Polaris: Financial Data: MD&A

RESULTS OF OPERATIONS | LIQUIDITY AND CAPITAL RESOURCES
YEAR 2000 | INFLATION AND EXCHANGE RATES

of financial condition and results of operations (continued)

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.

RESULTS OF OPERATIONS | LIQUIDITY AND CAPITAL RESOURCES
YEAR 2000 | INFLATION AND EXCHANGE RATES

© 1999 Polaris Industries Inc.


		RESULTS OF OPERATIONS \| LIQUIDITY AND CAPITAL RESOURCES YEAR 2000 \| INFLATION AND EXCHANGE RATES

		of financial condition and results of operations (continued)
		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.
		RESULTS OF OPERATIONS \| LIQUIDITY AND CAPITAL RESOURCES YEAR 2000 \| INFLATION AND EXCHANGE RATES

		© 1999 Polaris Industries Inc.