Polaris/Victory and Austria's KTM Motorcycles Announce Alliance

To an outsider at least, the possible marriage of Polaris/Victory and KTM motorcycles looks much prettier than the bike we created to represent it. It appears to be the first step toward a much wider range of Victory motorcycles, for one thing.

On the eve of its 2006 dealer meeting and new-model announcements, Polaris Industries, parent of Victory motorcycles and a leading manufacturer of snowmobiles and ATVs, has announced that it will form a "strategic partnership" with and purchase a 24% stake in Austria's KTM, the largest manufacturer of off-road motorcycles outside Japan. KTM also builds street bikes from 450 to 990cc in the dual-sport, super-motard and adventure categories.

This is the first step of an on-going plan that may eventually see Polaris acquiring all of KTM, though there are also bail-out provisions described in the release that follows at the end of this article. Such a merger would make Victory/KTM the largest manufacturer of powersports products outside of Japan.

The two companies will be run separately for the first two-year phase of the arrangement. The arrangement should benefit both companies and permit them to expand their markets and distribution. Although Victory motorcycles are not currently sold in Europe except for the UK, Polaris has been reported to be interested in expanding its European interests particularly ATVs, as demand there is growing rapidly. KTM has excellent distribution on the continent, most notably in Eastern Europe.

KTM also produces competitive high-end motorcycles for niches that Victory doesn't—, primarily off-road but also big on-road adventure bikes—and such models would complement Victory's cruisers. Any motorcycle models that Victory can offer in areas outside the cruiser segment would broaden the brand's appeal, particularly to younger riders who don't typically purchase cruisers.

KTM is likely to get an accelerated entry into the ATV market, and it would benefit from Polaris's larger (1700 compared to KTM's 400) dealer network in the U.S. The companies share some suppliers, so there could be benefits in that area. They would also share research and development. Finally, Polaris has been looking for ATV manufacturing facilities in Europe, and the alliance could provide that. The alliance could also permit the two companies to shift production in response to currency fluctuations.

Though Victory will announce its new models the weekend of July 24, none of them will have any KTM influence. Polaris has said that any models that the companies produce for each other would have "clear differentiation," as opposed to the minor differences seen in the recently abandoned Kawasaki-Suzuki model-sharing plan. However, KTM motorcycles will be shown to Victory dealers at its meeting, and KTM will be Polaris' recommended brand of off-road motorcycles. KTM dealers are likely to be encouraged to pick up Victory motorcycles and Polaris ATVs.

Harley-Davidson has also been rumored to be interested in acquiring a motorcycle company that would help expand its motorcycle product line to appeal to younger buyers and those that don't purchase Harleys or cruisers. KTM was among the companies mentioned in the rumors, though others, such as Ducati, have also come up.

Polaris posted this comparison of the two brands' histories on its investor website. It also provided the following description of KTM and the release about the alliance at the end of this article.

KTM has been eyeing ATVs, and technology and expertise from Polaris can accelerate its entry into that market.

Who is KTM?

Founded in 1934, KTM - an Austrian-based 400+ million Euro motorcycle company - designs, engineers, manufacturers and markets high-performance off-road and on-road motorcycles and related parts, garments and accessories, as well as exhaust systems, frames, shocks and spoke wheels. As the largest non-Japanese off-road motorcycle company in the world, KTM employs 1,500 people with 1,400 independent dealers and 50 distributors worldwide. Best known for its racing heritage, the company has won 96 world championship titles.

Historical Background

Ernst Kronreif and Hans Trunkenpolz in Mattighofen, Austria, founded KTM in 1934 as a repair workshop, with production of the first KTM-branded motorcycles and mopeds beginning in 1953, and a year later, KTM won its first race. Due to a depressed two-wheel economy and the emergence of the Japanese motorcycle manufacturers in Europe, the company ceased production from 1959 to 1960. When KTM reopened, it began producing motorcycles and bicycles, and by 1968, produced more than 10,000 vehicles, was racing again and began exporting motorcycles and scooters to the United States. In the `70s and `80s, KTM established its own engine production line, expanded its product range, established a wholly owned subsidiary in the United States and won several European and World motorcycle championships.

In 1991, the company filed for bankruptcy, but reopened in 1992 as KTM Sportmotorcycles GmbH under new management, consisting of Stefan Pierer, Rudi Knnz, and Hans-Joerg Hofer. Starting in 1992, the management team embarked on an aggressive growth path, growing the business organically with a clear focus on winning races and developing its "Ready to Race" brand positioning for its production motorcycles. During this period, they acquired Husaberg motorcycles (motocross and hard enduro engines/motorcycle brand), Adventure Tours Inc. (off-road motorcycle touring company), WP suspension (suspension technology supplier) and Trumag Special Machines (aluminum machining company).

Product Offering

KTM offers more than 23 different off-road and on-road motorcycles, ranging in engine size from 50cc to 950cc.

Motocross Segment: Motocross motorcycles are designed for racing on a closed track less than one mile long. Motorcycles in this segment are developed with a rigid chassis and specialty suspensions engineered to support the demands of racing, jumps and other aggressive maneuvers. KTM's models in this category range from 85cc to 525cc.

Enduro Segment: Enduro motorcycles are designed for competition on longer off-road tracks 10 to 50 miles long. These motorcycles are designed to accommodate various terrain and racing conditions. KTM's models in this category range from 125cc to 640cc.

Rally: Rally motorcycles are used for off-road racing that lasts for several days and several thousand miles in extreme terrain. Rally motorcycles combine the high performance characteristics of an enduro bike with extreme durability and reliability. KTM's models in this category range from 640cc to 950cc.

Youth Racing: Designed for competition similar to enduro motorcycles, youth racing bikes are used by riders who compete at the youth level and want to develop their riding skills so they can advance to enduro or motocross racing. These bikes look like adult competition bikes, ranging from 50cc to 65cc.

Naked/Standard/Traditional: Often referred to as "naked bikes," these traditional-style, on-road motorcycles feature minimal bodywork and an upright, comfortable riding position. Many naked bikes feature similar powertrains and chassis to "full-on" sportbikes. KTM's 990 SuperDuke is in this category.

Super Moto: Super Moto or "Super Motard" bikes are street-legal enduro bikes built to compete in super moto racing. (Super Motard is a sport that grew to great popularity in France in the 1990s. This sport combines motocross-style turns and jumps on dirt with road racing-style turns and straights on pavement.) KTM's 450 SMR, 525 SMR and 650 Duke compete in this segment.

Parts, Garments and Accessories: KTM offers a complete line of motorcycle parts, garments and accessories, sold exclusively through its dealer network and marketed via KTM's website and brochures.

KTM Marketing - Racing Racing is the primary marketing tool used by KTM to position the brand as "Ready to Race." Racing is used to build brand awareness, high performance credibility and overall image building. Notably, KTM has won 96 world championship titles, including the prestigious Paris-Dakar Rally, 3 Motocross world championships, the Enduro world championship, the Supermoto world championship and five constructor's world champion titles. In the on-road racing circuit, KTM took the GP 125 World championship and the International German 125cc class title.

KTM Adventure Tours KTM builds customer loyalty and brand awareness by having its top professional riders lead off-road motorcycle tours to locations throughout Europe and the world. KTM has a 40 percent interest in KTM Adventure Tours AG, the largest European off-road motorcycle tour provider.

Geographic Sales & Distribution KTM's distribution strategy is to be dealer direct in all key markets, including 14 European countries in addition to the United States and Canada, and has independent distributors in more than 50 additional countries, including Australia. KTM has approximately 1,400 dealers worldwide of which 400 are in North America. Approximately 75% of KTM's sales revenue is generated in Europe and approximately 20% of the sales revenue is generated in the United States.

R&D and Facilities KTM's philosophy is to develop engines and chassis for racing and then transfer the technology to series production motorcycles. KTM's R&D, assembly, manufacturing and distribution facilities include:

KTM CEO Stefan Pierer is expected to be named to the Polaris Board of Directors after the closing date of the transaction.

With bikes like the Adwentures S, a 950cc 75-degree V-twin, KTM has begun getting serious about street motorcycles. Models built on this sort of engine and with a sporting bent could allow Victory to expand its offerings beyond the cruiser segment, thereby attracting new customers, who might later want cruisers.

The investment in KTM Power Sports AG is expected to be neutral to calendar year 2005 Polaris consolidated earnings per share and somewhat accretive for the full year 2006. There are no changes in employment anticipated at either company as a result of this announcement.

Additionally, Polaris and KTM Power Sports' largest shareholder, Cross Industries AG ("Cross"), have entered into option agreements which, under certain conditions in 2007, either Cross may purchase Polaris' interest in KTM Power Sports AG or, alternatively, Polaris may become the majority shareholder of KTM Power Sports AG. In the latter case, the majority of the purchase price to Cross will be settled in Polaris shares and Cross will become a significant shareholder in the combined Polaris/KTM organization. Cross' principal shareholders are KTM CEO Stefan Pierer and KTM CFO Rudolf Knnz. The exercise price under both option arrangements are based on market-based, predetermined pricing formulas to be derived from operating results of both companies in 2007.

"I believe this partnership will provide substantial benefits to both Polaris and KTM, and both company's dealers, employees, suppliers and shareholders for many years to come," said Tiller. "We have long admired the success of KTM, and are excited about working together to strengthen both companies. Polaris can benefit from KTM's substantial experience in motorcycles, an outstanding brand, leading technology, and a solid manufacturing presence and dealer network in Europe. Moreover, this relationship complements nearly every aspect of Polaris' five-year strategic vision, which is a roadmap to make Polaris the most dominant brand in the powersports industry. Further, we believe the two-step approach we have outlined significantly lessens the cultural and execution risk associated with a partnership of this magnitude."

"In essence, this partnership combines the substantial strength, passion, and success of two industry leaders with very similar, successful 50-year histories, but who do not compete directly today. It is a very natural fit for both of us," added Tiller.

Mr. Pierer commented, "Polaris and KTM complement each other very well, and we are very excited about our new relationship. By joining forces, we believe we can strengthen KTM's presence in North America, reduce our production costs, spread our development costs over a larger base, and substantially accelerate our entry into the ATV business. We also look forward to sharing both chassis and engine technology with Polaris. The KTM and Polaris teams should work well together - both companies are driven by innovation, passion, and demand success." More information may be found at www.polarisindustries.com under the investor relations section.

Conference Call to be Held

Today at 10:00 AM (CDT) Polaris Industries Inc. will host a conference call to discuss the Company's investment and partnership with KTM. The conference call is accessible by dialing 800-374-6475 in the U.S. or 706-634-4982 for Canada and International calls or via the Investor Relations page of the Company's web site, www.polarisindustries.com. If listening to the web cast, please allow sufficient time to register and download the latest version of Real Player audio software. The conference call will be available through Tuesday, July 26, 2005 by dialing 800-642-1687 in the U.S., or 706-645-9291 for Canada and International calls and entering passcode 7895582, and on Polaris' web site.

About Polaris

Information about the complete line of Polaris products, apparel and vehicle accessories is available from authorized Polaris dealers or from the Polaris homepage at www.polarisindustries.com .

With annual 2004 sales of $1.8 billion, Polaris designs, engineers, manufactures and markets snowmobiles, all-terrain vehicles (ATVs), Victory motorcycles and the Polaris RANGER for recreational and utility use.

Polaris is the recognized leader in the snowmobile industry; and one of the largest manufacturers of ATVs in the world. Victory motorcycles, established in 1998 and representing the first all-new American-made motorcycle from a major company in nearly 60 years, are rapidly making impressive in-roads into the motorcycle cruiser marketplace. Polaris also enhances the riding experience with a complete line of Pure Polaris apparel, accessories and parts, available at Polaris dealerships.

Polaris Industries Inc. trades on the New York Stock Exchange and Pacific Stock Exchange under the symbol "PII," and the Company is included in the S&P Small-Cap 600 stock price index.

About KTM

KTM Sportmotorcycle AG, formerly known as Cross Holding AG, designs, engineers, manufacturers and markets off-road and on-road motorcycles and related parts, garments and accessories with annual sales of 402 million Euros in 2004. The product portfolio consists of over 23 different off-road and on-road motorcycles ranging in engine size from 50cc to 950cc.

KTM is best known for it racing heritage. KTM has won 106 World Championship Titles, 10 in 2004 alone. The Company employs approximately 1,500 employees and assembles its engines and motorcycles in Mattighofen, Austria. Additionally, the Company manufactures exhaust systems, frames, shocks and spoke wheels. KTM sells it motorcycles through a network of over 1400 independent dealers and approximately 50 distributors worldwide with Europe being its strongest market. Information about the complete line of KTM products, apparel and vehicle accessories is available from authorized KTM dealers or from the KTM homepage at www.ktm.com.

KTM Power Sports AG, formerly known as Cross Holding AG, is traded on the Vienna stock exchange under the symbol CRO, which is in the process of being changed to the symbol KTM. Additional information on KTM Power Sports AG can be found at www.cross-ag.com ., which is in the process of being changed to www.ktm.com/investor relations.

Except for historical information contained herein, certain matters set forth in this news release are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Potential risks and uncertainties include such factors as product offerings, promotional activities and pricing strategies by competitors; warranty expenses; foreign currency exchange rate fluctuations; benefits from the KTM relationship; environmental and product safety regulatory activity; effects of weather; higher commodity costs; uninsured product liability claims; and overall economic conditions, including inflation and consumer confidence and spending. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the company with the Securities and Exchange Commission.

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