Polaris: Letter to Investors

In 1998, Polaris did what we set out to do — deliver a record year. We got back on a growth trajectory by outperforming the industry in each of our core businesses. We added an entirely new product line with the successful introduction of the Victory motorcycle. And we began several new initiatives designed to add growth and profitability longer term. In short, while 1998 was a great year, we believe the best lies ahead. We see a world filled with opportunities.

Let’s review the financial highlights achieved by your company in 1998:

We resumed our tradition of profitable growth with $1.176 billion in sales, up 12% from 1997.
Adjusted net income increased 9.4%, to $71.5 million, our highest ever.
Adjusted earnings per share were a record $2.72, up 11%.
We used a portion of our healthy $121 million in operating cash flow to enhance shareholder value. We have repurchased a cumulative $3.1 million shares under the current five million share repurchase authorization. We paid our 16th consecutive dividend.
Our balance sheet remains strong. At year’s end, our long-term debt was only $20.5 million and the debt-to-total capital ratio was a favorable 12%.
Return on equity was an extraordinary 44%.

In a strong ATV market, our sales were even stronger. No company responded faster and more effectively to the industry’s healthy growth in 1998. Our ATV retail sales climbed 23 percent, and we gained market share, building on our strong #2 position. We’re performing well because we are close to the market. Our new product introductions have built on the continuing popularity of the Sportsman line. ATVs are now 57 percent of Polaris sales, and we believe there’s plenty of room left in this relatively immature market. We see 1999 as another strong year for ATVs.

Our new snowmobiles are better than ever. We invested aggressively to produce 23 high-quality new models. We captured several “Best of” honors and gained three points of market share, building on our number one position. We’ve recommitted ourselves to racing — and winning. When this cyclical industry returns, as it will, we will be in a stronger position than ever before.

We’re in good shape in Personal Watercraft. After several tough years for the PWC market, the worst is behind us. Old model inventory has been cleared out so dealers can sell new models. We’ve anticipated the shift to quieter, more environmentally friendly watercraft, like our new top of the line “Genesis” model. These new designs should drive moderate growth for Polaris in 1999, despite continued tough conditions for the industry.

Victory is a winner. We introduced our innovative new motorcycle to an enthusiastic marketplace, including winning Cycle World’s “Cruiser Motorcycle of the Year Award”, and ended the year with a strong backlog of orders. Victory has a tremendous upside as we stake out our first slice of the $5-billion motorcycle market. We expect to at least quadruple sales in 1999, and the line is on schedule to contribute to earnings in 2000.

RESUMING GROWTH.
After three years at the $1 billion plateau, a strong 1998 gives us the momentum to resume our growth. We have the ability, the opportunities — and the ambition — to grow faster. Polaris is determined to deliver even better financial performance and become the undisputed brand leader in motorsport recreation.

To keep this potential in front of us — and add a sense of urgency to our daily actions — we’ve set four ambitious goals:

Reach $2 billion in sales by 2002. By 2007, we should be a $3-billion company. Achieving and sustaining 15% annual growth will require us to move even more quickly than in the past.
Grow earnings per share as fast, or faster than revenue. We will continue to focus on profitable growth, a conservative balance sheet, and a long-term approach.
Develop a dominant brand. In the past, great products have carried the Polaris name. Building a stronger brand will help us sell a bigger portfolio of products and services, and communicate who we are to a broader spectrum of potential consumers.
Improve our price-to-earnings multiple so it’s more in line with overall market averages.

GROWING BY MAKING THE MOST OF TODAY'S OPPORTUNITIES.
Over our 45-year history, Polaris has built a very good company simply by growing internally. One segment at a time, we’ve transformed from a snowmobile company into a flexible manufacturer of motorized products for people who enjoy the outdoors. We have ample opportunities to grow by continuing to innovate and build high-quality, lower-cost products.

Innovative products. At heart, we’ve always been a motorsports company. And our future will always depend upon our ability to produce exciting, reliable and great-performing machines. We have diversified our product lines. Whenever we go into a new market, we expect to become a market share leader. And once we reach number one, we don’t plan to ride off into the sunset. Just look at snowmobiles, where we’re competing as aggressively as ever.

Continuing innovation drives purchases of our products and quality drives loyalty. Those core attributes have brought us this far and they’ll be the foundation of our future growth.

Disciplined, low-cost operations. The other key part of our success has been our manufacturing operations. This was brought home clearly in 1998 as demand for ATVs surged, and we watched some competitors struggle to keep up. Our non-union employee owners are proudly part of one of the most productive workforces in the industry. They didn’t miss a beat as we shifted capacity from other product lines to ATV production.

We intend to grow the company and produce sustained earnings whether or not our markets are hitting on all four cylinders. That means disciplined, low-cost operations are essential. In 1998 we added a new general manager of purchasing to further leverage materials and supply management strategies, improve quality and drive down costs.

PLANTING SEEDS FOR NEW GROWTH.
Up to now, we’ve grown by focusing on core products, where there’s certainly ample opportunity for more growth. But success has created some great opportunities surrounding our machines as well. We can accelerate growth by investing selectively in some of these new areas. Here are five places we’ve started planting seeds for new growth.

1. Parts, garments and accessories. Aftermarket sales have never been an after-thought. We’ve always looked at PG&A as a way to build dealer traffic, extend the Polaris brand and add a high-margin component to the sales mix. But we see the category as a pure growth opportunity, too. We have an aggressive plan to double PG&A sales within three years that includes investing in increased promotion and dedicating a sales group to PG&A.

2. Financial services. With more than $1 billion in sales flowing through Polaris dealers, we have a great opportunity to capture a share of the financial services associated with the sale of our products. Polaris Acceptance, our 50-percent owned joint venture with a wholly owned subsidiary of Transamerica Distribution Finance, has helped our dealers manage wholesale financing for years. Now, under the Polaris Acceptance umbrella, we’ll help dealers make the purchase process more convenient for their customers — and earn profits from the financing.

We’ve recently introduced five new financial products, including various credit plans, extended service packages and consumer leasing. We’re backing up all the programs with fast credit approvals and favorable dealer terms. Profitable dealers are essential to our success, and we’ll continue to introduce new services that increase the value of their Polaris business relationship.

3. Partnerships and acquisitions. We will reach our second billion in sales more quickly — and accelerate earnings growth — by working with partners who also want to reach Polaris’ outdoor-oriented customers. For example, a Remington™ special edition of the Sportsman 500 ATV introduced in 1998 proved very popular with hunters. Licensing, product acquisitions and co-marketing all present opportunities to bring new products into our dealer channel and new customers into their stores.

4. International business. Today, international business represents just under six percent of Polaris sales. But the motorcycle market is truly global, and there’s potential around the world for each of our machines. We believe our low-cost manufacturing and ability to develop product variations are two key elements of being an effective global competitor. We’re investing to learn more about customer needs and developing the relationships to expand our market share beyond North America.

5. The Polaris brand. Today, Polaris competes head-to-head and market-to-market with the biggest names in the industry. On price, quality and performance, our machines stand up against any in the world. But the Polaris name is not as well-known outside the snowbelt. Our challenge is to establish Polaris as a preferred brand wherever we do business. We’re placing more emphasis than ever on marketing and building brand awareness as well as selling products. We’ve named a vice president of sales and service who is focused on improving service and anticipating dealers’ needs. The Polaris brand represents trust, reliability and value. If a customer walks into a dealer showroom with that perception, our machines will make the sale. Then, we’ll work hard to reinforce the positive experience every time someone comes in contact with Polaris.

These are exciting opportunities, and we’ve made a good start in each one. You will see more in the months to come.

We have also had some exciting changes in the leadership of the company. After serving as president and chief operating officer for the past ten years, Ken Larson retired this fall. We are grateful to Ken for his tremendous contribution in both growing and diversifying the company — quite literally his fingerprints are on every product we make. With Ken Larson’s retirement, we’ve been fortunate to add Bruce Thomson to the Board of Directors.

Tom Tiller joined the company last summer, and is slated to be named to the combined position of President and Chief Executive Officer at the 1999 shareholder meeting. Hall Wendel, after 28 years of leading the company on a daily basis, will assume the sole role of Chairman where he will remain involved in developing our strategic direction.

W. Hall Wendel, Jr.
Chairman and Chief Executive Officer Thomas C. Tiller
President and Chief Operating Officer

© 1999 Polaris Industries Inc.





		In 1998, Polaris did what we set out to do — deliver a record year. We got back on a growth trajectory by outperforming the industry in each of our core businesses. We added an entirely new product line with the successful introduction of the Victory motorcycle. And we began several new initiatives designed to add growth and profitability longer term. In short, while 1998 was a great year, we believe the best lies ahead. We see a world filled with opportunities. Let’s review the financial highlights achieved by your company in 1998: We resumed our tradition of profitable growth with $1.176 billion in sales, up 12% from 1997. Adjusted net income increased 9.4%, to $71.5 million, our highest ever. Adjusted earnings per share were a record $2.72, up 11%. We used a portion of our healthy $121 million in operating cash flow to enhance shareholder value. We have repurchased a cumulative $3.1 million shares under the current five million share repurchase authorization. We paid our 16th consecutive dividend. Our balance sheet remains strong. At year’s end, our long-term debt was only $20.5 million and the debt-to-total capital ratio was a favorable 12%. Return on equity was an extraordinary 44%. In a strong ATV market, our sales were even stronger. No company responded faster and more effectively to the industry’s healthy growth in 1998. Our ATV retail sales climbed 23 percent, and we gained market share, building on our strong #2 position. We’re performing well because we are close to the market. Our new product introductions have built on the continuing popularity of the Sportsman line. ATVs are now 57 percent of Polaris sales, and we believe there’s plenty of room left in this relatively immature market. We see 1999 as another strong year for ATVs. Our new snowmobiles are better than ever. We invested aggressively to produce 23 high-quality new models. We captured several “Best of” honors and gained three points of market share, building on our number one position. We’ve recommitted ourselves to racing — and winning. When this cyclical industry returns, as it will, we will be in a stronger position than ever before. We’re in good shape in Personal Watercraft. After several tough years for the PWC market, the worst is behind us. Old model inventory has been cleared out so dealers can sell new models. We’ve anticipated the shift to quieter, more environmentally friendly watercraft, like our new top of the line “Genesis” model. These new designs should drive moderate growth for Polaris in 1999, despite continued tough conditions for the industry. Victory is a winner. We introduced our innovative new motorcycle to an enthusiastic marketplace, including winning Cycle World’s “Cruiser Motorcycle of the Year Award”, and ended the year with a strong backlog of orders. Victory has a tremendous upside as we stake out our first slice of the $5-billion motorcycle market. We expect to at least quadruple sales in 1999, and the line is on schedule to contribute to earnings in 2000. RESUMING GROWTH. After three years at the $1 billion plateau, a strong 1998 gives us the momentum to resume our growth. We have the ability, the opportunities — and the ambition — to grow faster. Polaris is determined to deliver even better financial performance and become the undisputed brand leader in motorsport recreation. To keep this potential in front of us — and add a sense of urgency to our daily actions — we’ve set four ambitious goals: Reach $2 billion in sales by 2002. By 2007, we should be a $3-billion company. Achieving and sustaining 15% annual growth will require us to move even more quickly than in the past. Grow earnings per share as fast, or faster than revenue. We will continue to focus on profitable growth, a conservative balance sheet, and a long-term approach. Develop a dominant brand. In the past, great products have carried the Polaris name. Building a stronger brand will help us sell a bigger portfolio of products and services, and communicate who we are to a broader spectrum of potential consumers. Improve our price-to-earnings multiple so it’s more in line with overall market averages. GROWING BY MAKING THE MOST OF TODAY'S OPPORTUNITIES. Over our 45-year history, Polaris has built a very good company simply by growing internally. One segment at a time, we’ve transformed from a snowmobile company into a flexible manufacturer of motorized products for people who enjoy the outdoors. We have ample opportunities to grow by continuing to innovate and build high-quality, lower-cost products. Innovative products. At heart, we’ve always been a motorsports company. And our future will always depend upon our ability to produce exciting, reliable and great-performing machines. We have diversified our product lines. Whenever we go into a new market, we expect to become a market share leader. And once we reach number one, we don’t plan to ride off into the sunset. Just look at snowmobiles, where we’re competing as aggressively as ever. Continuing innovation drives purchases of our products and quality drives loyalty. Those core attributes have brought us this far and they’ll be the foundation of our future growth. Disciplined, low-cost operations. The other key part of our success has been our manufacturing operations. This was brought home clearly in 1998 as demand for ATVs surged, and we watched some competitors struggle to keep up. Our non-union employee owners are proudly part of one of the most productive workforces in the industry. They didn’t miss a beat as we shifted capacity from other product lines to ATV production. We intend to grow the company and produce sustained earnings whether or not our markets are hitting on all four cylinders. That means disciplined, low-cost operations are essential. In 1998 we added a new general manager of purchasing to further leverage materials and supply management strategies, improve quality and drive down costs. PLANTING SEEDS FOR NEW GROWTH. Up to now, we’ve grown by focusing on core products, where there’s certainly ample opportunity for more growth. But success has created some great opportunities surrounding our machines as well. We can accelerate growth by investing selectively in some of these new areas. Here are five places we’ve started planting seeds for new growth. 1. Parts, garments and accessories. Aftermarket sales have never been an after-thought. We’ve always looked at PG&A as a way to build dealer traffic, extend the Polaris brand and add a high-margin component to the sales mix. But we see the category as a pure growth opportunity, too. We have an aggressive plan to double PG&A sales within three years that includes investing in increased promotion and dedicating a sales group to PG&A. 2. Financial services. With more than $1 billion in sales flowing through Polaris dealers, we have a great opportunity to capture a share of the financial services associated with the sale of our products. Polaris Acceptance, our 50-percent owned joint venture with a wholly owned subsidiary of Transamerica Distribution Finance, has helped our dealers manage wholesale financing for years. Now, under the Polaris Acceptance umbrella, we’ll help dealers make the purchase process more convenient for their customers — and earn profits from the financing. We’ve recently introduced five new financial products, including various credit plans, extended service packages and consumer leasing. We’re backing up all the programs with fast credit approvals and favorable dealer terms. Profitable dealers are essential to our success, and we’ll continue to introduce new services that increase the value of their Polaris business relationship. 3. Partnerships and acquisitions. We will reach our second billion in sales more quickly — and accelerate earnings growth — by working with partners who also want to reach Polaris’ outdoor-oriented customers. For example, a Remington™ special edition of the Sportsman 500 ATV introduced in 1998 proved very popular with hunters. Licensing, product acquisitions and co-marketing all present opportunities to bring new products into our dealer channel and new customers into their stores. 4. International business. Today, international business represents just under six percent of Polaris sales. But the motorcycle market is truly global, and there’s potential around the world for each of our machines. We believe our low-cost manufacturing and ability to develop product variations are two key elements of being an effective global competitor. We’re investing to learn more about customer needs and developing the relationships to expand our market share beyond North America. 5. The Polaris brand. Today, Polaris competes head-to-head and market-to-market with the biggest names in the industry. On price, quality and performance, our machines stand up against any in the world. But the Polaris name is not as well-known outside the snowbelt. Our challenge is to establish Polaris as a preferred brand wherever we do business. We’re placing more emphasis than ever on marketing and building brand awareness as well as selling products. We’ve named a vice president of sales and service who is focused on improving service and anticipating dealers’ needs. The Polaris brand represents trust, reliability and value. If a customer walks into a dealer showroom with that perception, our machines will make the sale. Then, we’ll work hard to reinforce the positive experience every time someone comes in contact with Polaris. These are exciting opportunities, and we’ve made a good start in each one. You will see more in the months to come. We have also had some exciting changes in the leadership of the company. After serving as president and chief operating officer for the past ten years, Ken Larson retired this fall. We are grateful to Ken for his tremendous contribution in both growing and diversifying the company — quite literally his fingerprints are on every product we make. With Ken Larson’s retirement, we’ve been fortunate to add Bruce Thomson to the Board of Directors. Tom Tiller joined the company last summer, and is slated to be named to the combined position of President and Chief Executive Officer at the 1999 shareholder meeting. Hall Wendel, after 28 years of leading the company on a daily basis, will assume the sole role of Chairman where he will remain involved in developing our strategic direction.

		W. Hall Wendel, Jr. Chairman and Chief Executive Officer					Thomas C. Tiller President and Chief Operating Officer


		© 1999 Polaris Industries Inc.