capacity for snowmobiles, ATVs,
motorcycles and PWC. The Company believes that Polaris' manufacturing facilities
are adequate in size and suitability for its present manufacturing needs.
Polaris owns all tooling and machinery (including heavy presses,
conventional and computer-controlled welding facilities for steel and aluminum,
assembly lines, paint lines, and sewing lines) used in the manufacture of its
products. Although Polaris holds numerous patents and uses various registered
trademarks and names, it believes that the loss of any of them would not have a
material effect on its business.
Polaris leases 92,000 square feet of headquarters and warehouse space in
Minneapolis, Minnesota from related parties pursuant to a lease that will
terminate in 2002. Polaris also leases an additional 13,000 square feet of
office space in Minneapolis, Minnesota and 42,000 square feet of office and
warehouse space in Winnipeg, Manitoba. Polaris does not anticipate any
difficulty in securing alternate facilities on competitive terms, if necessary,
upon the termination of any of its leases.
Polaris completed construction of a 259,000 square foot PG&A distribution
center on 50 acres in Vermillion, South Dakota in 1997.
In 1997, Polaris broke ground for the construction of a 58,000 square foot
plastic injection molding facility adjacent to the Roseau, Minnesota facility.
This will be a vertical integration project for Polaris in the manufacture of
snowmobile hoods and certain large plastic molded parts on ATVs. The facility is
expected to be operational in mid-1998.
ITEM 3. LEGAL PROCEEDINGS
Polaris is involved in a number of legal proceedings, none of which is
expected to have a material effect on the financial condition or the business of
Polaris.
9
Injection Research Specialists commenced an action in 1990 against Polaris
in Colorado Federal Court alleging various claims relating to electronic fuel
injection systems for snowmobiles. In April 1997, a judgment was entered in
favor of Injection Research Specialists, before interest, for $24.0 million in
compensatory damages and $10.0 million in punitive damages against Polaris, and
$15.0 million in compensatory damages and $8.0 million in punitive damages
against Fuji, one of Polaris' engine suppliers. The judgment against Fuji was
subsequently reduced on post trial motions to $11.6 million in compensatory
damages and no punitive damages. Polaris has appealed the judgment against
Polaris and has been advised that Fuji has also appealed the judgment against
it. Depending upon the conclusion of the appeal, Polaris may require additional
reserves associated with this litigation on its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names of the executive officers of the Company as of
March 3, 1998, their ages, titles, the year first appointed as an executive
officer of the Company and employment for the past five years:
NAME AGE TITLE
- -------------------------- --- ------------------------------------------------------
W. Hall Wendel, Jr. 55 Chairman and Chief Executive Officer
Kenneth D. Larson 57 President and Chief Operating Officer
Charles A. Baxter 50 Vice President--Engineering and General Manager
Engines
Jeffrey A. Bjorkman 38 Vice President--Manufacturing
Michael W. Malone 39 Vice President--Finance, Chief Financial Officer and
Secretary
Thomas H. Ruschhaupt 49 Vice President--Sales and Services
Ed Skomoroh 60 Vice President--Marketing
Executive officers of the Company are elected at the discretion of the Board
of Directors with no fixed term. There are no family relationships between or
among any of the executive officers or directors of the Company.
Mr. Wendel has served as Chairman and Chief Executive Officer since the
Company's formation in 1994. Mr. Wendel was the Chief Executive Officer of
Polaris Industries Capital Corporation ("PICC"), which was the managing general
partner of Polaris Industries Associates L.P., which was the operating general
partner of Polaris Industries L.P. from 1987 to December 1994. From 1981 to
1987, Mr. Wendel was Chief Executive Officer of a predecessor of Polaris, which
was formed to purchase the snowmobile assets of the Polaris E-Z-GO Division of
Textron Inc. Before that time, Mr. Wendel was President of the Polaris E-Z-GO
Division for two years and prior thereto, held marketing positions as Vice
President of Sales and Marketing and National Sales Manager since 1974.
Mr. Larson has been President and Chief Operating Officer of the Company
since 1994. Mr. Larson was President and Chief Operating Officer of PICC from
October 1988 to December 1994. Prior thereto, Mr. Larson was Executive Vice
President of The Toro Company and was responsible for its commercial, consumer
and international equipment business, and had held a number of general
management positions since joining The Toro Company in 1975.
Mr. Baxter has been Vice President--Engineering of the Company since
December 1994 and held that position with PICC or its predecessor since 1981.
Prior thereto, since 1970, Mr. Baxter was employed as Director of Engineering of
the Polaris E-Z-GO Division of Textron.
10
Mr. Bjorkman has been Vice President--Manufacturing of the Company since
January 1995, and prior thereto held positions of Plant Manager and
Manufacturing Engineering Manager since July 1990. Prior to joining Polaris, Mr.
Bjorkman was employed by General Motors Corporation in various management
positions for nine years.
Mr. Malone has been Vice President--Finance, Chief Financial Officer and
Secretary of the Company since January 1997. Mr. Malone was Vice President and
Treasurer of the Company from December 1994 to January 1997 and was Chief
Financial Officer and Treasurer of PICC from January 1993 to December 1994.
Prior thereto and since 1986, he was Assistant Treasurer of PICC or its
predecessor. Mr. Malone joined Polaris in 1984 after four years with Arthur
Andersen LLP.
Mr. Ruschhaupt has been Vice President--Sales and Service since March, 1998.
Prior to joining Polaris, Mr. Ruschhaupt was employed by Goodyear Tire and
Rubber Corporation in various management positions for twenty years.
Mr. Skomoroh has been Vice President--Marketing of the Company since
February, 1998. Mr. Skomoroh was Vice President--Sales and Marketing of the
Company from December 1994 and held that position with PICC since October 1988.
Prior thereto, he was Vice President, Polaris Canada and President, Secretary
and Director of Polaris Industries, Inc., an Ontario corporation and a wholly
owned subsidiary of Polaris Industries Partners L.P. Mr. Skomoroh joined Polaris
in 1982 as General Manager, Canada, and was prior thereto the General Manager of
the Canadian operations of Arctic Enterprises, Inc., a snowmobile manufacturer.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information under the caption "Investor Information" included in the
Company's 1997 Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Data" included in the
Company's 1997 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis" included in the Company's 1997 Annual
Report is included herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Registrant, included in the
Company's 1997 Annual Report, are incorporated herein by reference:
Consolidated Balance Sheets--December 31, 1997 and 1996.
Consolidated Statements of Operations--Years Ended December 31, 1997, 1996
and 1995.
Consolidated Statements of Shareholders' Equity--Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors of the Registrant
The information under the caption "Election of Directors--Information
Concerning Nominees and Directors" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
(b) Executive Officers of the Registrant
Information concerning Executive Officers of the Company is included in this
Report after Item 4, under "Executive Officers of the Registrant."
(c) Compliance with Section 16(a) of the Exchange Act
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1998 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation and Other
Information" and "Election of Directors--Directors' Remuneration" in the
Company's 1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's 1998 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Relationships and Related
Transactions" in the Company's 1998 Proxy Statement is incorporated herein by
reference.
13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements
Information concerning financial statements of Polaris Industries Inc.
included in the Company's 1997 Annual Report are incorporated by reference
to this Report under Item 8 "Financial Statements and Supplementary Data".
(2) Financial Statement Schedules
All supplemental financial statement schedules have been omitted because
they are not applicable or are not required or the information required to
be set forth therein is included in the Consolidated Financial Statements or
notes thereto.
(3) Exhibits
The Exhibits to this Report are listed in the Exhibit Index on page E-1.
A copy of any of these Exhibits will be furnished at a reasonable cost
to any person who was a shareholder of the Company as of March 25, 1998,
upon receipt from any such person of a written request for any such exhibit.
Such request should be sent to Polaris Industries Inc., 1225 Highway 169
North, Minneapolis, Minnesota 55441, Attention: Investor Relations.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 1997.
(c) Exhibits
Included in Item 14(a)(3) above.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota on March 30, 1998.
POLARIS INDUSTRIES INC.
By: /s/ W. HALL WENDEL, JR.
-----------------------------------------
W. Hall Wendel, Jr.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------ -------------------------- --------------
/s/ W. HALL WENDEL, JR. Chief Executive Officer
- ------------------------------------ and Director (Principal March 30, 1998
W. Hall Wendel, Jr. Executive Officer)
Vice President--Finance,
/s/ MICHAEL W. MALONE Chief Financial Officer
- ------------------------------------ and Secretary (Principal March 30, 1998
Michael W. Malone Financial and Accounting
Officer)
*
- ------------------------------------ Director March 30, 1998
Andris A. Baltins
*
- ------------------------------------ Director March 30, 1998
Raymond J. Biggs
*
- ------------------------------------ Director March 30, 1998
Beverly F. Dolan
*
- ------------------------------------ Director March 30, 1998
Kenneth D. Larson
*
- ------------------------------------ Director March 30, 1998
Robert S. Moe
*
- ------------------------------------ Director March 30, 1998
Gregory R. Palen
*
- ------------------------------------ Director March 30, 1998
Stephen G. Shank
*By: /s/ W. HALL WENDEL, JR. March 30, 1998
------------------------------
(W. Hall Wendel, Jr.
Attorney-in-Fact)
- ------------------------
* W. Hall Wendel, Jr., pursuant to Powers of Attorney executed by each of the
officers and directors listed above whose name is marked by an "*" and filed
as an exhibit hereto, by signing his name hereto does hereby sign and execute
this Report of Polaris Industries Inc. on behalf of each of such officers and
directors in the capacities in which the names of each appear above.
15
POLARIS INDUSTRIES INC.
EXHIBIT INDEX TO ANNUAL REPORT ON
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------
3.(a) Articles of Incorporation of Polaris Industries Inc. ("the Company"),
as amended, incorporated by reference to Exhibit 3(a) to the Company's
Registration Statement on Form S-4 (No. 33-55769) (the "Form S-4").
(b) Bylaws of the Company, incorporated by reference to Exhibit 3(b) to
the Form S-4.
4. Specimen Stock Certificate of the Company, incorporated by reference
to Exhibit 4 to the Form S-4.
10.(a) Agreement for Deferred Compensation and Disability Income and
Amendment No. 1 thereto with W. Hall Wendel, Jr. incorporated by
reference to Exhibit 10 to the Company's Annual Report on Form 10-K
dated May 15, 1995.
(b) [RESERVED]
(c) Retirement Savings Plan, incorporated by reference to Exhibit 10(g) to
the Form S-1.
(d) Polaris Industries Inc. Employee Stock Ownership Plan dated January 1,
1997.
(e) Fourth Amendment to Credit Agreement by and between the Company and
First Bank.
(f) Management Bonus Plan, incorporated by reference to Exhibit 10(j) to
the Form S-1.
(g) Polaris Industries Inc. 1995 Stock Option Plan, incorporated by
reference to the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on June 12, 1995 (No.
33-60157).
(h) Polaris Industries Inc. Deferred Compensation Plan for Directors
incorporated by reference to Exhibit 10(h) to the Company's Annual
Report on Form 10-K dated March 22, 1996.
(i) Joint Venture Agreement between the Company and Transamerica
Commercial Finance Corporation, now known as Transamerica Distribution
Finance ("TDF") dated February 7, 1996 incorporated by reference to
Exhibit 10(i) to the Company's Annual Report on Form 10-K dated March
22, 1996.
(j) Manufacturer's Repurchase Agreement between the Company and Polaris
Acceptance dated February 7, 1996 incorporated by reference to Exhibit
10(j) to the Company's Annual Report on Form 10-K dated March 22,
1996.
(k) Credit Agreement by and between the Company and First Bank National
Association and Bank of America Illinois and First Union National Bank
of North Carolina, Dated May 8, 1995 incorporated by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q dated May
15, 1995.
(l) Plymouth, Minnesota, Executive Office Lease, incorporated by reference
to Exhibit 10(m) to the Form S-1 ("the Executive Office Lease").
(m) Shareholder Agreement with Fuji Heavy Industries LTD., incorporated by
reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K
dated March 24, 1995.
(n) Registration Rights Agreement between and among the Company, Victor K.
Atkins, EIP I Inc., EIP Holdings Inc. and LB I Group Inc.,
incorporated by reference to Exhibit 10(1) to the Company's Annual
Report on Form 10-K dated March 24, 1995.
16
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------
(o) Amended and Restated Polaris Industries Inc. 1996 Restricted Stock
Plan, incorporated by reference to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on June 7, 1996 (No. 333-05463).
(p) Polaris Industries Inc. Employee Stock Purchase Plan, incorporated by
reference to the Company's Registration Statement on Form S-8 filed
with the Securities and Exchange Commission on February 3, 1997 (No.
333-21007).
(q) Form of Change of Control Agreement entered into with executive
officers of Company incorporated by reference to Exhibit 10(q) to the
Company's Annual Report on Form 10-K dated March 18, 1997.
(r) Amendment to Executive Office Lease dated November 22, 1996
incorporated by reference to Exhibit 10(r) to the Company's Annual
Report on Form 10-K dated March 18, 1997.
13. Portions of the Annual Report to Security Holders for the Year Ended
December 31, 1997 included pursuant to Note 2 to General Instruction
G.
21. Subsidiaries of Registrant.
23. Consent of Arthur Andersen LLP.
24. Power of Attorney.
27.(a) Financial Data Schedule.
(b) Restated Financial Data Schedule for Nine Month Period Ended September
30, 1997.
17