-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LJ5FZtz/1zSE6n7DPa+GDNbnvRW47doMaBzb+fAUx2zSoLq/xS/5M489jEGOXbcC CMF53/Cazjrn0/1BVd4QiA== 0001047469-98-012517.txt : 19980331 0001047469-98-012517.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012517 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEY DAVIDSON INC CENTRAL INDEX KEY: 0000793952 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 391382325 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09183 FILM NUMBER: 98579085 BUSINESS ADDRESS: STREET 1: 3700 W JUNEAU AVE CITY: MILWAUKEE STATE: WI ZIP: 53208 BUSINESS PHONE: 4143424680 10-K405 1 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- --------- Commission file number 1-9183 ------ HARLEY-DAVIDSON, INC. (Exact name of registrant as specified in its charter) WISCONSIN 39-1382325 (State of organization) (I.R.S. Employer Identification No.) 3700 WEST JUNEAU AVENUE, MILWAUKEE, WISCONSIN 53208 (Address of principal executive offices) (Zip code) Registrants telephone number: (414) 342-4680 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of each class on which registered - --------------------------------- ----------------------- COMMON STOCK, $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK 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 and (2) has been subject to such 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 the 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. [X] Aggregate market value of the voting stock held by nonaffiliates of the registrant at March 20, 1998: $4,950,831,304 Number of shares of the registrant's common stock outstanding at March 20, 1998: 151,939,760 shares. Part III of this report incorporates information by reference from registrant's Proxy Statement for the annual meeting of its shareholders to be held on May 2, 1998. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in this Annual Report on Form 10-K are "forward-looking statements" intended to qualify for the safe harbors from liability established by 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 "believes," "anticipates," "expects," "estimates" or words of similar meaning. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. ITEM 1. BUSINESS SUMMARY Harley-Davidson, Inc. was incorporated in 1981, at which time it purchased the Harley-Davidson motorcycle business from AMF Incorporated (currently doing business as Minstar) in a management buyout. In 1986, Harley-Davidson, Inc. became publicly held. Unless the context otherwise requires, all references to the "Company" include Harley-Davidson, Inc., all of its subsidiaries and all of its majority-owned affiliates. The Company operates in two segments: Motorcycles and Related Products and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. The Motorcycles and Related Products ("Motorcycles") segment consists primarily of the Company's wholly-owned subsidiary H-D Michigan, Inc., and its wholly-owned subsidiary, Harley-Davidson Motor Company (the "Motor Company"). In February 1998, the Company acquired substantially all of the common stock of Buell Motorcycle Company ("BMC"), a company in which it held a 49% interest since 1993, in a stock-for-stock transaction, accounted for as a purchase. The Motor Company designs, manufactures and sells primarily heavyweight (engine displacement of 651+cc) touring and custom motorcycles and a broad range of related products which include motorcycle parts and accessories, riding apparel and collectibles. BMC designs, manufactures and sells performance sport and sport-touring motorcycles powered by the Motor Company's 1200cc engines. The Motor Company, which is the only major American motorcycle manufacturer, has held the largest share of the United States heavyweight (651+cc) motorcycle market since 1986. The Motor Company ended 1997 with a domestic market share of approximately 49%. Internationally, the Motor Company ended 1997 with an approximate 6% share of the European heavyweight (651+cc) market and an approximate 17% share of the Asia/Pacific (Japan and Australia) heavyweight (651+cc) market. Buell Distribution Corporation, a wholly-owned subsidiary of the Company, and the exclusive distributor for BMC, sold 4,415, 2,762 and 1,407 units in 1997, 1996 and 1995, respectively. The Financial Services segment consists of the Company's majority-owned subsidiary, Eaglemark Financial Services, Inc. and its subsidiaries ("Eaglemark"). Eaglemark provides motorcycle floor planning and parts and accessories financing to the Company's participating North American dealers. Eaglemark also offers retail financing opportunities to the Company's domestic and Canadian motorcycle customers. Eaglemark provides property and casualty insurance for motorcycles as well as extended service contracts. A smaller portion of its customers are in other leisure products businesses. In addition, Eaglemark entered into a joint venture agreement with Transamerica Distribution Finance Corporation, in January 1998, to provide wholesale financing to dealers supported by the Company's European subsidiaries. 2 In January 1996, the Company announced its strategic decision to dispose of its Transportation Vehicles segment in order to concentrate on its core motorcycle business. During 1996, the Company completed the sale of the Transportation Vehicles segment for an aggregate sales price of approximately $105 million. The results of the Transportation Vehicles segment have been reported separately as discontinued operations. See Note 3 to the 1997 consolidated financial statements for further information. Revenue, operating income (loss) and identifiable assets attributable to each of the Company's segments are as follows (in thousands):
- ----------------------------------------------------------------------------------------------------------- Motorcycles and Related Transportation Financial Products Vehicles(1) Services(2) Corporate ----------- -------------- ----------- --------- 1997 ---- Revenue $1,762,569 $ n/a $ n/a $ n/a Operating income (loss) 265,486 n/a 12,355 (7,838) Identifiable assets as of December 31 856,779 n/a 598,514 143,608 1996 ---- Revenue $1,531,227 $ n/a $ n/a $ n/a Operating income (loss) 228,093 n/a 7,801 (7,448) Identifiable assets as of December 31 770,271 n/a 387,666 142,048 1995 ---- Revenue $1,350,466 $ n/a $ n/a $ n/a Operating income (loss) 184,475 n/a 3,620 (7,299) Identifiable assets as of December 31 595,118 111,556 269,461 24,535 - -----------------------------------------------------------------------------------------------------------
(1) The Transportation Vehicles segment was reported as discontinued operations commencing in 1995. See Note 3 to the 1997 consolidated financial statements for further information. (2) The Financial Services segment's results of operations are included in operating income. See Note 4 to the 1997 consolidated financial statements for further information. 3 Worldwide quarterly revenue and operating income (loss) (in thousands), by segment, and motorcycle shipment information (excluding Buell), are as follows:
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ---------- ---------- ---------- ---------- ------------ 1997 Revenue by segment: Motorcycles and Related Products $427,095 $444,085 $444,222 $447,167 $1,762,569 Financial Services n/a n/a n/a n/a n/a ---------- ---------- ---------- ---------- ------------ $427,095 $444,085 $444,222 $447,167 $1,762,569 Operating income (loss) by segment: Motorcycles and Related Products $ 63,016 $ 72,465 $ 62,750 $ 67,255 $ 265,486 Financial Services 2,219 3,346 3,002 3,788 12,355 Corporate (2,587) (2,021) (1,497) (1,733) (7,838) ---------- ---------- ---------- ---------- ------------ $ 62,648 $ 73,790 $ 64,255 $ 69,310 $ 270,003 Units: Harley-Davidson-Registered Trademark- Motorcycles 32,860 33,965 31,503 33,957 132,285 - ------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ---------- ---------- ---------- ---------- ------------ 1996 Revenue by segment: Motorcycles and Related Products $371,051 $392,804 $385,843 $381,529 $1,531,227 Financial Services n/a n/a n/a n/a n/a ---------- ---------- ---------- ---------- ------------ $371,051 $392,804 $385,843 $381,529 $1,531,227 Operating income (loss) by segment: Motorcycles and Related Products $ 54,771 $ 63,144 $ 50,853 $ 59,325 $ 228,093 Financial Services 1,732 1,990 1,277 2,802 7,801 Corporate (2,477) (2,025) (1,675) (1,271) (7,448) ---------- ---------- ---------- ---------- ------------ $ 54,026 $ 63,109 $ 50,455 $ 60,856 $ 228,446 Units: Harley-Davidson Motorcycles 30,071 30,852 28,013 29,835 118,771 - ----------------------------------------------------------------------------------------------------------------------- 1995 Revenue by segment: Motorcycles and Related Products $294,886 $355,631 $327,096 $372,853 $1,350,466 Financial Services n/a n/a n/a n/a n/a ---------- ---------- ---------- ---------- ------------ $294,886 $355,631 $327,096 $372,853 $1,350,466 Operating income (loss) by segment: Motorcycles and Related Products $ 40,473 $ 53,732 $ 38,421 $ 51,849 $ 184,475 Financial Services 651 1,001 771 1,197 3,620 Corporate (1,867) (1,330) (2,210) (1,892) (7,299) ---------- ---------- ---------- ---------- ------------ $ 39,257 $ 53,403 $ 36,982 $ 51,154 $ 180,796 Units: Harley-Davidson Motorcycles 23,651 28,167 25,012 28,274 105,104 - -----------------------------------------------------------------------------------------------------------------------
4 MOTORCYCLES AND RELATED PRODUCTS The primary business of the Motorcycles segment is to design, produce and sell premium heavyweight motorcycles. The Motor Company's motorcycle products emphasize traditional styling, design simplicity, durability, ease of service and evolutionary change. Studies by the Company indicate that the typical U.S. Harley-Davidson-Registered Trademark- motorcycle owner is a male in his mid-forties, with a household income of approximately $68,000, who purchases a motorcycle for recreational purposes rather than to provide transportation and who is an experienced motorcycle rider. Over two-thirds of the Motor Company's sales are to buyers with at least one year of higher education beyond high school, and 34% of the buyers have college degrees. Approximately 9% of the Motor Company's U.S. retail sales are to female buyers. The heavyweight class of motorcycles is comprised of four types: standard, which emphasizes simplicity and cost; performance, which emphasizes handling and acceleration; touring, which emphasizes comfort and amenities for long-distance travel; and custom, which emphasizes styling and individual owner customization. The Motor Company presently manufactures and sells 20 models of touring and custom heavyweight motorcycles, with suggested domestic retail prices ranging from approximately $5,200 to $19,300. The touring segment of the heavyweight market was pioneered by the Company and includes motorcycles equipped for long-distance touring with fairings, windshields, saddlebags and Tour Paks-Registered Trademark-. The custom segment of the market includes motorcycles featuring the distinctive styling associated with classic Harley-Davidson motorcycles. These motorcycles are highly customized through the use of trim and accessories. The Motor Company's motorcycles are based on variations of four basic chassis designs and are powered by one of three air cooled, twin cylinder engines of "V" configuration which have displacements of 883cc, 1200cc and 1340cc. The Motor Company manufactures its own engines and frames. Although there are some accessory differences between the Motor Company's top-of-the line touring motorcycles and those of its competitors, suggested retail prices are generally comparable. The prices for the high-end of the Motor Company's custom product line range from being competitive to 50% more than its competitors' custom motorcycles. The custom portion of the product line represents the Motor Company's highest unit volumes and continues to command a premium price because of its features, styling and high resale value. The Motor Company's smallest displacement custom motorcycle (the 883cc Sportster-Registered Trademark-) is directly price competitive with comparable motorcycles available in the market. The Motor Company's surveys of retail purchasers indicate that, historically, over three-quarters of the purchasers of its Sportster model have come from competitive-brand motorcycles, are people completely new to the sport of motorcycling or have not participated in the sport for at least five years. Since 1988, the Motor Company's research has consistently shown a repurchase intent in excess of 92% on the part of purchasers of Harley-Davidson motorcycles, and the Motor Company expects to see sales of its 883cc Sportster model partially translated into sales of its higher-priced products in the normal two to three year ownership cycle. The Motor Company's worldwide motorcycle sales generated 78.5%, 78.3% and 76.9% of revenues in the Motorcycles segment during 1997, 1996 and 1995, respectively. The major product categories for the Parts and Accessories (P&A) business are replacement parts (Genuine Motor Parts-TM-) and mechanical accessories (Genuine Motor Accessories-TM-). Worldwide net P&A sales comprised 13.7%, 13.7% and 14.2% of net sales in the Motorcycles segment in 1997, 1996 and 1995, respectively. Worldwide P&A net sales have grown 49.3% over the last three years (since 1994). 5 Worldwide net sales of the General Merchandise business, which includes MotorClothes-Registered Trademark- apparel and collectibles, comprised 5.4%, 5.9% and 7.4% of net sales in the Motorcycles segment in 1997, 1996 and 1995, respectively. The Motor Company also provides a variety of services to its dealers and retail customers including service training schools, customized software packages for dealers, delivery of its motorcycles, membership in an owners club and a Fly and Ride-TM- program through which a member can rent a motorcycle through a dealer at a vacation destination. LICENSING. In recent years, the Company has endeavored to create an awareness of the Harley-Davidson brand among the non-riding public and provide a wide range of product for enthusiasts by licensing the name "Harley-Davidson" and numerous related trademarks owned by the Company. The Company currently has licensed the production and sale of a broad range of consumer items, including t-shirts, jewelry, small leather goods, toys and numerous other products. In 1993, the licensed Harley-Davidson Cafe opened in Manhattan, New York. In 1995, the Company entered into an agreement to license three additional restaurants with the New York Cafe's owners. Under this agreement, a new Cafe in Las Vegas, Nevada was opened in September 1997. Although the majority of licensing activity occurs in the U.S., the Company continues to expand into international markets. The Company's licensing activity provides it with a valuable source of advertising and goodwill. Licensing also has proven to be an effective means for enhancing the Company's image with consumers and provides an important tool for policing the unauthorized use of the Company's trademarks, thereby protecting the Harley-Davidson brand and its use. Royalty revenues from licensing, included in motorcycle revenue, were approximately $24 million, $19 million and $24 million during 1997, 1996 and 1995, respectively. While royalty revenues from licensing activities are relatively small, the profitability of this business is relatively high. MARKETING AND DISTRIBUTION. The Company's basic channel of United States distribution for its motorcycles and related products consists of approximately 600 independently owned full-service dealerships to whom the Company sells direct. With respect to sales of new motorcycles, approximately 77% of the U.S. dealerships sell the Company's motorcycles exclusively. All dealerships carry the Company's genuine replacement parts and aftermarket accessories and perform servicing of the Company's motorcycle products. The Company's marketing efforts are divided among dealer promotions, customer events, magazine and direct mail advertising, public relations, and cooperative programs with Harley-Davidson dealers. The Company also sponsors racing activities and special promotional events and participates in all major motorcycle consumer shows and rallies. In an effort to encourage Harley-Davidson owners to become more actively involved in the sport of motorcycling, the Motor Company formed a riders club in 1983. The Harley Owners Group-Registered Trademark-, or "HOG-Registered Trademark-", currently has approximately 380,000 members worldwide and is the industry's largest company-sponsored motorcycle enthusiast organization. The Motor Company's expenditures on domestic marketing, selling and advertising were approximately $85.2 million, $75.4 million and $71.5 million during 1997, 1996 and 1995, respectively. RETAIL CUSTOMER AND DEALER FINANCING. The Company believes Eaglemark and other financial services companies provide adequate retail and wholesale financing to the Motor Company's domestic and Canadian dealers and customers. In addition, to encourage its dealers to carry sufficient parts and accessories inventories and to counteract the seasonality of the parts and accessories business, the Motor Company from time to time offers its domestic dealers quarterly special discounts and/or 120 6 day delayed payment terms through Eaglemark. Eaglemark also began to provide wholesale financing to dealers supported by the Company's European subsidiaries through a joint venture agreement with Transamerica Distribution Finance Corporation. Previously the Company offered extended winter terms to certain European customers. INTERNATIONAL SALES. International sales were approximately $458 million, $421 million and $401 million, accounting for approximately 26%, 27% and 30% of net sales of the Motorcycles segment, during 1997, 1996 and 1995, respectively. The international heavyweight (651+cc) market is growing and is significantly larger than the U.S. heavyweight market. The Motor Company ended 1997 with an approximate 6% share of the European heavyweight (651+cc) market and an approximate 17% share of the Asia/Pacific (Japan and Australia) heavyweight (651+cc) market. See Note 13 to the consolidated financial statements for additional information regarding foreign operations. In total, the Motor Company is represented internationally by 577 independent dealers in 55 countries. Japan, Germany, and Canada, in that order, represent the Company's largest export markets and account for approximately 51% of export sales. In the European Region (Europe/Middle East/Africa), there are currently 305 independent dealers serving 30 country markets. This network of dealers is served by nine independent distributors and four wholly-owned subsidiaries in France, Germany, The Netherlands and the United Kingdom. The Company has continued to build infrastructure in Europe, following the establishment of its United Kingdom based European Headquarters in 1995. New information systems, linking all the European subsidiary markets, were successfully installed and began operating in early 1997. The European management team is continuing to build and develop distributor, dealer and customer relationships. The Company's focus is to expand and improve the distribution network, tailor product development to market needs and attract new customers through coordinated Europe-wide and local marketing programs. In the Asia/Pacific Region, there are currently 179 independent dealers serving 8 country markets. During 1996, the Company began to implement a strategic plan for the Asia/Pacific Region, which outlined growth objectives and strategies for achieving them. While the economic crisis in Southeast Asia has currently curtailed the Company's plans to open new markets in Southeast Asia, short-term growth will continue to come from existing markets in Japan and Australia. Long-term growth opportunities are expected to come from existing markets in Japan, Australia and Southeast Asia and new markets in the region. The Americas markets include Canada and a separate Latin American distribution network. The Latin American market consists of 16 country markets managed from Milwaukee. The Latin American market has a diverse dealer network including 17 full line dealers, as well as 7 resort and mall stores focusing on selling General Merchandise. During 1997, the Company's distribution network was expanded in Mexico and Argentina. In the future, the focus will be on improving distribution and volumes within the two largest Latin American markets, Mexico and Brazil. The emphasis will be to expand further advertising and promotion, and investigation of regional sourcing of General Merchandise to extend the customer reach of our branded products in the region. In Canada, there are currently 76 full-line dealerships served by a single independent distributor. COMPETITION. The U.S. and international heavyweight (651+cc) motorcycle markets are highly competitive. The Company's major competitors generally have financial and marketing resources which are substantially greater than those of the Company. The Company's principal competitors 7 have larger overall sales volumes and are more diversified than the Company. The Company believes the heavyweight motorcycle market is the most profitable segment of the U.S. motorcycle market. During 1997, the heavyweight segment represented approximately 54% of the total U.S. motorcycle market (on- and off-highway motorcycles and scooters) in terms of new units registered. Domestically, the Motor Company competes in the touring and custom segments of the heavyweight motorcycle market, which together accounted for 80%, 80% and 78% of total heavyweight retail unit sales in the U.S. during 1997, 1996 and 1995, respectively. The custom and touring motorcycles are generally the most expensive and most profitable vehicles in the market. For the last 10 years, the Motor Company has led the industry in domestic (United States) sales of heavyweight motorcycles. The Motor Company's share of the heavyweight market was 49.1% in 1997; up from 48.2% in 1996. This is significantly greater than the Company's largest competitor domestically, which had an 18.5% market share at the end of 1997. Market share of U.S. Heavyweight Motorcycles* (Engine Displacement of 651+cc)
- ------------------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ New U.S. Registrations (thousands of units): Total new registrations 190.2 165.7 151.2 140.8 123.8 Harley-Davidson new registrations 93.5 79.9 72.1 65.2 59.3 Percentage Market Share: Harley-Davidson 49.1% 48.2% 47.7% 46.3% 47.9% Buell 1.0 1.0 0.5 0.1 0.0 Honda 18.5 18.8 20.2 22.5 20.1 Suzuki 10.1 8.7 9.6 10.6 12.1 Kawasaki 10.4 12.2 10.6 9.8 9.7 Yamaha 5.4 5.9 5.8 5.6 5.8 Other 5.5 5.2 5.6 5.1 4.4 ------ ------ ------ ------ ------ Total 100.0% 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ - -------------------------------------------------------------------------------------------------------
* Information in this report regarding motorcycle registrations and market shares has been derived from data published by R.L. Polk & Co. for the years 1993-1996. Data for 1997 was obtained from data published by the Motorcycle Industry Council. 8 On a worldwide basis, the Motor Company measures its market share using the heavyweight classification. Although definitive market share information does not exist for many of the smaller foreign markets, the Motor Company estimates its worldwide competitive position, using data reasonably available to the Motor Company, to be as follows:
- ------------------------------------------------------------------------------------------- Worldwide Heavyweight Motorcycle Registration Data (Engine Displacement of 651+cc) (Units in Thousands) 1997 1996 1995 ------- ------- -------- North America(1): Total registrations 205.4 178.5 163.1 Harley-Davidson registrations 99.3 85.1 77.0 Harley-Davidson market share percentage 48.3% 47.6% 47.2% Europe(2): Total registrations 250.3 224.7 207.2 Harley-Davidson registrations 15.3 15.3 15.4 Harley-Davidson market share percentage 6.1% 6.9% 7.4% Japan/Australia(3): Total registrations 58.9 37.4 39.4 Harley-Davidson registrations 9.7 8.2 7.9 Harley-Davidson market share percentage 16.5% 21.9% 20.1% Total Total registrations 514.6 440.6 409.7 Harley-Davidson registrations 124.3 108.6 100.3 Harley-Davidson market share percentage 24.1% 24.7% 24.5% (1) Includes the United States and Canada (2) Includes Austria, Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland and United Kingdom. (Data provided by Giral S.A.) (3) Data provided by JAMA and ABS. - -------------------------------------------------------------------------------------------
Competition in the heavyweight motorcycle market is based upon a number of factors, including price, quality, reliability, styling, product features, customer preference and warranties. The Motor Company emphasizes quality, reliability and styling in its products and offers warranties for its motorcycles. The Motor Company regards its support of a motorcycling lifestyle in the form of events, rides, rallies and HOG as a competitive advantage. In general, resale prices for used Harley-Davidson motorcycles, as a percentage of prices when new, are significantly higher than resale prices for used motorcycles of the Company's competitors. Domestic heavyweight registrations increased 15% and 10% during 1997 and 1996, respectively. The Company believes its ability to maintain its current market share will depend primarily on its ability to increase its annual production capacity as discussed below. MOTORCYCLE MANUFACTURING. In an effort to further control costs and maintain quality, the Motor Company has incorporated manufacturing techniques to continuously improve its operations. These techniques, which include employee involvement, just-in-time inventory principles, partnering agreements with the local unions, high performance work organizations and statistical process control, have significantly improved quality, productivity and asset utilization. 9 The Motor Company's use of just-in-time inventory principles allows it to minimize its inventories of raw materials and work in process, as well as scrap and rework costs. This system also allows quicker reaction to engineering design changes, quality improvements and market demands. The Motor Company has trained the majority of its manufacturing employees in problem solving and statistical methods. For the past two years, the Motor Company has been implementing a comprehensive motorcycle manufacturing strategy designed to, among other things, significantly increase its motorcycle production capacity. "Plan 2003" calls for the enhancement of the Motor Company's ability to increase capacity, increase flexibility to adjust to changes in the market place, improve product quality and reduce costs. The strategy calls for the achievement of the increased capacity at the existing facilities combined with some new additions. The transition into a new engine plant in Milwaukee and the construction of a new assembly plant in Kansas City, Missouri were both completed in 1997. The Motor Company believes the worldwide heavyweight (651+cc) market will continue to grow and plans to continue to increase its motorcycle production capacity to be able to sustain its annual double-digit unit growth. For 1998, the Motor Company's production target is 147,000 units, subject to the risks and uncertainties discussed with respect to this topic under Item 7 below. In 1997, the Motor Company and Dr. Ing. h.c. Porsche AG of Stuttgart, Germany formed a joint venture to source and assemble powertrain components for use in potential new motorcycle products. The joint venture plans to operate out of one of the Motor Company's U.S. manufacturing facilities. RAW MATERIAL AND PURCHASED COMPONENTS. The Motor Company is proceeding aggressively to establish with its suppliers long-term mutually beneficial relationships. Through these relationships the Motor Company is gaining access to technical and commercial resources for application directly to product design, development and manufacturing initiatives. This strategy is resulting in improved product technical integrity, application of new features and innovations, reduced lead times for product development, and smoother/faster manufacturing ramp-up of new vehicle introductions. The Motor Company purchases all of its raw material, principally steel and aluminum castings, forgings, sheets and bars, and certain motorcycle components, including carburetors, batteries, tires, seats, electrical components and instruments. The Motor Company anticipates no significant difficulties in obtaining raw materials or components for which it relies upon a limited source of supply. RESEARCH AND DEVELOPMENT. The Motor Company believes research and development are significant factors in the Motor Company's ability to lead the market definition of touring and custom motorcycling. As a result, the Motor Company completed construction of a new 213,000 square foot Product Development Center (PDC) in 1996. The PDC brings together employees from styling, purchasing and manufacturing with regulatory professionals and supplier representatives to create a concurrent product and process development methodology. The Motor Company incurred research and development expenses of approximately $53.3 million, $37.7 million and $27.2 million during 1997, 1996 and 1995, respectively. PATENTS AND TRADEMARKS. The Company owns certain patents which relate to its motorcycles and related products and processes for their production. The Company has increased its efforts to patent its technology and to enforce those patents. The Company sees such actions as important as it moves forward with new technologies. The Company's goal is to make all of its intellectual property assets work together to achieve the greatest effect. 10 Trademarks are important to the Company's motorcycle business and licensing activities. The Company has a vigorous global program of trademark registration and enforcement to strengthen the value of the trademarks associated with its products, prevent the unauthorized use of those trademarks and enhance its image and customer goodwill. The Company believes the "Harley-Davidson-Registered Trademark-" trademark is highly recognizable by the general public and a very valuable asset. The Bar and Shield Design trademark is also highly recognizable by the general public. Additionally, the Company uses numerous trademarks, trade names and logos, which are registered both in the United States and abroad. The "Harley-Davidson" trademark has been used since 1903 and the Bar and Shield trademark since 1907. SEASONALITY. The Company, in general, has not experienced significant seasonal fluctuations in motorcycle production. This has primarily been the result of a strong demand for the Motor Company's motorcycles and related products, as well as the availability of floor plan financing arrangements for its North American independent dealers. Floor plan financing allows dealers to build their inventory levels in anticipation of the spring and summer selling seasons. Beginning in 1998, floorplanning for dealers supported by the Company's European subsidiaries became available. REGULATION. Both federal and state authorities have various environmental control requirements relating to air, water and noise pollution which affect the business and operations of the Company. The Company endeavors to ensure that its facilities and products comply with all applicable environmental regulations and standards. European Union Certification procedures ensure that the Company's motorcycles comply with the lower European Union noise standards (80dba). At the beginning of the next decade there may be a further reduction of European Union noise standards. Accordingly, the Company expects that it will continue to incur some level of research and development costs related to this matter over the next several years. The Company's motorcycles are subject to certification by the U.S. Environmental Protection Agency (EPA) for compliance with applicable emissions and noise standards and by the State of California Air Resources Board (ARB) with respect to the ARB's more stringent emissions standards. The Company's motorcycles are subjected to the additional ARB tailpipe and evaporative emissions standards that require the Company to build unique vehicles for sale exclusively in California. The Company's motorcycle products have been certified to comply fully with all such applicable standards. The Company anticipates there will be further reductions in the ARB's, and potentially in the EPA's, motorcycle emissions standards in the coming years. Accordingly, the Company expects to incur some level of research and development costs related to this matter over the next several years. The Company, as a manufacturer of motorcycle products, is subject to the National Traffic and Motor Vehicle Safety Act (Safety Act), which is administered by the National Highway Traffic Safety Administration (NHTSA). The Company has acknowledged to NHTSA that its motorcycle products comply fully with all applicable federal motor vehicle safety standards and related regulations. In accordance with NHTSA policies, the Motor Company has from time to time initiated certain voluntary recalls. During the last three years, the Motor Company has initiated 5 voluntary recalls at a total cost of approximately $3.7 million. The Company fully reserves for all estimated costs associated with recalls in the period that they are announced. 11 Federal, state, and local authorities have adopted various control standards relating to air, water, and noise pollution which affect the business and operations of the Motorcycles segment. Management does not anticipate that any of these standards will have a materially adverse impact on its capital expenditures, earnings, or competitive position. EMPLOYEES. As of December 31, 1997, the Motorcycles segment had approximately 5,700 employees. Production workers at the motorcycle manufacturing facilities in Wauwatosa, Menomonee Falls, and Tomahawk, Wisconsin and Kansas City, Missouri are represented principally by the United Paperworkers International Union (UPIU) of the AFL-CIO, as well as the International Association of Machinist and Aerospace Workers (IAM). Production workers at the motorcycle manufacturing facility in York, Pennsylvania, are represented principally by the IAM. The collective bargaining agreement with the Wisconsin-UPIU and IAM will expire on March 31, 2001, the collective bargaining agreement with the Kansas City-UPIU and IAM will expire on December 31, 2003 and the collective bargaining agreement with the Pennsylvania-IAM will expire on February 2, 2002. FINANCIAL SERVICES Eaglemark provides financial services programs to leisure product manufacturers, their dealers and customers in the United States and Canada. The Company acquired a 49% interest in Eaglemark in 1993 and acquired substantially all of the remaining shares in 1995. Eaglemark commenced doing business in 1993 with the purchase of the Harley-Davidson wholesale financing portfolio from ITT Commercial Finance Corporation. In January 1998, Eaglemark entered the European market through a joint venture agreement with Transamerica Distribution Finance Corporation, to provide wholesale financing to dealers supported by the Company's European subsidiaries. HARLEY-DAVIDSON. Eaglemark's provides both wholesale and retail financial services to Harley-Davidson dealers and customers and operates under the trade names Harley-Davidson Credit and Harley-Davidson Insurance. Wholesale financial services include floorplan and open account financing of motorcycles, trade acceptance financing of motorcycle parts and accessories, computer loans, showroom remodeling loans and the brokerage of a range of commercial insurance products, including property and casualty, general liability and special events insurance policies. Eaglemark's wholesale financial services are offered to all Harley-Davidson dealers in the United States and Canada and during 1997 were utilized one or more times by approximately 95% of such dealers. Eaglemark's wholesale finance operations are located in Plano, Texas. Retail financial services include installment lending for new and used Harley-Davidson motorcycles, the Harley-Davidson Chrome-Registered Trademark-VISA-Registered Trademark- Card, the brokerage of a range of motorcycle insurance products, including liability, casualty, and credit life and disability insurance policies, and extended service agreements. Eaglemark acts only as an insurance agent and does not assume any underwriting risk with regard to the various insurance policies and extended service agreements that it sells. Eaglemark's retail financial services are available through virtually all Harley-Davidson dealers in the United States and Canada. Eaglemark's retail finance operations are located in Carson City, Nevada. OTHER MANUFACTURERS. Eaglemark also provides wholesale and retail financial services through manufacturer participation programs to certain aircraft, marine and recreational vehicle dealers and customers. These programs are similar to the Harley-Davidson program described above. FUNDING. Eaglemark's growth has been funded through a combination of capital contributions from the Company, unsecured commercial paper borrowings, revolving credit facilities borrowings, senior 12 subordinated notes borrowing and the securitization of its retail installment loans. Future growth is expected to be financed by using similar sources as well as internally generated funds. COMPETITION. Eaglemark believes that its ability to offer a package of wholesale and retail financial services utilizing the name of the manufacturer provides a significant competitive advantage over its competitors. Its competitors compete for business based largely on price and, to a lesser extent, service. Eaglemark competes based on convenience, service and, to a lesser extent, price. The only significant national retail financing competitor for Harley-Davidson motorcycle installment loans is Greentree Financial. During 1997, Eaglemark financed 19% of new Harley-Davidson motorcycles retailed in the U.S., up from 17% in 1996. In contrast, competition to provide retail financial services to aircraft, recreational vehicle and watercraft dealers is substantial, with many competitors being much larger than Eaglemark. These competitors include The CIT Group, Nations Credit, BankOne and Key Bank USA. Credit unions, banks, other financial institutions and insurance agencies also compete for retail financial services business in their local markets. Eaglemark faces little national competition for the Harley-Davidson wholesale finance business. Competitors are primarily banks and other financial institutions who provide wholesale financing to Harley-Davidson dealers in their local markets. In contrast, competition to provide wholesale financial services to aircraft, recreational vehicle and watercraft dealers is substantial, with many competitors being much larger than Eaglemark. These competitors include Deutsche Financial, Nations Credit, Bombardier and Transamerica. They typically offer manufacturer sponsored programs similar to Eaglemark's programs. PATENTS AND TRADEMARKS. Eaglemark has registered trademarks for the name "Eaglemark" and the Eaglemark logo. All the other trademarks or trade names used by Eaglemark, such as Harley-Davidson Credit, are licensed from the manufacturer. SEASONALITY. The leisure products for which Eaglemark currently provides financial services are primarily used only during the warmer months of the year in the northern United States and Canada, generally March through August. As a result, the business experiences significant seasonal variations. From September until mid-March dealer inventories build and turn more slowly, increasing wholesale financing volume substantially. During this same time there is a corresponding decrease in the retail financing volume. Customers typically do not buy motorcycles, watercraft and recreational vehicles until they can use them. From about mid-March through August retail financing volume increases and wholesale financing volume decreases. EMPLOYEES. As of December 31, 1997, the Financial Services segment had approximately 360 employees. None of Eaglemark's personnel are represented by labor unions. 13 ITEM 2. PROPERTIES The following is a summary of the principal properties of the Company as of March 20, 1998. MOTORCYCLES AND RELATED PRODUCTS SEGMENT
Type of Facility Location Square Feet Status - ---------------- -------- ----------- ------ Office and Warehouse Milwaukee, WI 512,100 Owned Product Development Center Wauwatosa, WI 213,000 Owned Manufacturing Wauwatosa, WI 443,000 Owned Manufacturing Menomonee Falls, WI 448,000 Owned Manufacturing Tomahawk, WI 112,250 Owned Manufacturing York, PA 1,033,060 Owned Manufacturing Kansas City, MO 330,000 Owned Manufacturing East Troy, WI 40,000 Lease expiring 1999 Distribution Center York, PA 84,000 Lease expiring 2004 Distribution Center Franklin, WI 250,000 Owned Motorcycle Testing Talladega, AL 23,500 Leases expiring 1998-1999 Office Kansas City, MO 23,600 Lease expiring 1998 Office Mukwanago, WI 4,800 Lease expiring 1998 Office Ann Arbor, MI 2,300 Lease expiring 1999 Office and Warehouse East Troy, WI 8,044 Leases expiring 1998 Office and Service Area Morfelden-Walldorf, 25,840 Lease expiring Germany 2001 Office Tokyo, Japan 13,048 Lease expiring 1999 Warehouse Yokohama, Japan 10,652 Lease expiring 1999 Office Brackley, England 2,845 Lease expiring 2005 Warehouse Brackley, England 1,122 Lease expiring 2005 Office Windsor, England 10,147 Lease expiring 2006 Office Liederdorp, The Netherlands 8,400 Lease expiring 2001 Office Paris, France 5,650 Lease expiring 2005
The Motor Company has five facilities that perform manufacturing operations: Wauwatosa and Menomonee Falls, Wisconsin, suburbs of Milwaukee (motorcycle powertrain production); Tomahawk, Wisconsin (fiberglass parts production and painting); York, Pennsylvania (motorcycle parts fabrication, painting and assembly). The construction of a new 330,000 square foot 14 manufacturing facility in Kansas City, Missouri was completed in 1997 and is expected to be producing all Sportster motorcycles by the end of the second quarter of 1998. In addition, as a result of the February acquisition of the remaining interest in BMC, the Company has a manufacturing facility in East Troy, Wisconsin dedicated to the production of Buell-Registered Trademark- motorcycles. Expansion has also taken place at the Company's powertrain operations in the Milwaukee area, its motorcycle assembly operations in York, Pennsylvania, and its fiberglass products plant in Tomahawk, Wisconsin to enable the Company to achieve its long-term goal of increased motorcycle production capacity, subject to the risks and uncertainties discussed with respect to this topic under Item 7 below. FINANCIAL SERVICES SEGMENT
Type of Facility Location Square Feet Status - ---------------- -------- ----------- ------ Office Chicago, IL 17,004 Lease expiring 2007 Office Carson City, Nevada 50,367 Lease expiring 2001 Office Plano,TX 15,788 Lease expiring 2007
The Financial Services segment has three office facilities: Chicago, Illinois (corporate headquarters); Carson City, Nevada (retail and insurance operations); and Plano, Texas (wholesale operations). ITEM 3. LEGAL PROCEEDINGS The Company is involved with government agencies in various environmental matters, including a matter involving soil and groundwater contamination at its York, Pennsylvania facility (the Facility). The Facility was formerly used by the U.S. Navy and AMF (the predecessor corporation of Minstar). The Company purchased the facility from AMF in 1981. Although the Company is not certain as to the extent of the environmental contamination at the Facility, it is working with the Pennsylvania Department of Environmental Resources in undertaking certain investigation and remediation activities. In March 1995, the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with investigation and remediation activities at the Facility (response costs). The trust will administer the payment of the future response costs at the Facility as covered by the Agreement. In addition, in March 1991 the Company entered into a settlement agreement with Minstar related to certain indemnification obligations assumed by Minstar in connection with the Company's purchase of the Facility. Pursuant to this settlement, Minstar is obligated to reimburse the Company for a portion of its response costs at the Facility. Although substantial uncertainty exists concerning the nature and scope of the environmental remediation that will ultimately be required at the Facility, based on preliminary information currently available to the Company and taking into account the Company's settlement agreement with the Navy and the settlement agreement with Minstar, the Company estimates that it will incur approximately $6 million of net additional response costs at the Facility. The Company has established reserves for this amount. The Company's estimate of additional response costs is based on reports of environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities, Response costs are expected to be incurred over a period of approximately 10 years. 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders of the Company in the fourth quarter of 1997. Executive officers of the registrant The following sets forth, as of March 20, 1998, the name, age and business experience for the last five years of each of the executive officers of Harley- Davidson, Inc. Executive Officers
NAME AGE Jeffrey L. Bleustein 58 President and Chief Executive Officer James M. Brostowitz 46 Vice President, Controller and Treasurer C. William Gray 56 Vice President, Human Resources Ronald M. Hutchinson 51 Vice President, Parts, Accessories and Customer Service-Motor Company Gail A. Lione 48 Vice President, General Counsel and Secretary James A. McCaslin 49 Vice President, Continuous Improvement- Motor Company David J. Storm 53 Vice President, Planning and Information Services-Motor Company Richard F. Teerlink 61 Chairman of the Board Earl K. Werner 52 Vice President, Engineering- Motor Company Jerry G. Wilke 46 Vice President-Motor Company President and Chief Operating Officer- Buell Motorcycle Company James L. Ziemer 48 Vice President, Chief Financial Officer
16 All of these individuals have been employed by the Company in an executive officer capacity for more than five years, except Ronald A. Hutchinson, Gail A. Lione, James A. McCaslin, David J. Storm, Earl K. Werner and Jerry G. Wilke. Mr. Hutchinson has been Vice President, Parts, Accessories and Customer Service, Motor Company since May 1996. He served as Vice President, Customer Service and Parts, Motor Company from 1993 to 1996. Prior to that he served as Vice President, Customer Service, Motor Company. Ms. Lione has been Vice President, General Counsel and Secretary since joining the Company in November 1997. Prior to that time she served as General Counsel and Secretary for U.S. News & World Report, General Counsel and Secretary of The Atlantic Monthly Company and Applied Printing Technologies L.P. and General Counsel and Assistant Secretary of Applied Graphics Technologies, Inc. Mr. McCaslin has been Vice President, Continuous Improvement, Motor Company since October 1997. From 1994 to October 1997 he served as Vice President and General Manager, York Operations, Motor Company and from 1992 to 1994 he served as General Manager, York Operations, Motor Company. Mr. Storm has served in his current position as Vice President, Planning and Information Services, Motor Company since 1996. Prior to that he served as Vice President, Planning, Logistics and Information Systems, Motor Company from 1994 and as Director, Operations Strategy and Systems, Motor Company from 1992 to 1994. Mr. Werner has been Vice President, Engineering, Motor Company since 1995. Prior to that he was Director, Engineering, Motor Company from 1993 to 1995. Mr. Wilke has been a Vice President of the Motor Company and President and Chief Operating Officer of BMC since July, 1997. From 1995 to July, 1997 he was Vice President, Marketing and Sales, the Americas, Motor Company; from 1994 to 1995 he was Vice President, Market Development/Sales, the Americas, Motor Company; and from 1992 to 1994 he was Vice President, Motorcycle/P&A Marketing, Motor Company. 17 PART II ITEM 5. MARKET FOR HARLEY-DAVIDSON, INC. COMMON STOCK AND RELATED SHAREHOLDER MATTERS Harley-Davidson, Inc. common stock is traded on the New York Stock Exchange. The high and low market prices for the common stock, reported as New York Stock Exchange Composite Transactions, were as follows:
1997 Low High ---- --- ---- First quarter $16-7/8 $23-3/16 Second quarter 16-11/16 24-23/32 Third quarter 23-1/2 29-7/8 Fourth quarter 23-3/16 31-1/4 1996 Low High ---- --- ---- First quarter $13-3/16 $19-9/16 Second quarter 18-7/8 24-3/4 Third quarter 18-9/16 22-9/16 Fourth quarter 20-5/8 23-1/2
The Company paid the following dividends per share:
1997 1996 1995 ---- ---- ---- First quarter $.030 $.025 $.020 Second quarter .035 .025 .020 Third quarter .035 .030 .025 Fourth quarter .035 .030 .025
Share and per share data have been adjusted to reflect the two-for-one stock split during September 1997. The Company has authorization from the Board of Directors to repurchase up to 4,700,000 shares of its common stock. In addition, the Company has continuing authorization from its Board of Directors to repurchase shares of the Company's common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (1) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (2) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock splits. As of March 20, 1998, there were approximately 52,578 shareholders of record of Harley-Davidson, Inc. common stock. 18 Item 6. Selected financial data - ---------------------------------
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands, except per share amounts) Income statement data: Net sales $1,762,569 $1,531,227 $1,350,466 $1,158,887 $933,262 Cost of goods sold 1,176,352 1,041,133 939,067 800,548 641,248 ------------ ------------- ----------- ----------- ---------- Gross profit 586,217 490,094 411,399 358,339 292,014 Operating income from financial services(1) 12,355 7,801 3,620 - - Selling, administrative and engineering (328,569) (269,449) (234,223) (204,777) (162,675) ------------ ------------ ----------- ----------- ---------- Income from operations 270,003 228,446 180,796 153,562 129,339 Interest income, net 7,871 3,309 96 1,682 994 Other income (expense), net (1,572) (4,133) (4,903) 1,196 (3,249) ------------ ------------ ----------- ----------- ---------- Income from continuing operations before provision for income taxes and accounting changes 276,302 227,622 175,989 156,440 127,084 Provision for income taxes 102,232 84,213 64,939 60,219 50,765 ------------ ------------ ----------- ----------- ---------- Income from continuing operations before accounting changes 174,070 143,409 111,050 96,221 76,319 Income (loss) from discontinued operations, net of tax(2) - 22,619 1,430 8,051 (57,904) ------------ ------------ ----------- ----------- ---------- Income before accounting changes 174,070 166,028 112,480 104,272 18,415 Cumulative effect of accounting changes, net of tax(3) - - - - (30,300) ------------ ------------ ----------- ----------- ---------- Net income (loss) $ 174,070 $ 166,028 $ 112,480 $ 104,272 $ (11,885) ------------ ------------ ----------- ----------- ---------- ------------ ------------ ----------- ----------- ---------- Weighted average common shares: Basic 151,650 150,683 149,972 150,440 149,048 ------------ ------------ ----------- ----------- ---------- ------------ ------------ ----------- ----------- ---------- Diluted 153,948 152,925 151,900 153,365 152,004 ------------ ------------ ----------- ----------- ---------- ------------ ------------ ----------- ----------- ---------- Earnings per common share from continuing operations: Basic $1.15 $.95 $.74 $.64 $.51 ----- ---- ---- ---- ---- ----- ---- ---- ---- ---- Diluted $1.13 $.94 $.73 $.63 $.50 ----- ---- ---- ---- ---- ----- ---- ---- ---- ---- Dividends paid $.135 $.11 $.09 $.07 $.03 ----- ---- ---- ---- ---- ----- ---- ---- ---- ---- Balance sheet data: Working capital $ 342,333 $ 362,031 $ 288,783 $189,358 $142,996 Current finance receivables, net(1) 293,329 183,808 169,615 - - Long-term finance receivables, net(1) 249,346 154,264 43,829 - - Total assets 1,598,901 1,299,985 980,670 676,663 527,958 Short-term debt, including current maturities of long-term debt - 2,580 2,691 1,431 4,190 Long-term debt, less current maturities 20,934 25,122 18,207 9,021 2,919 Short-term finance debt(1) 90,638 8,065 - - - Long-term finance debt(1) 280,000 250,000 164,330 - - ---------- ---------- ---------- -------- ------- Total debt 391,572 285,767 185,228 10,452 7,109 Shareholders' equity 826,668 662,720 494,569 433,232 324,912
Share and per share data have been adjusted to reflect the two-for-one stock split during September 1997. (1)Due to the acquisition of Eaglemark Financial Services, Inc. in 1995. (2)1993 includes a $57.0 million charge related primarily to the write-off of goodwill at Holiday Rambler. (3)During 1993, the Company adopted accounting standards related to postretirement health care benefits and income taxes. 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1997 COMPARED TO 1996 OVERALL Net sales for 1997 of $1,762.6 million were $231.4 million, or 15.1%, higher than net sales for 1996. Net income and diluted earnings per share from continuing operations were $174.1 million and $1.13, respectively, for 1997 as compared with $143.4 million and $.94, respectively, for 1996. The gain on disposition and diluted earnings per share from discontinued operations were $22.6 million and $.15, respectively, for 1996. The Company increased its quarterly dividend payment in June 1997 from $.03 per share to $.035 per share which resulted in a total year payout of $.135 per share. RESULTS OF OPERATIONS
MOTORCYCLE UNIT SHIPMENTS AND NET SALES 1997 1996 Increase %Change - ------------------------------------------------------------------------------------------------------------- Motorcycle units (excluding Buell) 132,285 118,771 13,514 11.4% - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- Net sales (in millions): - ------------------------------------------------------------------------------------------------------------- Motorcycles (excluding Buell) $1,382.8 $1,199.2 $183.6 15.3% - ------------------------------------------------------------------------------------------------------------- Motorcycle Parts and Accessories 241.9 211.2 30.7 14.5 - ------------------------------------------------------------------------------------------------------------- General Merchandise 95.1 90.7 4.4 4.8 - ------------------------------------------------------------------------------------------------------------- Other 42.8 30.1 12.7 42.2 - ------------------------------------------------------------------------------------------------------------- Total Motorcycles and Related Products $1,762.6 $1,531.2 $231.4 15.1% - ------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------
The Motorcycles and Related Products (Motorcycles) segment's net sales increased 15.1% over 1996 primarily due to a 13,514 unit (11.4%) increase in traditional (excluding Buell) motorcycle shipments. The increase in motorcycle shipments is the result of improved productivity and investment in additional capacity from the ongoing implementation of the Company's manufacturing strategy. The manufacturing strategy is designed to increase capacity, increase flexibility to adjust to changes in the marketplace, improve product quality and reduce costs. Buell Distribution Corporation, a wholly-owned subsidiary of the Company, and the exclusive distributor of Buell Motorcycle Company, increased sales (included in "Other" in the above table) to approximately $40 million (4,415 units) in 1997 as compared to approximately $23 million (2,762 units) in 1996. Buell motorcycles were introduced in Europe and Australia during the first and fourth quarters of 1997, respectively, and in Japan during the second quarter of 1996. The Company began 1997 at a scheduled motorcycle production rate of 520 units per day. As the implementation of the manufacturing strategy continued, the rate increased to 565 units per day by the end of the year. The Company exceeded its scheduled production goal of 130,000 units in 1997. During January 1998, the new manufacturing facility in Kansas City, Missouri began producing Sportster motorcycles, and the facility will take over building all Sportster motorcycles by the end of the second quarter of 1998. The manufacturing facility in York, Pennsylvania will use its Sportster capacity to produce more of the big twin cruiser and touring motorcycles. In addition, expansion initiatives continue at the Company's powertrain operations in the Milwaukee area and at its fiberglass 20 products plant in Tomahawk, Wisconsin to enable the Company to achieve its long-term production targets. The Company plans to continue to increase its motorcycle production capacity to be able to sustain its annual double-digit unit growth. For 1998, the Company's production target is 147,000 units.(1) The Company's ability to reach these production levels will depend upon, among other factors, the Company's ability to (i) continue to realize production efficiencies at its existing production facilities through implementation of innovative manufacturing techniques and other means, (ii) successfully implement production capacity increases in its new and existing facilities, and (iii) create sufficient demand for the Company's motorcycles. However, there is no assurance that the Company will continue to realize additional efficiencies. In addition, the Company could experience delays in making changes to existing facilities and the new manufacturing facilities as a result of risks normally associated with the operation of new and existing manufacturing facilities, including delays in the delivery of machinery and equipment or difficulties in making such machinery and equipment operational, work stoppages, difficulties with suppliers, natural causes or other factors. These risks, potential delays and uncertainties regarding the actual costs could also impact adversely the Company's capital expenditure estimates. Moreover, there is no assurance that the Company will have the ability to sell all of the motorcycles it has the capacity to produce. During 1997, the worldwide heavyweight (651+cc) motorcycle market grew 15.7% and the company's share of the market is 24.1% (excluding Buell). Compared to 1996, industry registrations of domestic (United States) heavyweight motorcycles were up 14.8% (data provided by the Motorcycle Industry Council), while retail registrations for the Company's traditional motorcycles increased 17.0%. The Company ended 1997 with a domestic market share of 49.1% compared to 48.2% in 1996. This increase is a reflection of the increased shipments of the Company's traditional motorcycles due to additional capacity and an increased allocation of motorcycles to the domestic market. European data for 1997 (provided by Giral S.A.) shows the Company with a 6.1% share of the heavyweight (651+cc) market, down from 6.8% in 1996. The European market grew at an 11.4% rate in 1997, while retail registrations for the Company's traditional motorcycles were approximately the same as 1996. Asia/Pacific (Japan and Australia) data for 1997 (provided by JAMA and ABS) shows the Company with a 16.5% share of the heavyweight (651+cc) market, down from 21.9% in 1996. While retail registrations for the Company's traditional motorcycles increased 18.3%, the Asia/Pacific market increased 57.5% in 1997. The increase in the Asia/Pacific market was primarily due to a change in the licensing requirements in Japan which made it easier for an individual to obtain a heavyweight motorcycle license. The greatest increase occurred in the performance motorcycle segment. Export revenues totaled $457.8 million during 1997, an increase of approximately $37.1 million (8.8%) over 1996. The Company exported approximately 27% of its traditional motorcycle shipments in 1997, down from approximately 30% in 1996. The Company adjusted the international allocation of motorcycles during 1997 due primarily to the combination of continued strong demand in the United States and softening demand in Europe. During 1997, Genuine Motor Parts and Genuine Motor Accessories (P&A) sales totaled $241.9 million, a $30.7 million, or 14.5% increase over 1996. The increase in 1997 is consistent with the Company's long-term growth target for the P&A business.(1) 21 General Merchandise sales, which consists of MotorClothes apparel and collectibles, totaled $95.1 million, up 4.8% compared to 1996. The Company considered 1997 a rebuilding year and anticipates higher growth in General Merchandise in 1998.(1) GROSS PROFIT In 1997, gross profit increased $96.1 million, or 19.6%, as compared with 1996 primarily due to an increase in volume. The gross profit margin was 33.3% in 1997 as compared with 32.0% in 1996. The 1997 gross profit margin was positively affected by a shift in mix away from the entry level Sportster models to the higher-margin big twin cruiser and touring models and increased efficiencies in manufacturing arising from the implementation of our manufacturing strategy over the past two years. However, the Company incurred approximately $19.3 million in start-up and plant rearrangement costs in 1997, compared to $12.8 million in 1996. OPERATING EXPENSES (Dollars in Millions)
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1997 1996 INCREASE % CHANGE - ------------------------------------------------------------------------------- Motorcycles and Related Products $320.7 $262.0 $58.7 22.4% - ------------------------------------------------------------------------------- Corporate 7.8 7.4 .4 5.2 - ------------------------------------------------------------------------------- Total operating expenses $328.5 $269.4 $59.1 21.9% - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Total operating expenses for 1997 increased $59.1 million, or 21.9%, over 1996. The increase was primarily related to new product development, information systems, international operations development, product liability expenses and other increases due to motorcycle volume when compared to 1996. OPERATING INCOME FROM FINANCIAL SERVICES The operating income of the Financial Services segment was $12.4 million and $7.8 million in 1997 and 1996, respectively. This increase was due to increased wholesale and retail origination volume, corresponding increases in outstanding wholesale and retail receivables and an increase in insurance service revenues. During 1997, Eaglemark Financial Services, Inc. (Eaglemark) financed 19% of new Harley-Davidson motorcycles retailed in the U.S., up from 17% in 1996. OTHER INCOME (EXPENSE) Other expense for 1997 decreased $2.5 million as compared to 1996. 1997 includes a $1.3 million loss on the equity investment in Buell Motorcycle Company compared to a $3.5 million loss in 1996. During 1997, a foreign currency exchange loss of approximately $1.9 million (compared to an exchange gain of approximately $1.8 million in 1996) was offset by a $1.6 million one-time benefit related to the sale of preferred stock that was acquired from the sale of the Transportation Vehicles segment. CAPITALIZED INTEREST The Company capitalized approximately $3.5 million and $2.1 million of interest during 1997 and 1996, respectively, in connection with its manufacturing expansion initiatives. CONSOLIDATED INCOME TAXES The Company's effective tax rate was 37.0% in 1997 and 1996. 22 DISCONTINUED OPERATIONS The operations for the Transportation Vehicles segment have been classified as discontinued operations. In 1996, the sale of the Transportation Vehicles segment resulted in a $22.6 million gain, net of applicable income taxes, or $.15 per share. 1996 COMPARED TO 1995 OVERALL Net sales for 1996 of $1,531.2 million were $180.7 million, or 13.4%, higher than net sales for 1995. Net income and diluted earnings per share from continuing operations were $143.4 million and $.94, respectively, for 1996 as compared with $111.1 million and $.73, respectively, for 1995. The gain on disposition and diluted earnings per share from discontinued operations were $22.6 million and $.15, respectively, for 1996 as compared with net income and diluted earnings per share from discontinued operations of $1.4 million and $.01, respectively, for 1995. On January 22, 1996, the Company announced its strategic decision to dispose of the Transportation Vehicles segment in order to concentrate on its core motorcycle business. During 1996, the Company completed the sale of the Transportation Vehicles segment for an aggregate sales price of approximately $105 million. The results of the Transportation Vehicles segment have been reported separately as discontinued operations for each year presented. The Company increased its quarterly dividend payment in September 1996 from $.025 per share to $.03 per share which resulted in a total year payout of $.11 per share. RESULTS OF OPERATIONS MOTORCYCLE UNIT SHIPMENTS AND NET SALES
- ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- INCREASE/ 1996 1995 (DECREASE) % CHANGE - ------------------------------------------------------------------------------------------- Motorcycle units (excluding Buell) 118,771 105,104 13,667 13.0% - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Net sales (in millions): - ------------------------------------------------------------------------------------------- Motorcycles (excluding Buell) $1,199.2 $1,038.3 $160.9 15.5% - ------------------------------------------------------------------------------------------- Motorcycle Parts and Accessories 211.2 192.1 19.1 9.9 - ------------------------------------------------------------------------------------------- General Merchandise 90.7 100.2 (9.5) (9.5) - ------------------------------------------------------------------------------------------- Other 30.1 19.9 10.2 51.3 - ------------------------------------------------------------------------------------------- Total Motorcycles and Related Products $1,531.2 $1,350.5 $180.7 13.4% - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
The Motorcycles and Related Products (Motorcycles) segment's net sales increased 13.4% over 1995 primarily due to a 13,667 unit (13.0%) increase in traditional motorcycle shipments. The increase in motorcycle shipments was the result of improved productivity and investment in additional capacity from the ongoing implementation of the Company's manufacturing strategy. Buell Distribution Corporation increased sales (included in "Other" in the above table) to approximately $23 million (2,762 units) in 1996 as compared to approximately $14 million (1,407 units) in 1995. Buell motorcycles were introduced in Japan during the second quarter of 1996 which resulted in the sale of 291 units for the year. 23 The Company began 1996 at a scheduled motorcycle production rate of 470 units per day. As the implementation of the manufacturing strategy continued, the rate increased to 520 units per day by the end of the year. Year-end data indicates that the domestic (United States) motorcycle market continued to grow throughout 1996. Compared to 1995, industry registrations of domestic heavyweight (651+cc) motorcycles were up 9.6% (data provided by R.L. Polk), while retail registrations for the Company's traditional motorcycles increased 10.8%. The Company ended 1996 with a domestic market share of 48.2% compared to 47.7% in 1995. This increase was a reflection of the increased shipments of the Company's traditional motorcycles due to the increased capacity. European data for 1996 (provided by Giral S.A.) shows the Company with a 6.8% share of the heavyweight (651+cc) market, down from 7.4% in 1995. The European market grew at an 8.4% rate in 1996, while retail registrations for the Company's traditional motorcycles were down slightly from 1995. Most of the growth in the European market occurred in the performance motorcycle segment, an area in which the Company did not compete. Asia/Pacific (Japan and Australia) data for 1996 (provided by JAMA and ABS) shows the Company with a 21.9% share of the heavyweight (651+cc) market, up from 20.1% for the same period in 1995. The Asia/Pacific market decreased 4.9% in 1996, while retail registrations for the Company's traditional motorcycles increased 3.4%. Export revenues totaled $420.7 million during 1996, an increase of approximately $19.6 million (4.9%) over 1995. The Company has exported approximately 30% of its traditional motorcycle shipments since 1990. During 1996, Genuine Motor Parts and Genuine Motor Accessories (P&A) sales totaled $211.2 million, a $19.1 million or 9.9% increase over 1995. P&A sales were adversely affected late in the fourth quarter by the transition to the new P&A distribution center and the inability to bring to market some new product introductions on schedule. General Merchandise sales, which consists of MotorClothes apparel and collectibles, totaled $90.7 million, down 9.5% compared to 1995. GROSS PROFIT Gross profit increased $78.7 million, or 19.1%, in 1996 as compared with 1995 primarily due to an increase in volume. The gross profit margin was 32.0% in 1996 as compared with 30.5% in 1995. The 1996 gross profit margin was positively affected by a shift in mix away from the entry level Sportster models to the higher-margin models. 1996 margins were also positively impacted by the reduction of overtime compared to 1995 and increasing efficiencies in manufacturing. However, the Company incurred approximately $12.8 million in start-up and plant rearrangement costs in 1996, compared to $10.6 million in 1995. 24 OPERATING EXPENSES (Dollars in Millions)
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 INCREASE % CHANGE - -------------------------------------------------------------------------------- Motorcycles and Related Products $262.0 $226.9 $35.1 15.5% - -------------------------------------------------------------------------------- Corporate 7.4 7.3 .1 2.0 - -------------------------------------------------------------------------------- Total operating expenses $269.4 $234.2 $35.2 15.0% - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Total operating expenses for 1996 increased $35.2 million, or 15.0%, over 1995. The increase was primarily related to volume, product development and information services. During 1996, an early retirement program in connection with the new Parts and Accessories Distribution Center resulted in a charge of $2.5 million and a voluntary product recall on fuel valves resulted in a $1.1 million charge for estimated repair costs. OPERATING INCOME FROM FINANCIAL SERVICES The operating income of the Financial Services segment was $7.8 million and $3.6 million in 1996 and 1995, respectively. This increase was due to increased wholesale and retail origination volume with the greatest increase occurring in retail. During 1996, Eaglemark financed 17% of new Harley-Davidson motorcycles retailed in the U.S., up from 13% in 1995. OTHER EXPENSE Other expense for 1996 decreased $.8 million as compared to 1995. 1996 includes a $3.5 million loss on the equity investment in Buell Motorcycle Company compared to a $1.2 million loss in 1995. Included in 1995 was $1.9 million of Eaglemark preacquisition earnings arising from the purchase of substantially all of the remaining interest in Eaglemark in November 1995. CONSOLIDATED INCOME TAXES The Company's effective tax rate was 37.0% in 1996 and 1995. DISCONTINUED OPERATIONS The operations for the Transportation Vehicles segment have been classified as discontinued operations. The sale of the Transportation Vehicles segment resulted in a $22.6 million gain, net of applicable income taxes, or $.15 per share, which was recorded in the fourth quarter. OTHER MATTERS ACCOUNTING CHANGES The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any nonvested stock. Diluted earnings per share is very similar to the previously defined fully diluted earnings per share. During 1996 and 1995, stock options were not materially dilutive; therefore, the Company was not required to disclose fully diluted earnings per share. Earnings per share amounts for all periods presented have been restated to conform to the Statement 128 requirements. 25 The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which became effective January 1, 1998. Comprehensive income and its components will be required to be presented for each year for which an income statement is presented. Components to be included in comprehensive income for the Company are expected to consist primarily of translation adjustments related to the consolidation of foreign subsidiaries. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. The Company elected to early adopt SFAS No. 131 effective December 31, 1997. Adoption of the Statement required the Company to change the disclosure of geographic information but did not require significant changes in the way segments were disclosed. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued a new Statement of Position (SOP), "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," which becomes effective January 1, 1999. The SOP will require the Company to capitalize costs incurred in connection with developing or obtaining internal-use software. The Company expects to early adopt the SOP in 1998. Had the Company adopted the SOP in 1997, approximately $9 million of costs associated with internal-use software would have been capitalized. IMPACT OF YEAR 2000 The Company has completed an assessment and will modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company also has initiated discussions with its significant suppliers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate their computer systems. The Company's comprehensive Year 2000 initiative is being managed by a team of internal staff with the assistance of outside consultants. The team's activities are designed to ensure that there is no adverse effect on the Company's core business operations and that transactions with suppliers and financial institutions are fully supported. The Company is well under way with these efforts, which are scheduled to be completed by mid-1999. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company. The cost of the Year 2000 initiatives is estimated to be approximately $11 million of which approximately $2 million was incurred in 1997.(1) The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are forward-looking statements and are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 26 ENVIRONMENTAL MATTERS The Company's policy is to comply with all applicable environmental laws and regulations, and the Company has a compliance program in place to monitor, and report on, environmental issues. The Company has reached settlement agreements with its former parent (Minstar, successor to AMF Incorporated) and the U.S. Navy regarding soil and groundwater remediation at the Company's manufacturing facility in York, Pennsylvania and currently estimates that it will incur approximately $6 million of net additional costs related to the remediation effort.1 The Company has established reserves for this amount. The Company's estimate of additional response costs is based on reports of environmental consultants retained by the Company, the actual costs incurred to date, and the estimated costs to complete the necessary investigation and remediation activities. Response costs are expected to be incurred over a period of approximately 10 years. See Note 7 of the notes to the consolidated financial statements. Recurring costs associated with managing hazardous substances and pollution in ongoing operations have not been material. The Company regularly invests in equipment to support and improve its various manufacturing processes. While the Company considers environmental matters in capital expenditure decisions, and while some capital expenditures also act to improve environmental compliance, only a small portion of the Company's annual capital expenditures relate to equipment that has the sole purpose of meeting environmental compliance obligations. During 1997, the Company spent approximately $1 million on equipment used to limit hazardous substances/pollutants, and the Company anticipates approximately the same level of spending in 1998. The Company does not expect that these expenditures related to environmental matters will have a material effect on future operating results or cash flows.(1) LIQUIDITY AND CAPITAL RESOURCES The Company generated $309.7 million of cash from operating activities in 1997 compared to $228.3 million in 1996. Net income adjusted for depreciation and amortization contributed $244.2 million. Depreciation and amortization for 1997 increased approximately $15 million compared to 1996 from continued investment in the manufacturing strategy. The Motorcycles segment's receivable balance at December 31, 1997 of $102.8 million was decreased by approximately $69 million due to the transfer of the Motorcycles segment's domestic receivables to Eaglemark (see Note 2 of the notes to the consolidated financial statements). As such, finance receivables increased by this same amount and this increase is reflected in cash from investing activities. During 1996, the Company completed the sale of the Transportation Vehicles segment for an aggregate sales price of approximately $105 million; approximately $100 million in cash and $5 million in notes and preferred stock. Capital expenditures amounted to approximately $186 million and $179 million during 1997 and 1996, respectively. For the past two years, the Company has been implementing a manufacturing strategy to, among other things, increase its motorcycle production capacity. The strategy included expansion in and near the Company's existing facilities and construction of a new manufacturing facility in Kansas City, Missouri. The construction of the new facility was completed in 1997, and is expected to be producing all Sportster motorcycles by the end of the second quarter of 1998. Additional expansion initiatives are still in process at the Wisconsin and Pennsylvania facilities to adjust to the shift in production between the Pennsylvania and Missouri facilities and to prepare for the planned increase in production. 27 Although the Company does not know the exact amount of capital expenditures it will incur, it estimates the capital required in 1998 will be in the range of $180-$200 million and in 1999 will be in the range of $120-$140 million. The Company plans to continue to increase its motorcycle production capacity to be able to sustain its annual double-digit unit growth. For 1998, the Company's production target is 147,000 units. The Company anticipates it will have the ability to fund all capital expenditures with internally generated funds and short-term financing.(1) The Company (excluding Eaglemark) currently has nominal levels of long-term debt and has available lines of credit of approximately $43 million, of which approximately $41 million remained available at year-end. Eaglemark finances its business through an unsecured commercial paper program, revolving credit facilities, senior subordinated debt and asset-backed securitizations. Eaglemark issues short-term commercial paper with maximum issuance available of $500 million of which approximately $307 million was outstanding at year-end. Maturities of commercial paper issued range from 1 to 270 days. Eaglemark has in place a $250 million 364-day revolving credit facility and a $250 million five-year revolving credit facility of which approximately $34 million was outstanding at December 31, 1997. The primary uses of the credit facilities are to provide liquidity to the unsecured commercial paper program and to fund normal business operations. Eaglemark has also issued $30 million of senior subordinated notes which expire in 2007. During 1997, Eaglemark securitized and sold approximately $300 million of its retail installment loans to investors with limited recourse, with servicing rights being retained by Eaglemark. The Company expects that the future growth of Eaglemark will be financed from internally generated funds, additional capital contributions from the Company, bank lines of credit, and continuation of its subordinated debt, commercial paper and securitization programs.(1) The Company has a support agreement with Eaglemark, whereby the Company agrees to provide Eaglemark with certain financial support payments if required. The payments may be provided at the Company's option either as a capital contribution or as a loan. The Company has authorization from its Board of Directors to repurchase up to 4,700,000 shares of the Company's outstanding common stock. In addition, the Company has continuing authorization from its Board of Directors to repurchase shares of the Company's outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (i) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (ii) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. Through February 1998, the Company repurchased 600,000 shares of its common stock under the latter authorization with cash on hand of approximately $15 million. The Company's Board of Directors declared quarterly cash dividends during 1997 and 1996 totaling $.135 and $.11 per share (adjusted for the 1997 stock split), respectively. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in foreign exchange and interest rates. To reduce such risks, the Company selectively uses financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for trading purposes. Sensitivity analysis is used to manage and monitor foreign exchange and interest rate risk. 28 A discussion of the Company's accounting policies for derivative financial instruments is included in the Summary of Significant Accounting Policies in the notes to the consolidated financial statements, and further disclosure relating to financial instruments is included in Note 12, Fair Value of Financial Instruments. The Company's earnings are affected by fluctuations in the value of the U.S. dollar against foreign currencies, predominately in European countries, as a result of the sales of its products in foreign markets. Forward foreign exchange contracts are used to hedge against the earnings effects of such fluctuations. At December 31, 1997, these contracts represented a combined U.S. dollar equivalent of approximately $70 million and have maturities of less than one year. A uniform 10% strengthening/weakening in the value of the dollar relative to the currencies underlying these contracts would result in a foreign currency gain(loss) of approximately $7 million. As noted above, the Company's policy prohibits the trading of financial instruments for profit. It is important to note that the gain(loss) indicated above would be offset by gains and losses on receivables originating from the firm commitments for the sale of products to foreign customers. In addition, the Company's foreign currency exposure to the Japanese Yen is mitigated by the existence of a natural hedge, which is sustained through balancing Yen cash inflows from sales, with Yen cash outflows for motorcycle component purchases and other operating expenses.(1) Eaglemark's earnings are affected by changes in short-term interest rates as a result of its borrowings under a bank credit facility and the issuance of commercial paper. Eaglemark enters into interest rate cap and swap agreements to reduce the impact of fluctuations in interest rates on its floating rate debt. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense. The effects of the interest rate changes are limited due to the interest rate swap and cap agreements entered into by Eaglemark. Also, certain finance receivables of Eaglemark carry a variable rate of interest tied to short-term rate indices which will further limit the effect of interest rate changes. Based on year-end balances, it is estimated that a 1% increase in short-term interest rates will not have a material impact on interest expense or income before taxes. This analysis does not take into effect other changes that might occur in the economic environment as a whole due to such changes in short-term interest rates.(1) (1)NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain matters discussed in "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 7a, Quantitative and Qualitative Disclosures About Market Risk" are forward-looking statements intended to qualify for the safe harbors from liability established by 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 "believes," "anticipates," "expects," "estimates" or words of similar meaning. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. 29 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Report of Ernst & Young LLP, independent auditors 31 Consolidated statements of operations 32 Consolidated balance sheets 33 Consolidated statements of cash flows 34 Consolidated statements of shareholders' equity 35 Notes to consolidated financial statements 36 Supplementary data Quarterly financial data (unaudited) 54
30 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Harley-Davidson, Inc. We have audited the accompanying consolidated balance sheets of Harley-Davidson, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harley-Davidson, Inc. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Milwaukee, Wisconsin ERNST & YOUNG LLP January 17, 1998 31 HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997, 1996 and 1995 (In thousands, except per share amounts)
1997 1996 1995 ---- ---- ---- Net sales $1,762,569 $1,531,227 $1,350,466 Cost of goods sold 1,176,352 1,041,133 939,067 ---------- ---------- ---------- Gross profit 586,217 490,094 411,399 Operating income from financial services 12,355 7,801 3,620 Selling, administrative and engineering (328,569) (269,449) (234,223) ---------- ---------- ---------- Income from operations 270,003 228,446 180,796 Interest income 7,871 3,309 1,446 Interest expense - - (1,350) Other - net (1,572) (4,133) (4,903) ---------- ---------- ---------- Income from continuing operations before provision for income taxes 276,302 227,622 175,989 Provision for income taxes 102,232 84,213 64,939 ---------- ---------- ---------- Income from continuing operations 174,070 143,409 111,050 Discontinued operations: Income from operations, net of applicable income taxes - - 1,430 Gain on disposition of discontinued operations, net of applicable income taxes - 22,619 - ---------- ---------- ---------- Net income $ 174,070 $ 166,028 $ 112,480 ---------- ---------- ---------- ---------- ---------- ---------- Basic earnings per common share: Income from continuing operations $1.15 $ .95 $.74 Income from discontinued operations - .15 .01 ---------- ---------- ---------- Net income $1.15 $1.10 $.75 ---------- ---------- ---------- ---------- ---------- ---------- Diluted earnings per common share: Income from continuing operations $1.13 $ .94 $.73 Income from discontinued operations - .15 .01 ---------- ---------- ---------- Net income $1.13 $1.09 $.74 ---------- ---------- ---------- ---------- ---------- ---------- Cash dividends per common share $.135 $ .11 $.09 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 32 HARLEY-DAVIDSON, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 (In thousands, except share amounts)
ASSETS 1997 1996 - ------ ---- ---- Current assets: Cash and cash equivalents $ 147,462 $ 142,479 Accounts receivable, net 102,797 141,315 Finance receivables, net 293,329 183,808 Inventories 117,475 101,386 Deferred income taxes 24,941 25,999 Prepaid expenses 18,017 18,142 ---------- ---------- Total current assets 704,021 613,129 Finance receivables, net 249,346 154,264 Property, plant, and equipment, net 528,869 409,434 Deferred income taxes 3,001 4,691 Goodwill 38,707 40,900 Other assets 74,957 77,567 ---------- ---------- $1,598,901 $1,299,985 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 106,112 $ 100,699 Accrued and other liabilities 164,938 142,334 Current portion of finance debt 90,638 8,065 ---------- ---------- Total current liabilities 361,688 251,098 Finance debt 280,000 250,000 Long-term liabilities 62,131 70,366 Postretirement health care benefits 68,414 65,801 Commitments and contingencies (Note 7) Shareholders' equity: Series A Junior Participating preferred stock, none issued - - Common stock, 157,241,441 and 156,252,182 shares issued in 1997 and 1996, respectively 1,572 1,562 Additional paid-in capital 187,180 174,371 Retained earnings 683,824 530,782 Cumulative foreign currency translation adjustment (2,835) (566) ---------- ---------- 869,741 706,149 Less: Treasury stock (4,916,488 and 4,914,368 shares in 1997 and 1996, respectively), at cost (41,959) (41,933) Unearned compensation (1,114) (1,496) ---------- ---------- Total shareholders' equity 826,668 662,720 ---------- ---------- $1,598,901 $1,299,985 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 33 HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $ 174,070 $ 166,028 $112,480 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 70,178 55,282 42,329 Provision for credit losses 6,547 1,382 1,275 Gain on disposition of discontinued operations - (22,619) - Deferred income taxes 2,748 (8,470) (6,284) Long-term employee benefits 1,275 7,089 4,201 Equity in net loss of joint venture 1,290 3,486 276 Other 476 3,419 138 Net change in discontinued operations - 28,862 2,525 Net changes in other current assets and current liabilities 53,151 (6,180) 14,937 ---------- ---------- -------- Total adjustments 135,665 62,251 59,397 ---------- ---------- -------- Net cash provided by operating activities 309,735 228,279 171,877 Cash flows from investing activities: Net capital expenditures (186,171) (178,771) (112,985) Investment in joint venture (1,526) (8,778) (46,918) Finance receivables, net - - (17,922) Finance receivables acquired or originated (1,618,307) (1,086,949) - Finance receivables collected 1,107,157 722,825 - Finance receivables sold 300,000 238,114 - Proceeds from disposition of discontinued operations - 100,313 - Net change in discontinued operations - - (8,449) Other - net (7,663) (519) (1,547) ---------- ---------- -------- Net cash used in investing activities (406,510) (213,765) (187,821) Cash flows from financing activities: Net increase (decrease) in notes payable (2,580) (111) 1,260 Net increase in finance debt 112,573 93,735 33,267 Payments on long-term debt - - (750) Dividends paid (21,028) (17,143) (13,593) Stock repurchases - - (39,972) Issuance of stock under employee stock plans 12,793 20,022 2,716 Net change in discontinued operations - - 6,594 ---------- ---------- -------- Net cash provided by (used in) financing activities 101,758 96,503 (10,478) ---------- ---------- -------- Net increase (decrease) in cash and cash equivalents 4,983 111,017 (26,422) Cash and cash equivalents: At beginning of year 142,479 31,462 57,884 ---------- ---------- -------- At end of year $ 147,462 $ 142,479 $ 31,462 ---------- ---------- -------- ---------- ---------- --------
The accompanying notes are an integral part of the consolidated financial statements. 34 HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1997, 1996 and 1995 (In thousands, except share amounts)
Cumulative Common Stock foreign ------------------------ Additional currency Issued paid-in Retained translation Treasury Unearned shares Balance capital earnings adjustment stock compensation ----------- ------- ---------- -------- ----------- -------- ------------ Balance December 31, 1994 154,312,504 $1,543 $149,957 $283,010 $1,174 $(1,581) $(871) Net income - - - 112,480 - - - Dividends - - - (13,593) - - - Nonvested stock issuance - - 740 - - 1 (741) Stock repurchase - - - - - (39,972) - Amortization of unearned compensation, net of cancellations - - - - - (351) 288 Exercise of stock options 400,872 4 1,712 - - - - Tax benefit of nonvested shares and stock options - - 1,350 - - - - Foreign currency translation adjustment - - - - (581) - - ----------- ------- ---------- -------- ----------- -------- ---------- Balance December 31, 1995 154,713,376 1,547 153,759 381,897 593 (41,903) (1,324) Net income - - - 166,028 - - - Dividends - - - (17,143) - - - Nonvested stock issuance - - 574 - - 1 (575) Amortization of unearned compensation, net of cancellations - - - - - (31) 403 Exercise of stock options 1,538,806 15 12,204 - - - - Tax benefit of nonvested shares and stock options - - 7,834 - - - - Foreign currency translation adjustment - - - - (1,159) - - ----------- ------- ---------- -------- ----------- -------- ---------- Balance December 31, 1996 156,252,182 1,562 174,371 530,782 (566) (41,933) (1,496) Net Income - - - 174,070 - - - Dividends - - - (21,028) - - - Amortization of unearned compensation, net of cancellations - - - - - (26) 382 Exercise of stock options 989,259 10 6,433 - - - - Tax benefit of nonvested shares and stock options - - 6,376 - - - - Foreign currency translation adjustment - - - - (2,269) - - ----------- ------- ---------- -------- ----------- -------- ---------- Balance December 31, 1997 157,241,441 $1,572 $187,180 $683,824 $(2,835) $(41,959) $(1,114) ----------- ------- ---------- -------- ----------- -------- ---------- ----------- ------- ---------- -------- ----------- -------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 35 HARLEY-DAVIDSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The consolidated financial statements include the accounts of Harley- Davidson, Inc. and all of its subsidiaries (the Company), including the accounts of Harley-Davidson Motor Company (HDMC), Eaglemark Financial Services, Inc. (Eaglemark), and Holiday Rambler LLC (Holiday Rambler). All significant intercompany accounts and transactions are eliminated. As disclosed in Note 3, the operations of Holiday Rambler are classified as discontinued operations. The Company has an investment which is accounted for using the equity method. Accordingly, the Company's share of the net earnings (losses) of this entity is included in consolidated net income. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. FINANCE RECEIVABLES INCOME RECOGNITION - Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued interest is classified with finance receivables. Certain loan origination costs are deferred and amortized over the estimated life of the related receivable as a reduction in financing revenue. FINANCE RECEIVABLES CREDIT LOSSES - The provision for credit losses on finance receivables is charged to income in amounts sufficient to maintain the allowance for uncollectible accounts at a level management believes is adequate to cover the losses of principal and interest in the existing portfolio. The Company's wholesale loan charge-off policy is based on a loan-by-loan review. Retail revolving charge receivables are charged off at the earlier of 180 days contractually past due or when otherwise deemed to be uncollectible. Retail installment receivables are generally charged off at 120 days contractually past due. RETAIL INSTALLMENT LOANS SOLD WITH LIMITED RECOURSE; SECURITIZATION AND SERVICING INCOME - During 1997 and 1996, Eaglemark securitized and sold approximately $300 million and $238 million, respectively, of its retail installment loans through securitization transactions. Eaglemark retained limited recourse and also the servicing rights to these contracts. Eaglemark recognizes a gain for the difference between the carrying value of the receivables sold and the adjusted sales price. The adjusted sales price is determined based on a present value estimate of future cash flows on each loan pool sold. Eaglemark adopted Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," effective January 1, 1997. Adopting SFAS No. 125 had an immaterial effect. 36 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES - Inventories are valued at the lower of cost or market. Inventories located in the United States are valued using the last- in, first-out (LIFO) method. Other inventories, $33.3 million in 1997 and $25.5 million in 1996, are valued at the lower of cost or market using the first-in, first-out (FIFO) method. DEPRECIATION - Depreciation of plant and equipment is determined on the straight-line basis over the estimated useful lives of the assets. Accelerated methods are used for income tax purposes. FACILITIES START-UP COSTS - Facilities start-up costs are expensed as incurred. During 1997 and 1996, the Company incurred approximately $19.3 million and $7.3 million in start-up costs, respectively. PRODUCT WARRANTY - Product warranty costs are charged to operations based upon the estimated warranty cost per unit sold. DERIVATIVE FINANCIAL INSTRUMENTS - The Company uses forward foreign exchange contracts to mitigate the risk that cash flows resulting from the Company's firm commitments for the sale of product to foreign customers will be adversely affected by changes in exchange rates. Realized and unrealized gains and losses on forward foreign exchange contracts resulting from changes in the spot exchange rate are deferred and recognized at the time the hedged transaction is settled. Eaglemark enters into interest rate cap and swap agreements to reduce the impact of fluctuations in interest rates on its floating rate debt. Eaglemark's credit risk is the amount of uncollected interest related to these agreements. The differential to be paid or received under these agreements is recognized as an adjustment to interest expense. The unamortized cost of the interest rate cap agreements is included in other assets. The fair values of interest rate cap agreements and forward foreign currency contracts are discussed in Note 12. RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses were approximately $53.3 million, $37.7 million, and $27.2 million for 1997, 1996 and 1995, respectively. ENVIRONMENTAL - The Company accrues for environmental loss contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company adopted SOP 96-1, "Environmental Remediation Liabilities," effective January 1, 1997. Adopting SOP 96-1 had an immaterial effect. EARNINGS PER SHARE - In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any nonvested stock. Diluted earnings per share is very similar to the previously defined fully diluted earnings per share. During 1996 and 1995, stock options were not materially dilutive; therefore, the Company was not required to disclose fully diluted earnings per share. Earnings per share amounts for all periods presented have been restated to conform to the Statement 128 requirements. 37 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) COMPREHENSIVE INCOME - The Company is required to adopt SFAS No. 130, "Reporting Comprehensive Income," effective January 1, 1998. Comprehensive income and its components will be required to be presented for each year for which an income statement is presented. Components to be included in comprehensive income for the Company are expected to consist primarily of translation adjustments related to the consolidation of foreign subsidiaries. INTERNAL-USE SOFTWARE - The Company is required to adopt the new SOP, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," effective January 1, 1999. The SOP will require the Company to capitalize costs incurred in connection with developing or obtaining internal-use software. The Company expects to early adopt the SOP in 1998. Had the Company adopted the SOP in 1997, approximately $9 million of costs associated with internal-use software would have been capitalized. RECLASSIFICATIONS - Certain prior year balances have been reclassified in order to conform to current-year presentation. 2. ADDITIONAL BALANCE SHEET AND CASH FLOWS INFORMATION Balance sheet information is as follows:
December 31, ----------------------- 1997 1996 ---- ---- (In thousands) Accounts receivable: Domestic $ 15,189 $ 49,888 Foreign 87,608 91,427 -------- -------- $102,797 $141,315 -------- -------- -------- --------
Domestic motorcycle sales are generally floor planned by the purchasing dealers. Foreign motorcycle sales are sold on open account, letter of credit, draft and payment in advance. Effective September 1, 1997, Eaglemark became responsible for all credit and collection activities for the Motorcycles segment's domestic receivables. As such, approximately $69 million of accounts receivable are classified as finance receivables as of December 31, 1997. The presentation of finance receivables has been changed to classify receivables representing wholesale motorcycle and parts and accessories receivables and retail finance receivables with maturities of less than one year as current (See Note 4). The allowance for doubtful accounts deducted from accounts receivable was $1.5 million and $1.9 million at December 31, 1997 and 1996, respectively. 38 2. ADDITIONAL BALANCE SHEET AND CASH FLOWS INFORMATION (CONTINUED)
December 31, ------------------------ 1997 1996 ---- ---- (In thousands) Inventories: Components at the lower of FIFO cost or market: Raw materials and work in process $ 37,597 $ 33,275 Finished goods 26,756 26,331 Parts and accessories 75,735 62,502 --------- --------- 140,088 122,108 Excess of FIFO over LIFO inventories 22,613 20,722 --------- --------- $117,475 $101,386 --------- --------- --------- --------- Property, plant and equipment, at cost: Land and land improvements $ 10,172 $ 3,727 Buildings and improvements 136,549 92,328 Machinery and equipment 488,086 406,062 Construction in progress 189,832 138,612 --------- --------- 824,639 640,729 Less accumulated depreciation 295,770 231,295 --------- --------- $ 528,869 $ 409,434 --------- --------- --------- --------- Accrued and other liabilities: Payroll, performance incentives, and related expenses $ 69,337 $ 59,970 Warranty/recalls 9,384 11,221 Dealer incentive programs 29,220 24,317 Product liability 7,229 8,888 Income taxes payable 15,767 9,416 Other 34,001 28,522 --------- --------- $ 164,938 $ 142,334 --------- --------- --------- ---------
Supplemental cash flow information is as follows:
1997 1996 1995 ---- ---- ---- (In thousands) Net changes in other current assets and current liabilities: Accounts receivable $38,518 $(12,360) $(35,623) Inventories (16,089) (16,959) 5,453 Prepaid expenses 125 (7,356) (2,287) Accounts payable and accrued liabilities 30,597 30,495 47,394 ------- -------- -------- $53,151 $ (6,180) $ 14,937 ------- -------- -------- ------- -------- --------
Cash paid during the period for interest and income taxes is as follows (in thousands): Interest $17,355 $ 14,400 $ 1,143 ------- -------- -------- ------- -------- -------- Income taxes $86,773 $ 71,029 $ 60,444 ------- -------- -------- ------- -------- --------
Of the interest paid in 1997 and 1996, approximately $3.5 millon and $2.1 million was capitalized, respectively. Interest paid includes the interest payments of Eaglemark for which the related expense is classified as part of operating income from financial services. 39 3. DISCONTINUED OPERATIONS On January 22, 1996, the Company announced its strategic decision to discontinue the operations of the Transportation Vehicles segment in order to concentrate its financial and human resources on its core motorcycle business. The Transportation Vehicles segment was comprised of the Recreational Vehicles division, the Commercial Vehicles division and B & B Molders, a manufacturer of custom or standard tooling and injection molded plastic pieces. During 1996, the Company completed the sale of the Transportation Vehicles segment for an aggregate sales price of approximately $105 million; approximately $100 million in cash and $5 million in notes and preferred stock. The condensed statement of operations relating to discontinued operations for the year ended December 31, 1995 is presented below (in thousands):
1995 ---- Net sales $443,950 Costs and expenses 441,388 -------- Income before income taxes 2,562 Provision for income taxes 1,132 -------- Net income $ 1,430 -------- --------
Included in the 1996 gain on disposition of discontinued operations is a net tax benefit of $2.0 million, including benefits related to the Company's 1994 legal reorganization. It is the Company's policy to allocate interest on debt (to be assumed by the buyer) to discontinued operations, which was approximately $.7 million and $2.5 million for 1996 and 1995, respectively. 4. EAGLEMARK FINANCIAL SERVICES, INC. On November 14, 1995, the Company acquired substantially all of the common stock and common stock equivalents of Eaglemark, a company in which it held a 49% interest since 1993. The transaction was accounted for as a step acquisition under the purchase method. The purchase price for the shares and equivalents was approximately $45 million, which was paid from internally generated funds and short-term borrowings. The excess of the acquisition cost over the fair value of the net assets purchased resulted in approximately $43 million of goodwill which is being amortized on a straight-line basis over twenty years. The Company has included the results of operations of Eaglemark in its statement of operations for the year ended December 31, 1995 as though it had been acquired at the beginning of the year and deducted the preacquisition earnings as part of non-operating expense. Prior to 1995, the Company accounted for its investment in Eaglemark using the equity method. The condensed statements of operations relating to the financial services segment are presented below:
Years ended December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Interest income $42,118 $31,520 $20,310 Other income 24,880 14,990 8,259 ------- ------- ------- Total income 66,998 46,510 28,569 ------- ------- ------- Interest expense 17,764 13,012 6,676 Allowance for credit losses 6,547 1,382 1,275 Operating expenses 30,332 24,315 16,998 ------- ------- ------- Total expenses 54,643 38,709 24,949 ------- ------- ------- Operating income from financial services $12,355 $ 7,801 $ 3,620 ------- ------- ------- ------- ------- -------
40 4. EAGLEMARK FINANCIAL SERVICES, INC. (CONTINUED) Included in interest income is approximately $4.7 million, $5.5 million and $4.9 million of interest on wholesale finance receivables paid by HDMC to Eaglemark in 1997, 1996, and 1995 respectively. Included in other income is approximately $.5 million of fees HDMC paid to Eaglemark for credit and collection activities on domestic receivables purchased from HDMC during 1997. Finance receivables originated or purchased by Eaglemark and owned at December 31, were as follows (in thousands):
1997 1996 ---- ---- Wholesale $243,765 $147,925 Retail 268,893 169,432 Investment in retained securitization interest 36,884 24,848 -------- -------- 549,542 342,205 Allowance for credit losses 6,867 4,133 -------- -------- $542,675 $338,072 -------- -------- -------- --------
Eaglemark's finance receivables include wholesale loans to dealers that are generally secured by the inventory being financed, retail loans to consumers in the form of installment sales contracts and revolving charge receivables. Eaglemark holds titles to vehicles financed, and all revolving charge receivables are cross-collateralized when the customer also has an installment contract. Eaglemark generates finance receivables in the United States and Canada and has a geographically diversified loan portfolio. Wholesale finance receivables are primarily motorcycles and related parts and accessories which are contractually due within one year. Retail finance receivables are primarily motorcycles, personal watercraft and revolving charges. On December 31, 1997, contractual maturities of finance receivables were as follows (in thousands):
1998 $293,329 1999 35,652 2000 32,364 2001 31,494 2002 32,713 Thereafter 123,990 -------- Total $549,542 -------- --------
The allowance for credit losses is comprised of individual components relating to wholesale and retail finance receivables. Changes in the allowance for credit losses for the year ended December 31, is as follows (in thousands):
1997 1996 ---- ---- Balance at beginning of year $4,133 $3,359 Provision 6,547 1,382 Charge-offs (3,813) (608) ------ ------ Balance at end of year $6,867 $4,133 ------ ------ ------ ------
Eaglemark serviced with limited recourse $405.6 million and $283.8 million of retail installment loans as of December 31, 1997 and 1996, respectively. 41 4. EAGLEMARK FINANCIAL SERVICES, INC. (CONTINUED) Eaglemark's debt as of December 31, consisted of the following (in thousands):
1997 1996 ---- ---- Commercial paper $306,677 $153,802 Revolving credit facility 33,961 104,263 Senior subordinated notes 30,000 - -------- -------- Total finance debt $370,638 $258,065 -------- -------- -------- --------
During 1997, Eaglemark established a $500 million unsecured commercial paper program operating under the name Harley-Davidson Funding Corp; replacing a $175 million asset-backed commercial paper program. Maturities under the unsecured commercial paper program can range up to 270 days from the issuance date. Liquidity support for the commercial paper program is provided by the unused portion of the Credit Facilities noted below. The weighted average interest rate on outstanding commercial paper balances was 6.08% and 5.54% at December 31, 1997 and 1996, respectively. Eaglemark entered into new bank credit facilities ("Credit Facilities") during 1997 consisting of a $250 million 364-day revolving facility and a $250 million five-year revolving facility provided by a group of financial institutions; replacing a $150 million facility, which expired during the year. The weighted average interest under the Credit Facilities was 4.50% and 7.01% at December 31, 1997 and 1996, respectively. Eaglemark has the option to borrow in various currencies up to set dollar amounts. Interest is based on LIBOR or other short-term rate indices, depending on the type of advance. In December, 1997, Eaglemark issued $30 million of 6.79% senior subordinated notes due December 18, 2007. The notes provide for semi-annual interest payments, with no principal payments due until final maturity. Eaglemark is required to comply with various operating and financial covenants. Long-term finance debt included on the balance sheet consists of the $250 million five-year revolving credit facility and the $30 million of senior subordinated notes at December 31, 1997. The full amount of the five-year credit facility has been excluded from current liabilities because the Company intends that at least that amount would remain outstanding for an uninterrupted period extending beyond one year from the balance sheet date. During 1996, the Company entered into a support agreement with Eaglemark, whereby, the Company agrees to provide Eaglemark with certain financial support payments if required. The payments may be provided at the Company's option either as a capital contribution or as a loan. 5. NOTES PAYABLE As of December 31, 1997, the Company had unsecured lines of credit totaling approximately $42.7 million, of which approximately $40.8 million remained available after consideration of outstanding letters of credit. As of December 31, 1996, $2.6 million of notes payable was included in accrued and other liabilities. There were no outstanding notes payable at December 31, 1997. 42 6. INCOME TAXES Provision for income taxes consists of the following:
1997 1996 1995 ---- ---- ---- (In thousands) Current: Federal $ 85,237 $73,537 $56,384 State 9,612 10,524 7,308 Foreign 4,634 6,254 8,279 --------- ------- ------- 99,483 90,315 71,971 Deferred: Federal 85 (5,005) (5,895) State 2,215 (667) (780) Foreign 449 (430) (357) --------- ------- ------- 2,749 (6,102) (7,032) --------- ------- ------- Total $102,232 $84,213 $64,939 --------- ------- ------- --------- ------- -------
The provision for income taxes differs from the amount which would be provided by applying the statutory U.S. corporate income tax rate due to the following items:
1997 1996 1995 ---- ---- ---- Provision at statutory rate 35.0% 35.0% 35.0% Foreign income taxes .7 1.0 1.2 Foreign tax credits (.7) (1.0) (1.2) State taxes, net of federal benefit 2.9 2.9 2.6 Foreign sales corporation (1.1) (1.3) (.8) Other .2 .4 .2 ---- ---- ---- Provision for income taxes 37.0% 37.0% 37.0% ---- ---- ---- ---- ---- ----
Deferred income taxes result from temporary differences between the recognition of revenues and expenses for financial statements and income tax returns. The principal components of the Company's deferred tax assets and liabilities as of December 31, include the following:
1997 1996 ---- ---- (In thousands) Deferred tax assets: Accruals not yet tax deductible $30,034 $30,921 Postretirement health care benefit obligation 28,756 27,719 ------- ------- 58,790 58,640 Deferred tax liabilities: Depreciation, tax in excess of book (18,730) (13,923) Inventory adjustments (1,116) (1,185) Pension obligation (2,830) (1,140) Other, net (8,172) (11,702) ------- ------- (30,848) (27,950) ------- ------- Net deferred tax asset $27,942 $30,690 ------- ------- ------- -------
43 7. COMMITMENTS AND CONTINGENCIES The Company is involved with government agencies in various environmental matters, including a matter involving soil and groundwater contamination at its York, Pennsylvania facility (the Facility). The Facility was formerly used by the U.S. Navy and AMF (the predecessor corporation of Minstar). The Company purchased the Facility from AMF in 1981. Although the Company is not certain as to the extent of the environmental contamination at the Facility, it is working with the Pennsylvania Department of Environmental Resources in undertaking certain investigation and remediation activities. In March 1995, the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with investigation and remediation activities at the Facility (response costs). The trust will administer the payment of the future response costs at the Facility as covered by the Agreement. In addition, in March 1991 the Company entered into a settlement agreement with Minstar related to certain indemnification obligations assumed by Minstar in connection with the Company's purchase of the Facility. Pursuant to this settlement, Minstar is obligated to reimburse the Company for a portion of its response costs at the Facility. Although substantial uncertainty exists concerning the nature and scope of the environmental remediation that will ultimately be required at the Facility, based on preliminary information currently available to the Company and taking into account the Company's settlement agreement with the Navy and the settlement agreement with Minstar, the Company estimates that it will incur approximately $6 million of net additional response costs at the Facility. The Company has established reserves for this amount. The Company's estimate of additional response costs is based on reports of environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response costs are expected to be incurred over a period of approximately 10 years. Under the terms of the sale of the Commercial Vehicles Division, the Company has agreed to indemnify Utilimaster Corporation, for 12 years, for certain claims related to environmental contamination present at the date of sale, up to $20 million. Based on the environmental studies performed as part of the sale of the Transportation Vehicles segment, the Company does not expect to incur any material expenditure under this indemnification. Since June, 1996, the Company self-insures its product liability losses in the United States up to $2.5 million ($3.0 million between June, 1995 and June, 1996). Catastrophic coverage is maintained for individual claims in excess of $2.5 million ($3.0 million between June, 1995 and June, 1996) up to $25 million. Prior to June, 1995, the Company was self-insured for all product liability losses in the United States. Outside the United States, the Company is insured for product liability up to $25 million per individual claim and in the aggregate. The Company accrues for claim exposures which are probable of occurrence and can be reasonably estimated. At December 31, 1997, the Company was contingently liable for $15.9 million related to letters of credit. The letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. 44 8. EMPLOYEE BENEFIT PLANS The Company has several noncontributory defined benefit pension plans covering substantially all employees of the Motorcycles segment. Benefits are based primarily on years of service and, for certain plans, levels of compensation. The Company's policy with respect to the pension plans is to fund pension benefits to the extent contributions are deductible for tax purposes. The following data is provided for the pension plans for the years indicated (in thousands):
Year Ended December 31, --------------------------------- 1997 1996 1995 ---- ---- ---- Components of net periodic pension cost: Service cost - benefits earned during the year $ 7,770 $ 6,243 $ 5,184 Interest cost on projected benefit obligations 14,861 12,540 11,237 Actual return on plan assets (36,075) (15,912) (16,547) Net amortization and deferral 24,095 5,245 7,523 -------- -------- -------- Net periodic pension cost $ 10,651 $ 8,116 $ 7,397 -------- -------- -------- -------- -------- --------
Reconciliation of funded status:
September 30, 1997 September 30, 1996 --------------------------- ------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets -------- -------- -------- --------- Actuarial present value of benefit obligations: Vested benefit obligation $ 89,653 $62,448 $42,716 $ 82,185 Nonvested benefit obligation 9,895 4,370 5,473 12,117 --------- -------- -------- --------- Accumulated benefit obligation $ 99,548 $66,818 $48,189 $ 94,302 --------- -------- -------- --------- --------- -------- -------- --------- Projected benefit obligations for service rendered to date $130,076 $71,567 $68,785 $107,834 Plan assets at fair value, consisting primarily of debt securities, bank common trust funds, common stock, and an immediate participation guarantee contract 114,320 66,319 54,345 83,569 --------- -------- -------- --------- Projected benefit obligation in excess of plan assets 15,756 5,248 14,440 24,265 Unrecognized net loss from past experience different from that assumed and changes in assumptions (2,738) 3,866 (9,952) (11,589) Unrecognized prior service cost (14,097) (8,573) (4,871) (12,309) Unrecognized transition asset 392 423 495 669 Additional minimum liability - - - 9,696 --------- -------- -------- --------- Accrued (prepaid) pension cost, September 30 (687) 964 112 10,732 Fourth quarter contribution - (773) - (403) --------- -------- -------- --------- Accrued (prepaid) pension cost, December 31 $ (687) $ 191 $ 112 $ 10,329 --------- -------- -------- --------- --------- -------- -------- ---------
The provisions of Financial Accounting Standards Board Statement No. 87, "Employers' Accounting for Pensions," require the recognition of an additional minimum liability and related intangible asset to the extent that accumulated benefits exceed plan assets. At December 31, 1996, the adjustment required to reflect the Company's minimum pension liability was $9.7 million. No adjustment was required at December 31, 1997. 45 8. EMPLOYEE BENEFIT PLANS (CONTINUED) The assumptions used in determining pension expense (for the following year) and funded status information shown above were as follows:
1997 1996 1995 ---- ---- ---- Discount rate 8.3% 8.3% 8.3% Rate of increase in future compensation levels 5.0% 5.0% 5.0% Assumed long-term rate of return on plan assets 10.3% 10.3% 10.3%
Included in plan assets are 453,096 shares of the Company's common stock at December 31, 1997 and 1996. The market value of these shares at December 31, 1997 and 1996 was $12.3 million and $10.6 million, respectively. Dividends paid on these shares were approximately $61,000 and $47,000 during 1997 and 1996, respectively. Certain of the Company's plans relating to hourly and salaried employees have been amended to increase the scheduled benefits. During 1996, the Company accrued approximately $2.0 million related to early retirement benefits offered to some hourly employees. The Company has various defined contribution benefit plans which in total cover substantially all full-time employees. Employees can make voluntary contributions in accordance with the provisions of their respective plan, which includes a 401(k) tax deferral option. The Company accrued $2.9 million, $2.0 million and $1.5 million for matching contributions during 1997, 1996 and 1995, respectively. The Company also has unfunded supplemental executive retirement plan (SERP) agreements with certain executive officers. The plan was instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. The Company has recorded a net liability of $4.8 million and $4.1 million for the SERP at December 31, 1997 and 1996, respectively. 9. POSTRETIREMENT HEALTH CARE BENEFITS The Company has several postretirement health care benefit plans covering substantially all employees of the Motorcycles segment. Employees are eligible to receive benefits upon attaining age 55 after rendering at least 10 years of service to the Company. The Company's postretirement health care plans are currently funded as claims are submitted ($2.5 million in 1997 and $2.3 millionin 1996). Some of the plans require employee contributions to offset benefit costs. The status of the plans was as follows:
September 30, ------------------------ 1997 1996 ---- ---- (In thousands) Accumulated postretirement benefit obligation Retirees $15,410 $16,134 Fully eligible active plan participants 7,410 8,064 Other active plan participants 30,072 25,091 -------- -------- 52,892 49,289 Unrecognized net gain 14,089 14,611 Unrecognized prior service cost 2,126 2,382 Fourth quarter contribution (693) (481) -------- ------- Accrued postretirement benefit liability, December 31 $68,414 $65,801 -------- ------- -------- -------
46 9. POSTRETIREMENT HEALTH CARE BENEFITS (CONTINUED) The net periodic postretirement benefit cost includes the following:
Year Ended December 31, ----------------------- 1997 1996 ---- ---- (In thousands) Service cost - benefits earned during the year $1,990 $2,036 Interest cost on projected benefit obligation 3,967 3,524 Net amortization and deferral (841) (1,065) ------- ------- Net periodic postretirement benefit cost $5,116 $4,495 ------- ------- ------- -------
The weighted average health care cost trend rate used in determining the accumulated postretirement benefit obligation of the health care plans was 8% in 1997. The per capita health care cost trend rate is assumed to decrease gradually to 6% for 1999 and remain at that level thereafter. This assumption can have a significant effect on the amounts reported. If the weighted average health care cost trend rate were to increase by 1%, the accumulated postretirement benefit obligation as of September 30, 1997 and the aggregate of service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1998 would increase by $5.4 million and $.8 million, respectively. The weighted average discount rate used to determine the accumulated postretirement benefit obligation of the health care plans as of September 30, 1997 and 1996 was 8.25%. 10. CAPITAL STOCK The Company has 400 million authorized shares of $.01 par value common stock. On August 20, 1997, the Company's Board of Directors declared a two-for-one stock split for shareholders of record on September 12, 1997, payable on September 26, 1997. Stock option agreements have been adjusted to reflect the split. An amount equal to the par value of the shares issued has been transferred from additional paid-in capital to the common stock account. All references to number of shares have been adjusted to reflect the stock split on a retroactive basis. The Board of Directors authorized the Company to repurchase up to 8 million shares of the Company's outstanding common stock. During 1995, the Company repurchased 3,300,000 shares of its common stock with cash on hand and short-term borrowings. As a result, the Company has 4,700,000 shares available to repurchase under this authorization. In addition, the Company has continuing authorization from its Board of Directors to repurchase shares of the Company's outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (1) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (2) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. The Company has designated .5 million of the 2.0 million authorized shares of preferred stock as Series A Junior Participating preferred stock (Preferred Stock). The Preferred Stock has a par value of $1 per share. Each share of Preferred Stock, none of which is outstanding, is entitled to 800 votes per share (subject to adjustment) and other rights such that the value of a one one-hundredth interest in a share of Preferred Stock should approximate the value of eight shares of common stock. 47 10. CAPITAL STOCK (CONTINUED) The Preferred Stock is reserved for issuance in connection with the Company's outstanding Preferred Stock purchase rights (Rights). Each outstanding share of common stock entitles its holder to one-eighth Right. Under certain conditions, each Right entitles the holder to purchase one one-hundredth of a share of Preferred Stock at an exercise price of $300, subject to adjustment. The Rights are only exercisable if a person or group has acquired 15% or more of the outstanding common stock or has announced an intention to acquire 25% or more of the outstanding common stock. If there is a 15% acquiring party, each holder of a Right, other than the acquiring party, will be entitled to purchase, at the exercise price, common stock having a market value of two times the exercise price. The Company has a nonvested stock plan in which plan participants are entitled to cash dividends and voting rights on their respective shares. Restrictions generally limit the sale or transfer of shares during a restricted period, not exceeding ten years. Participants may vest in certain amounts of the nonvested stock upon death, disability or retirement as described in the plan. Unearned compensation was charged for the market value of the nonvested shares on the date of grant and is being amortized over the restricted period. The unamortized unearned compensation value is shown as a reduction of shareholders' equity in the accompanying consolidated balance sheets. Information with respect to nonvested stock outstanding is as follows:
1997 1996 1995 ---- ---- ---- Outstanding at beginning of year at $2.37 to $17.53 per share 167,800 203,400 68,400 Nonvested shares granted at $11.53 to $17.53 - 32,800 135,000 Nonvested shares vested at $2.37 to $13.47 per share (15,000) (68,400) - -------- -------- ------- Total shares outstanding at end of year at $11.53 to $17.53 per share 152,800 167,800 203,400 -------- ------- ------- -------- ------- ------- Weighted-average fair value of shares granted during the year N/A $17.53 $13.47 --- ------ ------ --- ------ ------
Expense in 1997, 1996 and 1995 associated with this nonvested stock plan was $.4 million, $.4 million, and $.3 million, respectively. The Company has a Stock Option Plan under which the Board of Directors may grant to employees nonqualified stock options with or without appreciation rights. The options may be exercised one year after the date of grant, not to exceed 25 percent of the shares in the first year with an additional 25 percent to be exercisable in each of the three following years. The options expire ten years from the date of grant. The number of shares of common stock available for future grants under such plans were 5.6 million and 6.6 million at December 31, 1997 and 1996, respectively. 48 10. CAPITAL STOCK (CONTINUED) The following table summarizes the transactions of the Company's Stock Option Plan for the three-year period ended December 31, 1997:
1997 1996 1995 ----------------------------- --------------------------- -------- Weighted-Average Weighted-Average Options Exercise Price Options Exercise Price Options ------- ----------------- -------- ----------------- -------- Options outstanding at beginning of year 6,398,292 $10.04 7,100,166 $ 8.16 6,036,116 Options granted 1,058,178 20.86 1,097,080 17.91 1,610,720 Options exercised (989,259) 6.51 (1,538,806) 6.52 (400,868) Options cancelled (224,810) 15.88 (260,148) 12.89 (145,802) ---------- ---------- ---------- Options outstanding at end of year 6,242,401 12.23 6,398,292 10.04 7,100,166 ---------- ---------- ---------- ---------- ---------- ---------- Weighted-average fair value of options granted during the year $8.13 $ 7.13 $ 5.45 ----- ------- ------- ----- ------- ------- Number of options exercisable at end of year 3,653,421 $ 8.45 3,649,876 $ 6.36 4,208,480 ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- -------- ---------- Options outstanding at December 31, 1997: Price range $1.65 to $10; weighted average contractual life of 3.3 years 2,175,274 $ 4.96 Price range $10.01 to $20; weighted average contractual life of 7.1 years 3,045,735 14.52 Price range $20.01 to $30; weighted average contractual life of 9.1 years 1,021,392 20.91 ---------- 6,242,401 ---------- ----------
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," became effective January 1, 1996. As is permitted under SFAS No. 123, the Company elected to continue to account for employee stock compensation (e.g., nonvested stock and stock options) in accordance with APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Under APB 25, the total compensation expense recognized is equal to the difference between the award's exercise price and the underlying stock's market price at the measurement date. SFAS No. 123 calculates the total compensation expense to be recognized as the fair value of the award at the date of grant for effectively all awards. For purposes of pro forma disclosures under SFAS No. 123, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share amounts):
1997 1996 1995 ---- ---- ---- Pro forma net income $169,883 $162,733 $110,201 Pro forma earnings per share: Basic $1.12 $1.08 $.73 Diluted 1.11 1.07 .73
In determining the effect of SFAS No. 123, the Black-Scholes option pricing model was used with the following weighted-average assumptions for 1997 and 1996: risk-free interest rate of approximately 6% and 5%, respectively; dividend yield of .5%; expected common stock market volatility factor of .4; and a weighted-average expected life of the options of two years from the vesting date. Forfeitures are recognized as they occur. These pro forma calculations only include the effects of 1997, 1996 and 1995 grants. 49 11. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share. All share and per share data have been adjusted to reflect the stock split described in Note 10. (In thousands, except per share amounts).
Year Ended December 31, 1997 1996 1995 ---- ---- ---- NUMERATOR Income from continuing operations used in computing basic and diluted earnings per share $174,070 $143,409 $111,050 -------- -------- -------- -------- -------- -------- DENOMINATOR Denominator for basic earnings per share - weighted-average common shares 151,650 150,683 149,972 Effect of dilutive securities - employee stock options and nonvested stock 2,298 2,242 1,928 -------- -------- -------- Denominator for diluted earnings per share - adjusted weighted-average shares 153,948 152,925 151,900 -------- -------- -------- -------- -------- -------- Basic earnings per share $1.15 $.95 $.74 ----- ---- ---- ----- ---- ---- Diluted earnings per share $1.13 $.94 $.73 ----- ---- ---- ----- ---- ----
12. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, finance receivables, debt and forward foreign exchange contracts. The book values of cash and cash equivalents, trade receivables and finance receivables are considered to approximate their respective fair values. None of the Company's debt instruments have readily ascertainable market values; however, the carrying values are considered to approximate their respective fair values. See Note 4, for the terms and carrying values of the Company's various debt instruments. The Company enters into forward foreign exchange contracts to hedge against sales transactions denominated principally in European currencies. At December 31, 1997, the Company had forward foreign exchange contracts that required it to convert these foreign currencies, at a variety of rates, into U.S. Dollars or German Deutsche Marks. These contracts represent a combined U.S. dollar equivalent commitment of approximately $70 million and $64 million at December 31, 1997 and 1996, respectively. The current contracts have maturities of less than one year. Unrealized gains and losses on these forward foreign exchange contracts, which were not material at December 31, 1997 or 1996, are deferred and recognized at the time the hedged transaction is settled. Eaglemark has interest rate cap and swap agreements to reduce the impact of fluctuations in interest rates on its floating rate debt. At December 31, 1997 and 1996, Eaglemark had approximately $20 million in interest rate caps outstanding. At December 31, 1997, Eaglemark had approximately $48 million in interest rate swaps outstanding. At December 31, 1997, the fair value of the caps and swaps, if Eaglemark were to terminate the agreements, was not material. 50 13. BUSINESS SEGMENTS AND FOREIGN OPERATIONS (a) BUSINESS SEGMENTS The Company operates in two business segments (excluding discontinued operations): Motorcycles and Related Products and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. The Motorcycles and Related Products ("Motorcycles") segment consists primarily of the Company's wholly-owned subsidiary, H-D Michigan, Inc., and its wholly-owned subsidiary, Harley-Davidson Motor Company. The Motorcycles segment designs, manufactures and sells primarily heavyweight (engine displacement of 651+cc) touring and custom motorcycles and a broad range of related products which include motorcycle parts and accessories and riding apparel. The Company, which is the only major American motorcycle manufacturer, has held the largest share of the United States heavyweight motorcycle market since 1986. The Company holds a smaller market share in the European market, which is a larger market than the United States, and in the Japanese market, which is a smaller market than the United States. The Financial Services ("Eaglemark") segment consists of the Company's majority-owned subsidiary, Eaglemark Financial Services, Inc. Eaglemark provides motorcycle floor planning and parts and accessories financing to the Company's participating North American dealers. Eaglemark also offers retail financing opportunities to the Company's domestic motorcycle customers. In addition, Eaglemark has established The Harley-Davidson Chrome VISA Card for customers in the United States. Eaglemark also provides property and casualty insurance for motorcycles as well as extended service contracts. A smaller portion of its customers are in other leisure products businesses. Prior to 1995, Eaglemark carried on business only in the United States. In 1995, Eaglemark expanded its operations to include Canada. The Company early adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective December 31, 1997. Adoption of the Statement required the Company to change the disclosure of geographic information but did not require significant changes in the way segments were disclosed. 51 13. BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED) Information by industry segment is set forth below (in thousands):
1997 1996 1995 ---- ---- ---- Net sales: Motorcycles and Related Products $1,762,569 $1,531,227 $1,350,466 Financial Services (1) n/a n/a n/a ----------- ------------ ----------- $1,762,569 $1,531,227 $1,350,466 ----------- ------------ ----------- ----------- ------------ ----------- Income from operations: Motorcycles and Related Products $265,486 $228,093 $184,475 Financial Services (1) 12,355 7,801 3,620 General corporate expenses (7,838) (7,448) (7,299) ----------- ----------- ----------- $270,003 $228,446 $180,796 ----------- ----------- ----------- ----------- ----------- -----------
Motorcycles and Related Transportation Financial Products Vehicles (2) Services(1) Corporate Consolidated ------------ --------------- ----------- --------- ------------ 1997 ---- Identifiable assets $856,779 n/a $598,514 $143,608 $1,598,901 Depreciation and amortization 66,426 n/a 3,489 263 70,178 Net capital expenditures 183,194 n/a 2,834 143 186,171 1996 ---- Identifiable assets $770,271 n/a $387,666 $142,048 $1,299,985 Depreciation and amortization 51,657 n/a 3,367 258 55,282 Net capital expenditures 176,771 n/a 1,994 6 178,771 1995 ---- Identifiable assets $575,118 $111,556 $269,461 $ 24,535 $ 980,670 Depreciation and amortization 41,754 n/a 320 255 42,329 Net capital expenditures 112,579 n/a 221 185 112,985
(1) The results of operations for the majority-owned financial services subsidiary are included as Operating income from financial services in the statements of operations. See Note 4. (2) The results of operations for the Transportation Vehicles segment are classified as discontinued operations in the statements of operations. See Note 3. 52 13. BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED) (b) GEOGRAPHIC INFORMATION Included in the consolidated financial statements are the following amounts relating to geographic locations:
1997 1996 1995 ---- ---- ---- (In thousands) Revenues (1): United States $1,304,748 $1,110,527 $ 949,415 Canada 62,717 58,053 48,046 Germany 81,541 82,800 102,638 Japan 90,243 79,401 69,350 Other foreign countries 223,320 200,446 181,017 ---------- ---------- ---------- $1,762,569 $1,531,227 $1,350,466 ---------- ---------- ---------- ---------- ---------- ---------- Long-lived assets (2): United States $607,363 $492,054 $353,801 Other foreign countries 7,073 7,508 5,325 --------- -------- -------- $614,436 $499,562 $359,126 --------- -------- -------- --------- -------- --------
(1) Revenues are attributed to geographic regions based on location of customer. (2) Long-lived assets include all long-term assets except those specifically excluded under SFAS No. 131 such as deferred income taxes and financial instruments, including finance receivables. 53 SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED) (In millions, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------- ------------- ------------- ------------- 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- Net sales $427.1 $371.1 $444.1 $392.8 $444.2 $385.8 $447.2 $381.5 Gross profit 138.2 115.8 150.3 124.8 145.2 120.5 152.5 129.0 Income from continuing operations 40.3 33.0 49.2 39.9 41.1 33.2 43.5 37.3 Income from discontinued operations, net of tax - - - - - - - 22.6 Net income 40.3 33.0 49.2 39.9 41.1 33.2 43.5 59.9 Earnings per common share from continuing operations: Basic .27 .22 .32 .26 .27 .22 .29 .25 Diluted .26 .22 .32 .26 .27 .22 .28 .24
54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 55 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included or to be included in the Company's definitive proxy statement for the 1998 annual meeting of shareholders, which will be filed within 120 days after the close of the Company's fiscal year ended December 31, 1997 (the "Proxy Statement"), under the captions "1-Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION The information included or to be included in the Proxy Statement under the caption "Executive Compensation" (except the information from and after the caption "Board of Directors Human Resources Committee Report on Executive Compensation") is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information included or to be included in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included or to be included in the Proxy Statement under the caption "Certain Transactions" is incorporated by reference herein. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS - The financial statements listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules are filed as part of this annual report and such Index to Consolidated Financial Statements and Financial Statement Schedules is incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES - The financial statement schedule listed in the accompanying Index to Consolidated Financial Statements and Financial Statement Schedules is filed as part of this annual report and such Index to Consolidated Financial Statements and Financial Statement Schedules is incorporated herein by reference. 3. EXHIBITS - The exhibits listed on the accompanying List of Exhibits are filed as part of this annual report and such List of Exhibits is incorporated herein by reference. 56 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES [Item 14(a) 1 and 2]
Page ---- Consolidated statements of operations for each of the three years in the period ended December 31, 1997 32 Consolidated balance sheets at December 31, 1997 and 1996 33 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1997 34 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1997 35 Notes to consolidated financial statements 36 Consolidated financial statement schedules for each of the three years in the period ended December 31, 1997 II - Valuation and qualifying accounts 60
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules. 57 LIST OF EXHIBITS [Items 14(a)(3) and 14(c)]
Exhibit No. Description - ----------- ----------- 3.1 Restated Articles of Incorporation 3.2 By-Laws 4.1 Form of Rights Agreement between the Registrant and Firstar Trust Company 4.2 Amendment to Rights Agreement dated as of June 21, 1991 4.3 Amendment to Rights Agreement dated as of August 23, 1995 10.1* Form of Employment Agreement between the Registrant and each of Messrs. Bleustein, and Teerlink 10.2* 1988 Stock Option Plan 10.3* 1990 Stock Option Plan 10.4* 1995 Stock Option Plan 10.5* Consulting Agreement between the Registrant and Mr. Beals 10.6* Form of Transition Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, McCaslin, Teerlink, Werner, Wilke and Ziemer and Ms. Lione. 10.7* Deferred Compensation Plan 10.8* Form of Life Insurance Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Hutchinson, McCaslin, Storm, Teerlink, Werner, Wilke and Ziemer and Ms. Lione 10.9* Harley-Davidson, Inc. Corporate Short Term Incentive Plan 10.10* Form of Restricted Stock Agreement between the Registrant and each of Messrs. Bleustein, Gray and McCaslin
* Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 58 LIST OF EXHIBITS [Items 14(a)(3)and 14(c)]
Exhibit No. Description - ----------- ----------- 10.11* Form of Severance Benefits Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Hutchinson, McCaslin, Storm, Teerlink, Werner, Wilke and Ziemer and Ms. Lione 10.12* Form of Supplemental Executive Retirement Plan Agreement between the Registrant and each of Messrs. Bleustein, Gray, Werner and Teerlink 10.13* Harley-Davidson Pension Benefit Restoration Plan 10.14* Description of post-retirement life insurance equivalent 21 List of Subsidiaries 23 Consent of Ernst & Young LLP, Independent Auditors 27.1 Financial Data Schedule for 1997 27.2 Restated Financial Data Schedule for 1996 27.3 Restated Financial Data Schedule for 1995 27.4 Restated Financial Data Schedule for the three months ended March 30, 1997 27.5 Restated Financial Data Schedule for the six months ended June 29, 1997 27.6 Restated Financial Data Schedule for the nine months ended September 28, 1997 27.7 Restated Financial Data Schedule for the three months ended March 31, 1996 27.8 Restated Financial Data Schedule for the six months ended June 30, 1996 27.9 Restated Financial Data Schedule for the nine months ended September 29, 1996
* Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 59 Schedule II HARLEY-DAVIDSON, INC. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1997, 1996 and 1995 (In thousands)
Balance at Additions Balance beginning charged to at end Classification of year expense Deductions(1) of year - -------------- ---------- ---------- ------------- ------- Accounts receivable - Allowance for doubtful accounts: 1997 $1,918 $ 0 $(370) $1,548 ------ ------ ------ ------ ------ ------ ------ ------ 1996 $1,541 $ 377 $ 0 $1,918 ------ ------ ------ ------ ------ ------ ------ ------ 1995 $1,750 $(123) $ (86) $1,541 ------ ------ ------ ------ ------ ------ ------ ------ Finance receivables - Allowance for doubtful accounts: 1997 $4,133 $6,547 $(3,813) $6,867 ------ ------ ------ ------ ------ ------ ------ ------ 1996 $3,359 $1,382 $ (608) $4,133 ------ ------ ------ ------ ------ ------ ------ ------ 1995 $2,638 $1,275 $ (554) $3,359 ------ ------ ------ ------ ------ ------ ------ ------ Inventories - Allowance for obsolescence and loss (2): 1997 $4,634 $1,642 $(2,518) $3,758 ------ ------ ------ ------ ------ ------ ------ ------ 1996 $2,232 $3,846 $(1,444) $4,634 ------ ------ ------ ------ ------ ------ ------ ------ 1995 $1,961 $1,857 $(1,586) $2,232 ------ ------ ------ ------ ------ ------ ------ ------
(1) Represents amounts written off to the reserve, net of recoveries. (2) Stated in last-in, first-out (LIFO) cost. 60 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, on March 30, 1998. HARLEY-DAVIDSON, INC. By: /S/ Jeffrey L. Bleustein --------------------------- Jeffrey L. Bleustein President, 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 and in the capacities indicated on March 30, 1998. Name Title ---- ----- /S/ Jeffrey L. Bleustein President, Chief Executive Officer ----------------------------- (Principal executive officer) and Director Jeffrey L. Bleustein /S/ James L. Ziemer Vice-President and Chief Financial Officer ----------------------------- (Principal financial officer) James L. Ziemer /S/ James M. Brostowitz Vice-President/Controller (Principal ----------------------------- accounting officer) and Treasurer James M. Brostowitz /S/ Barry K. Allen Director ----------------------------- Barry K. Allen /S/ Vaughn L. Beals Director ----------------------------- Vaughn L. Beals, Jr. /S/ Richard I. Beattie Director ----------------------------- Richard I. Beattie /S/ Richard J. Hermon-Taylor Director ----------------------------- Richard J. Hermon-Taylor /S/ Donald A. James Director ----------------------------- Donald A. James /S/ Richard G. LeFauve Director ----------------------------- Richard G. LeFauve /S/ Sara L. Levinson Director ----------------------------- Sara L. Levinson /S/ James A. Norling Director ----------------------------- James A. Norling /S/ Richard F. Teerlink Chairman and Director ----------------------------- Richard F. Teerlink 61 INDEX TO EXHIBITS ----------------- [Items 14(a)(3) and 14(c)]
EXHIBIT NO. DESCRIPTION - ----------- ----------- 3.1 Restated Articles of Incorporation. 3.2 By-Laws (incorporated herein by reference to Exhibit 3.2 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-9183)). 4.1 Form of Rights Agreement between the Registrant and Firstar Trust Company (incorporated herein by reference to Exhibit 4.6 to the Registrants' Quarterly Report on Form 10-Q for the period ended September 30, 1990 (File No. 1-9183)). 4.2 Amendment to Rights Agreement dated as of June 21, 1991 (incorporated herein by reference to Exhibit 4.8 to the Registrants's Registration Statement on Form 8-B dated June 24, 1991 (File No. 1-9183 (the "Form 8-B")). 4.3 Amendment to Rights Agreement dated as of August 23, 1995 (incorporated herein by reference to Exhibit 4 to the Registrants' Quarterly Report on Form 10-Q for the period ended September 24, 1995 (File No. 1-9183)). 10.1* Form of Employment Agreement between the Registrant and each of Messrs. Bleustein and Teerlink (incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (File No. 33-5871)). 10.2* Harley-Davidson, Inc. 1988 Stock Option Plan. 10.3* Harley-Davidson, Inc. 1990 Stock Option Plan. 10.4* Harley-Davidson, Inc. 1995 Stock Option Plan. 10.5* Consulting Agreement between the Registrant and Mr. Beals (incorporated herein by reference from Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 (File No. 1-9183)). 10.6* Form of Transition Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, McCaslin, Teerlink, Werner, Wilke and Ziemer and Ms. Lione (incorporated herein by reference to Exhibit 10.7 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-9183)). 10.7* Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.8 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-9183)).
* Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 62 INDEX TO EXHIBITS -------------------------- [Items 14(a)(3) and 14(c)]
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.8* Form of Life Insurance Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Hutchinson, McCaslin, Storm, Teerlink, Werner, Wilke and Ziemer and Ms. Lione (incorporated herein by reference from Exhibit 10.10 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1993 (File No. 1-9183)). 10.9* Harley-Davidson, Inc. Corporate Short Term Incentive Plan (incorporated herein by reference from Exhibit A to the Registrants' 1993 Proxy Statement for the May 14, 1994 Annual Meeting of Shareholders). 10.10* Form of Restricted Stock Agreement between the Registrant and each of Messrs. Bleustein, Gray and McCaslin (incorporated herein by reference to Exhibit 10.11 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-9183)). 10.11* Form of Severance Benefits Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Hutchinson, McCaslin, Storm, Teerlink, Werner, Wilke and Ziemer and Ms. Lione (incorporated herein by reference to Exhibit 10.12 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-9183)). 10.12* Form of Supplemental Executive Retirement Plan Agreement between the Registrant and each of Messrs. Bleustein, Gray, Werner and Teerlink (incorporated herein by reference from Exhibit 10.2 to the Registrants' Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No. 1-9183)). 10.13* Harley-Davidson Pension Benefit Restoration Plan (incorporated herein by reference from Exhibit 10.1 to the Registrants' Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No. 1-9183)). 10.14* Description of post-retirement life insurance equivalent (incorporated herein by reference to Exhibit 10.15 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-9183)). 21 List of Subsidiaries. 23 Consent of Ernst & Young LLP, Independent Auditors.
* Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 63 INDEX TO EXHIBITS ----------------- [Items 14(a)(3) and 14(c)]
EXHIBIT NO. DESCRIPTION - ----------- ----------- 27.1 Financial Data Schedule for 1997. 27.2 Restated Financial Data Schedule for 1996. 27.3 Restated Financial Data Schedule for 1995. 27.4 Restated Financial Data Schedule for the three months ended March 30, 1997. 27.5 Restated Financial Data Schedule for the six months ended June 29, 1997. 27.6 Restated Financial Data Schedule for the nine months ended September 28, 1997. 27.7 Restated Financial Data Schedule for the three months ended March 31, 1996. 27.8 Restated Financial Data Schedule for the six months ended June 30, 1996. 27.9 Restated Financial Data Schedule for the nine months ended September 29, 1996.
* Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 64 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION * * * * * ARTICLE I The name of the Corporation is Harley-Davidson, Inc. ARTICLE II The registered agent and registered office of the Corporation is CT Corporation System, 44 E. Mifflin St., Madison, Wisconsin 53703. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Wisconsin Business Corporation Law. ARTICLE IV (a) AUTHORIZED SHARES. The total number of shares of all classes of stock that the Corporation is authorized to issue is four hundred two million (402,000,000), consisting of (i) four hundred million (400,000,000) shares of Common Stock of $.01 par value ("Common Stock"), and (ii) two million (2,000,000) shares of Preferred Stock of $1.00 par value. All cross references in each Subdivision of this ARTICLE IV refer to other paragraphs in such subdivision unless otherwise indicated. (i) Voting Rights. The holders of Common Stock will be entitled to one vote per share on all matters to be voted on by the Corporation's shareholders. (ii) Registration of Transfer. The Corporation shall keep at its principal office (or such other place as the Corporation reasonably designates) a register for the registration of shares of Common Stock. Upon the surrender of any certificate representing shares of Common Stock at such place, the Corporation shall, at the request of the registered holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of shares of Common Stock represented by the surrendered certificate (and the Corporation forthwith shall cancel such surrendered certificate), subject to the requirements of applicable securities laws. Each such new certificate shall be registered in such name and shall represent such number of shares as shall be requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate. (iii) Replacement. (A) Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder without bond shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing one or more shares of Common Stock and, in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation, or, in the case of any such mutilation, upon surrender of such certificate, the Corporation shall, at the expense of the registered holder, execute and deliver in lieu of such certificate a new certificate of like kind representing the number of shares of Common Stock represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. (B) The term "outstanding" when used in this ARTICLE IV with reference to the shares of Common Stock as of any particular time shall not include any such shares represented by any certificate in lieu of which a new certificate has been executed and delivered by the Corporation in accordance with paragraph (ii) or this paragraph (iii), but shall include only those shares represented by such new certificate. (iv) DISSOLUTION. Upon the dissolution of the Corporation, after there shall have been paid to or set aside for the holders of shares of Preferred Stock the full preferential amounts to which they are entitled, if any, the holders of outstanding shares of Common Stock shall be entitled to receive pro rata the remaining net assets of the Corporation. (b) PREFERRED STOCK. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and the provisions of the Restated Articles of Incorporation of the Corporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for the issuances thereof, prior to the issuances of any shares thereof. Unless otherwise provided in the resolution establishing a series of Preferred Stock, prior to the issue of any shares of a series so established or to be established, the Board of Directors may, by resolution, amend the relative rights and preferences of the shares of such series. The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock shall be governed by the following provisions: -2- (i) The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, including (but not limiting the generality thereof) the following: (A) The number of shares to constitute each such series, and the designation of each such series. (B) The dividend rate of each such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes or on any other series of any class or classes of stock, and whether such dividends shall be cumulative or non-cumulative. (C) Whether the shares of each such series shall be subject to redemption by the Corporation and if made subject to such redemption, the times, prices and other terms and conditions of such redemption. (D) The terms and amount of any sinking fund provided for the purchase or redemption of the shares of each such series. (E) Whether or not the shares of each such series shall be convertible into or exchangeable for shares of any other class or classes or any other series of any other class or classes of stock of the Corporation, and, if provision be made for conversion or exchange, the times, prices, rates of exchange, adjustments, and other terms and conditions of such conversion or exchange. (F) The extent, if any, to which the holders of the shares of each such series shall be entitled to vote with respect to the election of directors or otherwise. (G) The restrictions, if any, on the issue or reissue of any additional Preferred Stock. (H) The rights of the holders of the shares of each such series upon the dissolution of, or upon the distribution of the assets of, the Corporation. (ii) Except as otherwise required by law and except for such voting powers with respect to the election of directors or other matters as may be stated in the resolutions of the Board of Directors creating any series of Preferred Stock, the holders of any such series shall have no voting powers whatsoever. -3- (c) SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. Pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of the Restated Articles of Incorporation, a series of shares of Preferred Stock, par value $1.00 per share, of the Corporation be and it hereby is created, and the designation and amount thereof and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" ("SERIES A PREFERRED STOCK") and the number of shares constituting such series shall be 500,000. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all cash dividends declared or paid on the Common Stock, presently $0.01 par value per share, of the Corporation ("COMMON STOCK") and (ii) a preferential cash dividend ("PREFERENTIAL DIVIDENDS"), if any, on the fifteenth day of January, April, July and October of each year (each a "QUARTERLY DIVIDEND PAYMENT DATE") commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount equal to $1.00 per share of Series A Preferred Stock less the per share amount of all cash dividends declared on the Series A Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall, at any time after the issuance of any share or fraction of a share of Series A Preferred Stock, make any distribution on the shares of Common Stock of the Corporation, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Corporation or otherwise, which is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to clause (i) of the immediately preceding sentence and other than a distribution of shares of Common Stock or other capital stock of the Corporation and other than a distribution of rights or warrants to acquire any such share, including any debt security convertible into or exchangeable for any such share, at a price less than the Current Market Price of such share), then and in each such event the Corporation shall simultaneously pay on each then outstanding share of Series A Preferred Stock of the Corporation a distribution, in like kind, of 100 times (subject to the provisions for adjustment hereinafter set forth) such distribution paid on a share of Common Stock. The dividends and distributions on the Series A Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and pursuant to the second sentence of this paragraph are hereinafter referred to as "PARTICIPATING DIVIDENDS" and the multiple of such cash and non-cash dividends on the Common Stock applicable to the determination of the -4- Participating Dividends, which shall be 100 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "DIVIDEND MULTIPLE". In the event the Corporation shall at any time after June 1, 1991 declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of Participating Dividends which holders of shares of Series A Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare each Participating Dividend at the same time it declares any cash or non-cash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid. No cash or noncash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid shall be paid or set aside for payment on the Common Stock unless a Participating Dividend in respect of such dividend or distribution on the Common Stock shall be simultaneously paid, or set aside for payment, on the Series A Preferred Stock. (C) Preferential Dividends shall begin to accrue on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of any shares of Series A Preferred Stock. Accrued but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. Section 3. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. The number of votes which a holder of Series A Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "VOTE MULTIPLE". In the event the Corporation shall at any time after June 1, 1991 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series A Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a fraction the numerator of which is the number -5- of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (C) In the event that the Preferential Dividends accrued on the Series A Preferred Stock for six or more consecutive quarterly dividend periods shall not have been declared and paid or set apart for payment, the holders of record of the Series A Preferred Stock, voting together with the holders of record of any other series of preferred stock of the Corporation who shall have been granted voting rights to elect directors upon a default in the payments of dividends by the Corporation, shall have the right, at the next meeting of shareholders called for the election of directors, voting as a class, to elect up to two members to the Board of Directors, which directors shall be in addition to the number provided for under the Corporation's Restated Articles of Incorporation prior to such event, to serve until the expiration of their respective terms and until their successors are elected and qualified or their earlier resignation, removal or incapacity or until such earlier time as all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full (PROVIDED, HOWEVER, that after giving effect to the exercise of such right, under no circumstances shall the number of members of the Board of Directors exceed the maximum number of directors, if any, then specified in the Restated Articles of Incorporation). The holders of shares of Series A Preferred Stock shall continue to have the right to elect directors as provided by the immediately preceding sentence until all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full. Such directors may be removed and replaced by such shareholders, and vacancies in such directorships may be filled only by such shareholders (or by the remaining director elected by such shareholders, if there be one) in the manner permitted by law. (D) Except as otherwise required by law or set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever Preferential Dividends are in arrears or the Corporation shall be in default in payment thereof, thereafter and until all accrued and unpaid Preferential Dividends, whether or not earned or declared, on shares of Series A Preferred Stock outstanding shall have been paid or set aside for payment in full, and in addition to any and all other rights which any holder of shares of Series A Preferred Stock may have in such circumstances, the Corporation shall not -6- (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to, the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series A Preferred Stock, unless dividends are paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) except as permitted by subparagraph (iv) of this paragraph 4 (A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock; PROVIDED that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up), except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. (C) The Corporation shall not issue any shares of Series A Preferred Stock except upon exercise of rights (the "RIGHTS") issued pursuant to that certain Rights Agreement dated as of August 6, 1990 between the Corporation (as successor to Harley-Davidson, Inc., a Delaware corporation) and First Wisconsin Trust Company (the RIGHTS AGREEMENT"), a copy of which is on file with the Secretary of the Corporation at its principal executive office and shall be made available to shareholders of record without charge upon written request therefor addressed to said Secretary. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Corporation from issuing for any purpose any series of preferred stock with rights and privileges similar to, different from, or greater than, those of the Series A Preferred Stock. -7- Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. The Corporation shall cause all such shares upon their retirement and cancellation to become authorized but unissued shares of Preferred Stock, without designation as to series, and such shares may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior to the Series A Preferred Stock (upon liquidation, dissolution or winding up) unless the holders of shares of Series A Preferred Stock shall have received, subject to adjustment as hereinafter provided, the greater of either (A) $1.00 per share plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the date of such payment, or (B) the amount equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Series A Preferred Stock are entitled under clause (i) (A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up. The amount to which holders of Series A Preferred Stock shall be entitled upon liquidation, dissolution or winding up of the Corporation pursuant to clause (i) (B) of the foregoing sentence is hereinafter referred to as the "PARTICIPATING LIQUIDATION AMOUNT" and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Corporation applicable pursuant to said clause to the determination of the Participating Liquidation Amount, which shall be 100 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "LIQUIDATION MULTIPLE". In the event the Corporation shall at any time after June 1, 1991 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series A Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CERTAIN RECLASSIFICATIONS AND OTHER EVENTS. (A) In the event that holders of shares of Common Stock of the Corporation receive after June 1, 1991 in respect of their shares of Common Stock any share of capital stock of the Corporation (other than any share of Common Stock of the Corporation), whether by way of reclassification, recapitalization, reorganization, dividend or other distribution or otherwise -8- (a "TRANSACTION"), then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Corporation of the shares of Series A Preferred Stock shall be adjusted so that after such event the holders of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Corporation as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Corporation by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock of the Corporation receive after June 1, 1991 in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for Common Stock) at a purchase price per share less than the Current Market Price (as hereinafter defined) of a share of Common Stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Corporation of the shares of Series A Preferred Stock shall each be adjusted so that after such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Current Market Price of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In the event that holders of shares of Common Stock of the Corporation receive after June 1, 1991 in respect of their shares of Common Stock any right or warrant (except for the Rights) to purchase capital stock of the Corporation (other than shares of Common Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for capital stock of the Corporation (other than Common Stock), at a purchase price per share less than the Current Market Price of such shares of capital stock on the date of issuance of such right or warrant, then and in each such event the dividend -9- rights, voting rights and rights upon liquidation, dissolution or winding up of the Corporation of the shares of Series A Preferred Stock shall each be adjusted so that after such event each holder of a share of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such event, to receive (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional dividends to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined) and (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction and (iii) such additional distributions upon liquidation, dissolution or winding up of the Corporation as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Corporation upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "DISCOUNT FRACTION" shall be a fraction the numerator of which shall be the difference between the Current Market Price (as hereinafter defined) of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock of the Corporation as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and the denominator of which shall be the Current Market Price of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Section 7, the "CURRENT MARKET PRICE" of a share of capital stock of the Corporation (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing prices per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; PROVIDED, HOWEVER, that, in the event that such Current Market Price of any such share of capital stock is determined during a period which includes any date that is within 30 Trading Days after the ex-dividend date for (i) a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then, and in each such case, the Current Market Price shall be appropriately adjusted by the Board of Directors of the Corporation to reflect the Current Market Price of such stock to take into account ex-dividend trading. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal -10- national securities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors of the Corporation. The term "TRADING DAY" shall mean a day on which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to trading on any national securities exchange, on which the New York Stock Exchange or such other national securities exchange as may be selected by the Board of Directors of the Corporation is open. If the shares are not publicly held or not so listed or traded on any day within the period of 30 Trading Days applicable to the determination of Current Market Price thereof as aforesaid, "Current Market Price" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors of the Corporation. In either case referred to in the foregoing sentence, the determination of Current Market Price shall be described in a statement filed with the Secretary of the Corporation. Section 8. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination, share exchange or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Vote Multiple, the Dividend Multiple or the Liquidation Multiple in effect immediately prior to such event. Section 9. EFFECTIVE TIME OF ADJUSTMENTS. (A) Adjustments to the Series A Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustments occurs. (B) The Corporation shall give prompt written notice to each holder of a share of Series A Preferred Stock of the effect of any adjustment to the voting rights, dividend rights or rights upon liquidation, dissolution or winding up of the Corporation of such shares required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Corporation to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. Section 10. NO REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable at the option of the Corporation or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Corporation may acquire shares of Series A Preferred -11- Stock in any other manner permitted by law, the provisions hereof and the Restated Articles of Incorporation of the Corporation. Section 11. RANKING. Unless otherwise provided in the Restated Articles of Incorporation of the Corporation or Articles of Amendment relating to a subsequent series of preferred stock of the Corporation, the Series A Preferred Stock shall rank junior to all other series of the Corporation's preferred stock (as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up) and senior to the Common Stock. Section 12. AMENDMENT. Subsequent to the Distribution Date (as defined under the Rights Agreement), the provisions hereof and the Restated Articles of Incorporation of the Corporation shall not be amended in any manner which would adversely affect the rights, privileges or powers of the Series A Preferred Stock without, in addition to any other vote of shareholders required by law, the affirmative vote of the holders of eighty percent or more of the outstanding shares of Series A Preferred Stock, voting together as a single class. Section 13. FRACTIONAL SHARES. A holder of one or more fractional shares of Series A Preferred Stock shall, to the extent of such fractional shares held, be entitled to exercise voting rights, receive dividends thereon, participate in any of the assets of the Corporation in the event of liquidation and otherwise exercise the rights and receive the benefits to which holders of Series A Preferred Stock are entitled. ARTICLE V (a) VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. (i) In addition to any affirmative vote required by law or these Restated Articles of Incorporation, and except as otherwise expressly provided in Section (b) of this ARTICLE V: (A) any merger of the Corporation or any Subsidiary (as hereinafter defined), or any share exchange to which the Corporation is a party with (I) any Interested Shareholder (as hereinafter defined) or (II) any other corporation (whether or not an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or (B) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or in a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of all or a Substantial Part of the assets of the Corporation (including, without limitation, any securities of a Subsidiary) or any Subsidiary; or -12- (C) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or in a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof); or (D) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or (E) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger of the Corporation with any of its Subsidiaries or any share exchange to which the Corporation is a party or any self tender offer for or repurchase of securities of the Corporation by the Corporation or any Subsidiary or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder, shall require the affirmative vote of the holders of at least 66-2/3% of the voting power of the then outstanding shares of stock of the Corporation entitled to vote generally in the election of directors (the "Voting Stock") (it being understood that for purposes of this ARTICLE V, each share of the Voting Stock shall have the number of votes granted to it pursuant to ARTICLE IV of these Restated Articles of Incorporation), which vote shall include the affirmative vote of at least a majority of the voting power of the then outstanding shares of Voting Stock held by shareholders other than the Interested Shareholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by these Restated Articles of Incorporation or in any agreement with any national securities exchange or otherwise. (ii) The term "Business Combination" as used in this ARTICLE V shall mean any transaction which is referred to in any one or more of subparagraphs (A) through (E) of paragraph (i) of this Section (a). (b) WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Section (a) of this ARTICLE V shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law, any other provision of these Restated Articles of Incorporation or any agreement with any national securities exchange, if, in the case of a Business Combination that does not involve any cash or other consideration being received by the shareholders of the Corporation, solely in their respective capacities as shareholders of the Corporation, the condition specified in the following paragraph -13- (i) is met, or, in the case of any other Business Combination, the conditions specified in either of the following paragraphs (i) and (ii) are met: (i) The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). (ii) Each of the five conditions specified in the following subparagraphs (A) through (E) shall have been met: (A) The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of consummation of the Business Combination of consideration other than cash to be received per share by holders of each class of Voting Stock in such Business Combination shall be at least equal to the higher of the following: (I) (if applicable) the Highest Per Share Price (as hereinafter defined) (including the brokerage commissions, transfer taxes and soliciting dealers' fees) paid in order to acquire any shares of such class of Voting Stock beneficially owned by the Interested Shareholder which were acquired beneficially by such Interested Shareholder (x) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (y) in the transaction in which it became an Interested Shareholder, whichever is higher; or (II) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this ARTICLE V as the "Determination Date"), whichever is higher; or (III) an amount which bears the same or greater percentage relationship to the Fair Market Value of such class of Voting Stock on the Announcement Date as the Highest Per Share Price determined in (ii) (A) (I) above bears to the Fair Market Value of such class of Voting Stock on the date of the commencement of the acquisition of Voting Stock by such Interested Shareholder. (B) The consideration to be received by holders of the outstanding Voting Stock shall be in cash or in the same form as was previously paid in order to acquire beneficially shares of Voting Stock that are beneficially owned by the Interested Shareholder. If the Interested Shareholder beneficially owns shares of Voting Stock that were acquired with varying forms of consideration, the form of consideration to be received by holders of Voting Stock shall be either cash or -14- the form used to acquire beneficially the largest number of shares of Voting Stock beneficially acquired by it prior to the Announcement Date. (C) After such Interested Shareholder has become an Interested Shareholder and prior to consummation of such Business Combination: (I) there shall have been (x) no reduction in the annual rate of dividends paid on the Voting Stock (except as necessary to reflect any subdivision of the Voting Stock), except as approved by a majority of the Disinterested Directors, and (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Voting Stock, unless the failure so to increase such annual rate is approved by a majority of the Disinterested Directors; and (II) such Interested Shareholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which resulted in such Interested Shareholder becoming an Interested Shareholder. (D) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (E) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). (c) CERTAIN DEFINITIONS. For the purposes of this ARTICLE V: (i) A "person" shall mean any individual, firm, corporation, group (as such term is defined in Section 13(d) (3) of the Securities Exchange Act of 1934, as in effect on March l, 1991) or other entity. (ii) "Interested Shareholder" shall mean any person (other than the Corporation, any Subsidiary or any compensation or retirement plan of the Corporation) who or which, as of the record date for the determination of shareholders entitled to notice of and to vote on such Business Combination or immediately prior to the consummation of any such transaction: -15- (A) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or (B) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock; or (C) is an assignee of or has otherwise succeeded to beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (iii) A person shall be a "beneficial owner" of any Voting Stock: (A) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (B) which such person or any of its Affiliates or Associates has (I) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise or (II) the right to vote or direct the vote pursuant to any agreement, arrangement or understanding; or (C) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purposes of acquiring, holding, voting or disposing of any shares of Voting Stock. (iv) For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph (ii) of this Section (c), the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph (iii) of this Section (c) but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding or upon exercise of conversion rights, warrants or options, or otherwise. (v) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on March 1, 1991. -16- (vi) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation or by a Subsidiary or by the Corporation and one or more subsidiaries; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph (ii) of this Section (c), the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (vii) "Substantial Part" means more than 10% of the book value of the total assets of the person or entity in question, as of the end of its most recent fiscal year ending prior to the time of the determination. (viii) "Disinterested Director" means any member of the Board of Directors of the Corporation who is unaffiliated with, and not a nominee of, the Interested Shareholder and was a member of the Board of Directors prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with, and not a nominee of, the Interested Shareholder and who is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. (ix) "Fair Market Value" means: (A) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the Composite Tape for American Stock Exchange-Listed Stocks, or if such stock is not quoted on such Composite Tape, on the American Stock Exchange or on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sales price or bid quotation with respect to a share of stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith; and (B) in the case of stock of any class or series which is not traded on any United States registered securities exchange nor in the over-the-counter market or in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. (x) References to "Highest Per Share Price" shall reflect an appropriate adjustment for any dividend or distribution in shares of Voting Stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. -17- (xi) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in subparagraph (A) of paragraph (ii) of Section (b) of this ARTICLE V shall include the shares of Voting Stock retained by the holders of such shares. (d) POWERS OF THE BOARD OF DIRECTORS. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this ARTICLE V on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this ARTICLE V, including, without limitation, (i) whether a person is an Interested Shareholder, (ii) whether a Business Combination is proposed by or on behalf of an Interested Shareholder or an Affiliate of an Interested Shareholder, (iii) the number of shares of Voting Stock beneficially owned by any person, (iv) whether a person is an Affiliate or Associate of another person, (v) whether the requirements of Section (b) (ii) of this ARTICLE V have been met with respect to any Business Combination, and (vi) whether any Business Combination involves all or a Substantial Part of the assets of the Corporation or any Subsidiary. The good faith determination of a majority of the Disinterested Directors shall be conclusive and binding for all purposes of this ARTICLE V. (e) NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing contained in this ARTICLE V shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. (f) AMENDMENT OR REPEAL. Notwithstanding any other provision of these Restated Articles of Incorporation or the By-laws of the Corporation to the contrary (and notwithstanding the fact that a lesser percentage may be specified by law, these Restated Articles of Incorporation or the By-laws of the Corporation), the affirmative vote of the holders of at least 66-2/3% of the voting power of the then outstanding shares of Voting Stock shall be required to alter, amend or repeal this ARTICLE V or to adopt any provision inconsistent therewith provided, however, that if there is an Interested Shareholder on the record date for the meeting at which such action is submitted to the shareholders for this consideration, such 66-2/3% vote must include the affirmative vote of at least a majority of the voting power of the then outstanding shares of Voting Stock held by shareholders other than the Interested Shareholder. ARTICLE VI (a) BOARD OF DIRECTORS. (i) NUMBER, TERM AND QUALIFICATION. The authorized number of directors of the Corporation which shall constitute the entire Board of Directors shall be such as from time to time shall be determined by a majority of the then authorized number of directors, but in no case shall the authorized number of directors be less than six nor more than fifteen. The directors shall be divided with respect to the time for which they severally hold office into three classes, as nearly equal in number as possible (but with -18- not less than two directors in each class), as determined by the Board of Directors, with the members of each class to hold office until their successors have been elected and qualified. At each annual meeting of shareholders, the successors of the members of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (ii) REMOVAL. Any director may be removed from office by the shareholders, but only for cause and only by the affirmative vote of a majority of the votes then entitled to be cast in an election of directors. (iii) VACANCIES. Any vacancy occurring in the Board of Directors, including, but not limited to, a vacancy created by an increase in the number of directors or the removal of a director, shall be filled only by the affirmative vote of a majority of the directors then in office, even if such majority is less than a quorum of the Board of Directors, or by a sole remaining director. If no director remains in office, any vacancy may be filled by the shareholders. Any director elected to fill a vacancy shall serve until the next election of the class for which such director shall have been chosen. (b) NOMINATIONS AND QUALIFICATIONS OF DIRECTORS. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote generally in the election of directors. However, any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 60 calendar days in advance of the date in the current fiscal year of the Corporation corresponding to the date the Corporation released its proxy statement to shareholders in connection with the annual meeting for the immediately preceding year and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (A) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated, (B) a representation that the shareholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (C) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder, (D) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the then current proxy rules of the Securities and Exchange Commission, if the nominee were to be nominated by the Board and (E) the consent of each nominee to serve as a director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in -19- compliance with the foregoing procedure. The directors shall be at least twenty-one years of age. Directors need not be shareholders. At each meeting of shareholders for the election of directors at which a quorum is present, the persons receiving a plurality of the votes cast shall be elected directors. ARTICLE VII The shareholders shall not be entitled to take action without a meeting by less than unanimous consent. Except as otherwise required by law and subject to the express rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, annual and special meetings of the shareholders shall be called, the record date or dates shall be determined and notice shall be sent as set forth in the By-laws of the Corporation. Notwithstanding any other provisions of these Restated Articles of Incorporation or the By-laws of the Corporation (and notwithstanding the fact that a lesser affirmative vote may be specified by law), the affirmative vote of shareholders possessing at least eighty percent of the voting power of the then outstanding shares of all classes of stock of the Corporation generally possessing voting rights in elections of directors, considered for this purpose as one class, shall be required to amend, alter, change or repeal, or to adopt any provision inconsistent with, sections 1.02, 1.04 and 1.05 of Article I of the By-laws, or this ARTICLE VII or any provision thereof or hereof; provided, however, that the Board of Directors, may amend, alter, change or repeal, or adopt any provision inconsistent with, sections 1.02, 1.04 and 1.05 of Article I of the By-laws, or any provision thereof, without a vote of shareholders. ARTICLE VIII Unless a greater number is required by law or by these Restated Articles of Incorporation, (a) action on a matter, other than the election of directors, by a voting group of shareholders is approved only if a majority of the votes within the voting group represented (in person or by proxy) at a meeting at which a quorum is present are cast in favor of the action and (b) notwithstanding Section (a) of this Article VIII, these Restated Articles of Incorporation may only be amended by the affirmative vote of a majority of the votes entitled to be cast by each voting group of shareholders entitled to vote on the amendment. ARTICLE IX Annual meetings of shareholders shall be held, at a date, time and place fixed by the Board of Directors and stated in the notice of meeting, to elect a Board of Directors and to transact such other business as may properly come before the meeting. Special meetings of shareholders may be called only in accordance with the provisions of ARTICLE VII of these Restated Articles of Incorporation. At each meeting of shareholders only such business may be -20- conducted as is (a) specified in the written notice of meeting given by or at the direction of the Board of Directors, (b) in the case of an annual meeting, brought before the meeting by the Board of Directors or by the chairman of the meeting or (c) in the case of an annual meeting, specified in a written notice given by or on behalf of a shareholder of record, provided that written notice of such shareholder's intent to make a proposal or proposals has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than 60 calendar days in advance of the date in the current fiscal year of the Corporation corresponding to the date the Corporation released its proxy statement to shareholders in connection with the annual meeting for the immediately preceding year. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the proposal and the number of shares of the Corporation's capital stock owned or controlled by such shareholder, (b) a representation that the shareholder is entitled to vote at such annual meeting and intends to appear in person or by proxy at the annual meeting to make the proposal specified in the notice and (c) such other information regarding each proposal made by such shareholder as would be required to be included in a proxy statement filed pursuant to the then current proxy rules of the Securities and Exchange Commission with respect to such proposals. The chairman of the meeting may refuse to acknowledge any proposal not made in compliance with the foregoing procedure. -21- EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 HARLEY-DAVIDSON, INC. 1988 STOCK OPTION PLAN (as amended through August 20, 1997) ARTICLE I PURPOSE The purpose of the Harley-Davidson, Inc. 1988 Stock Option Plan is to provide favorable opportunities for certain selected employees of Harley-Davidson, Inc. and its subsidiaries to purchase or receive shares of Common Stock of Harley-Davidson, Inc., or to benefit from the appreciation thereof. Such opportunities should provide an increased incentive for these employees to contribute to the future success and prosperity of Harley-Davidson, Inc., thus enhancing the value of the stock for the benefit of the shareholders, and increase the ability of Harley-Davidson, Inc. to attract and retain individuals of exceptional skill upon whom, in large measure, its sustained progress, growth and profitability depend. ARTICLE II DEFINITIONS The following capitalized terms used in the Plan shall have the respective meanings set forth in this Article: 2.1. BOARD: The Board of Directors of Harley-Davidson, Inc. 2.2. CODE: The Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. 2.3. COMMITTEE: The Human Resources Committee of the Board; provided that if any member of the Human Resources Committee is not both a Disinterested Person and Outside Director, the Committee shall be comprised of only those members of the Human Resources Committee who are both Disinterested Persons and Outside Directors. 2.4. COMMON STOCK: The common stock of Harley-Davidson, Inc. 2.5. COMPANY: Harley-Davidson, Inc. and any of its Subsidiaries. 2.6. DISABILITY: Disability within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. 2.7. DISINTERESTED PERSONS: Non-employee directors within the meaning of Rule 16b-3 as promulgated under the Securities Exchange Act of 1934, as amended. 2.8. EMPLOYER: The entity that employs the employee or Optionee. 2.9. FAIR MARKET VALUE: The average of the high and low reported sales prices of Common Stock on the New York Stock Exchange Composite Tape on the date for which fair market value is being determined. 2.10. ISO: An incentive stock option within the meaning of Section 422 of the Code and which is designated as an incentive stock option by the Committee. 2.11. NON-ISO: A stock option which is not an ISO. 2.12. OPTION: A stock option granted under the Plan. Options include both ISOs and Non-ISOs. 2.13. OPTION PRICE: The purchase price of a share of Common Stock under an Option. 2.14. OPTIONEE: A person who has been granted one or more Options. 2.15. OUTSIDE DIRECTORS: Outside Directors within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. 2.16. PARENT CORPORATION: The parent corporation, as defined in Section 424(e) of the Code. 2.17. PLAN: The Harley-Davidson, Inc. 1988 Stock Option Plan. 2.18. RETIREMENT: Retirement on or after age sixty-two or, with the consent of the Committee, at an earlier age. 2.19. SUBSIDIARY: A corporation, limited partnership, general partnership, limited liability company, business trust or other entity of which more than fifty percent (50%) of the voting power or ownership interest is directly and/or indirectly held by the Harley-Davidson, Inc. 2.20. TERMINATION DATE: A date fixed by the Committee but not later than the day preceding the tenth anniversary of the date on which the Option is granted. ARTICLE III ADMINISTRATION 3.1. The Committee shall administer the Plan and shall have full power to grant Options, construe and interpret the Plan, establish and amend rules and regulations for its administration, and perform all other acts relating to the Plan, including the delegation of administrative responsibilities, which it believes reasonable and proper. 3.2. Subject to the provisions of the Plan, the Committee shall, in its discretion, determine who shall be granted Options, the number of shares subject to option under any such Options, the dates after which Options may be exercised, in whole or in part, whether Options shall be ISOs, and the terms and conditions of the Options. 3.3. Any decision made, or action taken, by the Committee arising out of or in connection with the interpretation and administration of the Plan shall be final and conclusive. ARTICLE IV SHARES SUBJECT TO THE PLAN 4.1. The total number of shares of Common Stock available for grants of Options under the Plan shall be 1,600,000; provided that Options for not more than 400,000 shares of Common Stock shall be granted to an Optionee in any calendar year under the Plan, which amount shall be reduced by the amount of Common Stock subject to options granted to such Optionee in such calendar year under any other stock option plan of the Company. The foregoing amounts shall be subject to adjustment in accordance with Article VIII of the Plan. These shares may be either authorized but unissued or reacquired shares of Common Stock. If an Option or portion thereof shall expire, be canceled or terminate for any reason without having been exercised in full, the unpurchased shares covered by such Option shall be available for future grants of Options. An Option, or portion thereof, exercised through the exercise of a stock appreciation right pursuant to Section 6.7 of the Plan shall be treated, for the purposes of this Article, as though the Option, or portion thereof, had been exercised through the purchase of Common Stock, 2 with the result that the shares of Common Stock subject to the Option, or portion thereof, that was so exercised shall not be available for future grants of Options. ARTICLE V ELIGIBILITY 5.1. Options may be granted to key employees of the Company or to persons who have been engaged to become key employees of the Company. Key employees will comprise, in general, those who contribute to the management, direction and overall success of the Company, including those who are members of the Board. Members of the Board who are not employees of the Company shall not be eligible for Option grants. ARTICLE VI TERM OF OPTIONS 6.1. OPTION AGREEMENTS: All Options shall be evidenced by written agreements executed by the Company. Such Options shall be subject to the applicable provisions of the Plan, and shall contain such provisions as are required by the Plan and any other provisions the Committee may prescribe. All agreements evidencing Options shall specify the total number of shares subject to each grant, the Option Price and the Termination Date. Those Options that comply with the requirements for an ISO set forth in Section 422 of the Code and are designated ISOs by the Committee shall be ISOs and all other Options shall be Non-ISOs. 6.2. OPTION PRICE: The Option Price shall be set by the Committee; provided, however, that the price per share shall not be less than the Fair Market Value of a share of Common Stock on the date the Option is granted. 6.3. PERIOD OF EXERCISE: The Committee shall determine the dates after which Options may be exercised in whole or in part. If Options are exercisable in installments, installments or portions thereof that are exercisable and not exercised shall accumulate and remain exercisable. The Committee may also amend an Option to accelerate the dates after which Options may be exercised in whole or in part. However, no Option or portion thereof shall be exercisable after the Termination Date. 6.4. SPECIAL RULES REGARDING ISOS GRANTED TO CERTAIN EMPLOYEES: Notwithstanding any contrary provisions of Sections 6.2 and 6.3 of the Plan, no ISO shall be granted to any employee who, at the time the Option is granted, owns (directly or indirectly, within the meaning of Section 424(d) of the Code) more than ten percent of the total combined voting power of all classes of stock of the Employer or of any Subsidiary or Parent Corporation thereof, unless (a) the Option Price under such Option is at least 110 percent of the Fair Market Value of a share of Common Stock on the date the Option is granted and (b) the Termination Date of such Option is a date not later than the day preceding the fifth anniversary of the date on which the Option is granted. 6.5. MANNER OF EXERCISE AND PAYMENT: An Option, or portion thereof, shall be exercised by delivery of a written notice of exercise to the Company and payment of the full price of the shares being purchased pursuant to the Option. An Optionee may exercise an Option with respect to less than the full number of shares for which the Option may then be exercised, but an Optionee must exercise the Option in full shares of Common Stock. The price of Common Stock purchased pursuant to an Option, or portion thereof, may be paid: a. in United States dollars in cash or by check, bank draft or money order payable to the order of the Company. b. through the delivery of shares of Common Stock with an aggregate Fair Market Value on the date of exercise equal to the Option Price, or 3 c. by any combination of the above methods of payment. The Committee shall determine acceptable methods for tendering Common Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Common Stock to exercise an Option as it deems appropriate, including, without limitation, any limitation or prohibition designed to avoid certain accounting consequences which may result from the use of Common Stock as payment upon exercise of an Option. 6.6. WITHHOLDING TAXES: The Company may, in its discretion, require an Optionee to pay to the Company at the time of exercise the amount that the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise. Upon or prior to the exercise of an Option requiring tax withholding, an Optionee may make a written election to have shares of Common Stock withheld by the Company from the shares otherwise to be received. The number of shares so withheld shall have an aggregate Fair Market Value on the date of exercise sufficient to satisfy the applicable withholding taxes. The acceptance of any such election by an Optionee shall be at the sole discretion of the Committee. Where the exercise of an Option does not give rise to an obligation to withhold Federal income taxes on the date of exercise, the Company may, in its discretion, require an Optionee to place shares of Common Stock purchased under the Option in escrow for the benefit of the Company until such time as Federal income tax withholding is required on amounts included in the gross income of the Optionee as a result of the exercise of an Option. At such time, the Company, in its discretion, may require an Optionee to pay to the Company the amount that the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise of the Option, in which case the shares of Common Stock will be released from escrow to the Optionee. Alternatively, subject to acceptance by the Committee, in its sole discretion, an Optionee may make a written election to have shares of Common Stock held in escrow applied toward the Company's obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise of the Option, based on the Fair Market Value of the shares on the date of the termination of the escrow arrangement. Upon application of such shares toward the Company's withholding obligation, any shares of Common Stock held in escrow and not, in the judgment of the Committee, necessary to satisfy such obligation shall be released from escrow to the Optionee. 6.7. STOCK APPRECIATION RIGHTS: At or after the grant of an Option, the Committee, in its discretion, may provide an Optionee with an alternate means of exercising an Option, or a designated portion thereof, by granting the Optionee a stock appreciation right. A "stock appreciation right" is a right to receive, upon exercise of an Option or any portion thereof, in the Committee's sole discretion, an amount of cash equal to, and/or shares of Common Stock having a Fair Market Value on the date of exercise equal to, the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Option Price, multiplied by the number of shares of Common Stock that the Optionee would have received had the Option or portion thereof been exercised through the purchase of shares of Common Stock at the Option Price, provided that (a) such Option or portion thereof has been designated as exercisable in this alternative manner, (b) such Option or portion thereof is otherwise exercisable, and (c) the Fair Market Value of a share of Common Stock on the date of exercise exceeds the Option Price. 6.8. NONTRANSFERABILITY OF OPTIONS: Each Option shall, during the Optionee's lifetime, be exercisable only by the Optionee, and neither it nor any right hereunder shall be transferable otherwise than by will or the laws of descent and distribution or be subject to attachment, execution or other similar process. In the event of any attempt by the Optionee to alienate, assign, pledge, hypothecate or otherwise dispose of an Option or of any right hereunder, except as provided for herein, or in the event of any levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Optionee and the Option shall thereupon become null and void. 6.9. CESSATION OF EMPLOYMENT OF OPTIONEE: a. CESSATION OF EMPLOYMENT OTHER THAN BY REASON OF RETIREMENT, DISABILITY OR DEATH. If an Optionee shall cease to be employed by the Company otherwise than by reason of Retirement, 4 Disability, or death, each Option held by the Optionee, together with all rights hereunder, shall terminate on the date of cessation of employment, to the extent not previously exercised. b. CESSATION OF EMPLOYMENT BY REASON OF RETIREMENT OR DISABILITY. If an Optionee shall cease to be employed by the Company by reason of Retirement or Disability, each Option held by the Optionee shall remain exercisable, to the extent it was exercisable at the time of cessation of employment, until the earliest of: i. the Termination Date, ii. the death of the Optionee, or such later date not more than one year after the death of the Optionee as the Committee, in its discretion, may provide pursuant to Section 6.9(c) of the Plan, iii. the third anniversary of the date of the cessation of the Optionee's employment, if employment ceased by reason of Retirement, or iv. the first anniversary of the date of the cessation of the Optionee's employment by reason of Disability; and thereafter all such Options shall terminate together with all rights hereunder, to the extent not previously exercised. c. CESSATION OF EMPLOYMENT BY REASON OF DEATH. In the event of the death of the Optionee, while employed by the Company, an Option may be exercised at any time or from time to time prior to the earlier of the Termination Date or the first anniversary of the date of the Optionee's death, by the person or persons to whom the Optionee's rights under each Option shall pass by will or by the applicable laws of descent and distribution, to the extent that the Optionee was entitled to exercise such Option on the Optionee's date of death. In the event of the death of the Optionee while entitled to exercise an Option pursuant to Section 6.9(b), the Committee, in its discretion, may permit such Option to be exercised at any time or from time to time prior to the Termination Date during a period of up to one year from the death of the Optionee, as determined by the Committee, by the person or persons to whom the Optionee's rights under each Option shall pass by will or by the applicable laws of descent and distribution, to the extent that the Option was exercisable at the time of cessation of the Optionee's employment. Any person or persons to whom an Optionee's rights under an Option have passed by will or by the applicable laws of descent and distribution shall be subject to all terms and conditions of the Plan and the Option applicable to the Optionee. 6.10. NOTIFICATION OF SALES OF COMMON STOCK: Any Optionee who disposes of shares of Common Stock acquired upon the exercise of an ISO either (a) within two years after the date of the grant of the ISO under which the stock was acquired or (b) within one year after the transfer of such shares to the Optionee, shall notify the Company of such disposition and of the amount realized upon such disposition. ARTICLE VII LIMITATIONS AND ACCELERATIONS ON EXERCISABILITY 7.1. Notwithstanding any other provision of this Plan, in the case of an ISO, the aggregate Fair Market Value (determined at the time the ISO is granted) of the shares of Common Stock with respect to which all "incentive stock options" (within the meaning of Section 422 of the Code) are first exercisable by the Optionee during any calendar year (under this Plan and under all other incentive stock option plans of the Employer, any Subsidiary and any Parent Corporation) shall not exceed $100,000. 5 ARTICLE VIII ADJUSTMENTS 8.1. If (a) the Company shall at any time be involved in a transaction to which Section 424(a) of the Code is applicable; (b) the Company shall declare a dividend payable in, or shall subdivide or combine, its Common Stock; or (c) any other event shall occur which in the judgment of the Committee necessitates an adjustment to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in such manner as it may deem equitable, adjust any or all of (i) the number and type of securities subject to the Plan and which thereafter may be the subject of Options; (ii) the number and type of securities subject to outstanding Options; (iii) the Option Price with respect to any Option; and (iv) the number of shares of Common Stock that may e issued pursuant to Options granted to an Optionee in any calendar year; provided, however, that each such adjustment, in the case of ISOs, shall be made in such manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. The judgment of the Committee with respect to any matter referred to in this Article shall be conclusive and binding upon each Optionee. ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1. The Board may at any time, or from time to time, suspend or terminate the Plan in whole or in part or amend it in such respects as the Board may deem appropriate, provided, however, that no such amendment shall be made, which would, without approval of the shareholders: a. materially modify the eligibility requirements for receiving Options; b. increase the aggregate number of Shares of Common Stock which may be issued pursuant to Options granted under the Plan, except as is provided for in accordance with Article VIII of the Plan; c. Increase the number of shares of Common Stock which may be issued pursuant to Options granted to an Optionee in any calendar year, except as is provided for in accordance with Article VIII of the Plan; d. reduce the minimum Option Price, except as is provided for in accordance with Article VIII of the Plan; e. extend the period of granting Options; or f. materially increase in any other way the benefits accruing to Optionees. 9.2. No amendment, suspension or termination of this Plan shall, without the Optionee's consent, alter or impair any of the rights or obligations under any Option theretofore granted to an Optionee under the Plan. 9.3. The Board may amend this Plan, subject to the limitations cited above, in such manner as it deems necessary to permit the granting of Options meeting the requirements of future amendments or issued regulations, if any, to the Code. ARTICLE X GOVERNMENT AND OTHER REGULATIONS 10.1. The obligation of the Company to issue or transfer and deliver shares for Options exercised under the Plan shall be subject to all applicable laws, regulations, rules, orders and approvals which shall 6 then be in effect and required by governmental entities and the stock exchanges on which Common Stock is traded. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1. PLAN DOES NOT CONFER EMPLOYMENT OR SHAREHOLDER RIGHTS: The right of the Employer to terminate (whether by dismissal, discharge, retirement or otherwise) the Optionee's employment with it at any time at will, or as otherwise provided by any agreement between the Company and the Optionee, is specifically reserved. Neither the Optionee nor any person entitled to exercise the Optionee's rights in the event of the Optionee's death shall have any rights of a shareholder with respect to the shares subject to each Option, except to the extent that, and until, such shares shall have been issued upon the exercise of each Option. 11.2. PLAN EXPENSES: Any expenses of administering this Plan shall be borne by the Company. 11.3. USE OF EXERCISE PROCEEDS: Payments received from O ptionees upon the exercise of Options shall be used for the general corporate purposes of the Company, except that any stock received in payment may be retired, or retained in the Company's treasury and reissued. 11.4. INDEMNIFICATION: In addition to such other rights of indemnification as they may have as members of the Board, or the Committee, the members of the Committee and the Board shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except a judgment based upon a finding of bad faith; provided that upon the institution of any such action, suit or proceeding a Committee or Board member shall, in writing, give the Company notice thereof and an opportunity, at its own expense, to handle and defend the same before such Committee or Board member undertakes to handle and defend it on such member's own behalf. ARTICLE XII SHAREHOLDER APPROVAL AND EFFECTIVE DATES 12.1. The Plan shall become effective when it is adopted by the Board. However, the Plan and all Options shall terminate after the passage of one year from the date the Plan was adopted by the Board unless: a. within such one year period, the Plan is approved by the vote at a meeting of the shareholders of Harley-Davidson, Inc. of the holders of a majority of the outstanding shares of Harley-Davidson, Inc. entitled to vote; provided that if at a meeting of such shareholders held within such one year period, the Plan is not so approved, the Plan and all Options shall terminate at the time of that meeting of shareholders; or b. within such one year period, the Plan is approved by the shareholders of Harley-Davidson, Inc. Options may not be granted under the Plan after May 6, 1995. 7 EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 HARLEY-DAVIDSON, INC. 1990 STOCK OPTION PLAN (as amended through August 20, 1997) ARTICLE I PURPOSE The purpose of the Harley-Davidson, Inc. 1990 Stock Option Plan is to provide favorable opportunities for certain selected employees of Harley-Davidson, Inc. and its subsidiaries to purchase or receive shares of Common Stock of Harley-Davidson, Inc., or to benefit from the appreciation thereof. Such opportunities should provide an increased incentive for these employees to contribute to the future success and prosperity of Harley-Davidson, Inc., thus enhancing the value of the stock for the benefit of the shareholders, and increase the ability of Harley-Davidson, Inc. to attract and retain individuals of exceptional skill upon whom, in large measure, its sustained progress, growth and profitability depend. ARTICLE II DEFINITIONS The following capitalized terms used in the Plan shall have the respective meanings set forth in this Article: 2.1. BOARD: The Board of Directors of Harley-Davidson, Inc. 2.2. CODE: The Internal Revenue Code of 1986, as amended. 2.3. COMMITTEE: The Human Resources Committee of the Board; provided that if any member of the Human Resources Committee is not both a Disinterested Person and Outside Director, the Committee shall be comprised of only those members of the Human Resources Committee who are both Disinterested Persons and Outside Directors. 2.4. COMMON STOCK: The common stock of Harley-Davidson, Inc. 2.5. COMPANY: Harley-Davidson, Inc. and any of its Subsidiaries. 2.6. DISABILITY: Disability within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. 2.7. DISINTERESTED PERSONS: Non-employee directors within the meaning of Rule 16b-3 as promulgated under the Securities Exchange Act of 1934, as amended. 2.8. EMPLOYER: The entity that employs the employee or Optionee. 2.9. FAIR MARKET VALUE: The average of the high and low reported sales prices of Common Stock on the New York Stock Exchange Composite Tape on the date for which fair market value is being determined. 2.10. ISO: An incentive stock option within the meaning of Section 422 of the Code and which is designated as an incentive stock option by the Committee. 2.11. NON-ISO: A stock option which is not an ISO. 2.12. OPTION: A stock option granted under the Plan. Options include both ISOs and Non-ISOs. 2.13. OPTION PRICE: The purchase price of a share of Common Stock under an Option. 2.14. OPTIONEE: A person who has been granted one or more Options. 2.15. OUTSIDE DIRECTORS: Outside Directors within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. 2.16. PARENT CORPORATION: The parent corporation, as defined in Section 424(e) of the Code. 2.17. PLAN: The Harley-Davidson, Inc. 1990 Stock Option Plan. 2.18. RETIREMENT: Retirement on or after age sixty-two or, with the consent of the Committee, at an earlier age. 2.19. SUBSIDIARY: A corporation, limited partnership, general partnership, limited liability company, business trust or other entity of which more than fifty percent (50%) of the voting power or ownership interest is directly and/or indirectly held by Harley-Davidson, Inc. 2.20. TERMINATION DATE: A date fixed by the Committee but not later than the day preceding the tenth anniversary of the date on which the Option is granted. ARTICLE III ADMINISTRATION 3.1. The Committee shall administer the Plan and shall have full power to grant Options, construe and interpret the Plan, establish and amend rules and regulations for its administration, and perform all other acts relating to the Plan, including the delegation of administrative responsibilities, which it believes reasonable and proper. 3.2. Subject to the provisions of the Plan, the Committee shall, in its discretion, determine who shall be granted Options, the number of shares subject to option under any such Options, the dates after which Options may be exercised, in whole or in part, whether Options shall be ISOs, and the terms and conditions of the Options. 3.3. Any decision made, or action taken, by the Committee arising out of or in connection with the interpretation and administration of the Plan shall be final and conclusive. ARTICLE IV SHARES SUBJECT TO THE PLAN 4.1. The total number of shares of Common Stock available for grants of Options under the Plan shall be 7,200,000 provided that Options for not more than 400,000 shares of Common Stock shall be granted to an Optionee in any calendar year under the Plan, which amount shall be reduced by the amount of Common Stock subject to options granted to such Optionee in such calendar year under any other stock option plan of the Company. The foregoing amounts shall be subject to adjustment in accordance with Article VIII of the Plan. If an Option or portion thereof shall expire, be canceled or terminate for any reason without having been exercised in full, the unpurchased shares covered by such Option shall be available for future grants of Options. An Option, or portion thereof, exercised through the exercise of a stock appreciation right pursuant to Section 6.7 of the Plan shall be treated, for the purposes of this Article, as though the Option, or portion thereof, had been exercised through the purchase of Common Stock, with the result that the shares of Common Stock subject to the Option, or portion thereof, that was so exercised shall not be available for future grants of Options. 2 ARTICLE V ELIGIBILITY 5.1. Options may be granted to key employees of the Company or to persons who have been engaged to become key employees of the Company. Key employees will comprise, in general, those who contribute to the management, direction and overall success of the Company, including those who are members of the Board. Members of the Board who are not employees of the Company shall not be eligible for Option grants. ARTICLE VI TERM OF OPTIONS 6.1. OPTION AGREEMENTS: All Options shall be evidenced by written agreements executed by the Company. Such Options shall be subject to the applicable provisions of the Plan, and shall contain such provisions as are required by the Plan and any other provisions the Committee may prescribe. All agreements evidencing Options shall specify the total number of shares subject to each grant, the Option Price and the Termination Date. Those Options that comply with the requirements for an ISO set forth in Section 422 of the Code and are designated ISOs by the Committee shall be ISOs and all other Options shall be Non-ISOs. 6.2. OPTION PRICE: The Option Price shall be set by the Committee; provided, however, that the price per share shall not be less than the Fair Market Value of a share of Common Stock on the date the Option is granted. 6.3. PERIOD OF EXERCISE: The Committee shall determine the dates after which Options may be exercised in whole or in part. If Options are exercisable in installments, installments or portions thereof that are exercisable and not exercised shall accumulate and remain exercisable. The Committee may also amend an Option to accelerate the dates after which Options may be exercised in whole or in part. However, no Option or portion thereof shall be exercisable after the Termination Date. 6.4. SPECIAL RULES REGARDING ISOS GRANTED TO CERTAIN EMPLOYEES: Notwithstanding any contrary provisions of Sections 6.2 and 6.3 of the Plan, no ISO shall be granted to any employee who, at the time the Option is granted, owns (directly or indirectly, within the meaning of Section 424(d) of the Code) more than ten percent of the total combined voting power of all classes of stock of the Employer or of any Subsidiary or Parent Corporation thereof, unless (a) the Option Price under such Option is at least 110 percent of the Fair Market Value of a share of Common Stock on the date the Option is granted and (b) the Termination Date of such Option is a date not later than the day preceding the fifth anniversary of the date on which the Option is granted. 6.5. MANNER OF EXERCISE AND PAYMENT: An Option, or portion thereof, shall be exercised by delivery of a written notice of exercise to the Company and payment of the full price of the shares being purchased pursuant to the Option. An Optionee may exercise an Option with respect to less than the full number of shares for which the Option may then be exercised, but an Optionee must exercise the Option in full shares of Common Stock. The price of Common Stock purchased pursuant to an Option, or portion thereof, may be paid: a. in United States dollars in cash or by check, bank draft or money order payable to the order of the Company. b. through the delivery of shares of Common Stock with an aggregate Fair Market Value on the date of exercise equal to the Option Price, or c. by any combination of the above methods of payment. 3 The Committee shall determine acceptable methods for tendering Common Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Common Stock to exercise an Option as it deems appropriate, including, without limitation, any limitation or prohibition designed to avoid certain accounting consequences which may result from the use of Common Stock as payment upon exercise of an Option. 6.6. WITHHOLDING TAXES: The Company may, in its discretion, require an Optionee to pay to the Company at the time of exercise the amount that the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise. Upon or prior to the exercise of an Option requiring tax withholding, an Optionee may make a written election to have shares of Common Stock withheld by the Company from the shares otherwise to be received. The number of shares so withheld shall have an aggregate Fair Market Value on the date of exercise sufficient to satisfy the applicable withholding taxes. The acceptance of any such election by an Optionee shall be at the sole discretion of the Committee. Where the exercise of an Option does not give rise to an obligation to withhold Federal income taxes on the date of exercise, the Company may, in its discretion, require an Optionee to place shares of Common Stock purchased under the Option in escrow for the benefit of the Company until such time as Federal income tax withholding is required on amounts included in the gross income of the Optionee as a result of the exercise of an Option. At such time, the Company, in its discretion, may require an Optionee to pay to the Company the amount that the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise of the Option, in which case the shares of Common Stock will be released from escrow to the Optionee. Alternatively, subject to acceptance by the Committee, in its sole discretion, an Optionee may make a written election to have shares of Common Stock held in escrow applied toward the Company's obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise of the Option, based on the Fair Market Value of the shares on the date of the termination of the escrow arrangement. Upon application of such shares toward the Company's withholding obligation, any shares of Common Stock held in escrow and not, in the judgment of the Committee, necessary to satisfy such obligation shall be released from escrow to the Optionee. 6.7. STOCK APPRECIATION RIGHTS: At or after the grant of an Option, the Committee, in its discretion, may provide an Optionee with an alternate means of exercising an Option, or a designated portion thereof, by granting the Optionee a stock appreciation right. A "stock appreciation right" is a right to receive, upon exercise of an Option or any portion thereof, in the Committee's sole discretion, an amount of cash equal to, and/or shares of Common Stock having a Fair Market Value on the date of exercise equal to, the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Option Price, multiplied by the number of shares of Common Stock that the Optionee would have received had the Option or portion thereof been exercised through the purchase of shares of Common Stock at the Option Price, provided that (a) such Option or portion thereof has been designated as exercisable in this alternative manner, (b) such Option or portion thereof is otherwise exercisable, and (c) the Fair Market Value of a share of Common Stock on the date of exercise exceeds the Option Price. 6.8. NONTRANSFERABILITY OF OPTIONS: Except as may otherwise be provided by the Committee, each Option shall, during the Optionee's lifetime, be exercisable only by the Optionee, and neither it nor any right hereunder shall be transferable otherwise than by will or the laws of descent and distribution or be subject to attachment, execution or other similar process. In the event of any attempt by the Optionee to alienate, assign, pledge, hypothecate or otherwise dispose of an Option or of any right hereunder, except as provided for herein, or in the event of any levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Optionee and the Option shall thereupon become null and void. 6.9. CESSATION OF EMPLOYMENT OF OPTIONEE: a. CESSATION OF EMPLOYMENT OTHER THAN BY REASON OF RETIREMENT, DISABILITY OR DEATH. If an Optionee shall cease to be employed by the Company otherwise than by reason of Retirement, Disability, or death, each Option held by the Optionee, together with all rights hereunder, shall terminate on the date of cessation of employment, to the extent not previously exercised. 4 b. CESSATION OF EMPLOYMENT BY REASON OF RETIREMENT OR DISABILITY. If an Optionee shall cease to be employed by the Company by reason of Retirement or Disability, each Option held by the Optionee shall remain exercisable, to the extent it was exercisable at the time of cessation of employment, until the earliest of: i. the Termination Date, ii. the death of the Optionee, or such later date not more than one year after the death of the Optionee as the Committee, in its discretion, may provide pursuant to Section 6.9(c) of the Plan, iii. the third anniversary of the date of the cessation of the Optionee's employment, if employment ceased by reason of Retirement, or iv. the first anniversary of the date of the cessation of the Optionee's employment by reason of Disability; and thereafter all such Options shall terminate together with all rights hereunder, to the extent not previously exercised. c. CESSATION OF EMPLOYMENT BY REASON OF DEATH. In the event of the death of the Optionee while employed by the Company, an Option may be exercised at any time or from time to time prior to the earlier of the Termination Date or the first anniversary of the date of the Optionee's death, by the person or persons to whom the Optionee's rights under each Option shall pass by will or by the applicable laws of descent and distribution, to the extent that the Optionee was entitled to exercise such Option on the Optionee's date of death. In the event of the death of the Optionee while entitled to exercise an Option pursuant to Section 6.9(b), the Committee, in its discretion, may permit such Option to be exercised at any time or from time to time prior to the Termination Date during a period of up to one year from the death of the Optionee, as determined by the Committee, by the person or persons to whom the Optionee's rights under each Option shall pass by will or by the applicable laws of descent and distribution, to the extent that the Option was exercisable at the time of cessation of the Optionee's employment. Any person or persons to whom an Optionee's rights under an Option have passed by will or by the applicable laws of descent and distribution shall be subject to all terms and conditions of the Plan and the Option applicable to the Optionee. 6.10. NOTIFICATION OF SALES OF COMMON STOCK: Any Optionee who disposes of shares of Common Stock acquired upon the exercise of an ISO either (a) within two years after the date of the grant of the ISO under which the stock was acquired or (b) within one year after the transfer of such shares to the Optionee, shall notify the Company of such disposition and of the amount realized upon such disposition. ARTICLE VII LIMITATIONS AND ACCELERATIONS ON EXERCISABILITY 7.1. Notwithstanding any other provision of this Plan, in the case of an ISO, the aggregate Fair Market Value (determined at the time the ISO is granted) of the shares of Common Stock with respect to which all "incentive stock options" (within the meaning of Section 422 of the Code) are first exercisable by the Optionee during any calendar year (under this Plan and under all other incentive stock option plans of the Employer, any Subsidiary and any Parent Corporation) shall not exceed $100,000. 7.2. Each Option granted under the Plan shall have a limited right of surrender allowing the Optionee to surrender that Option within the 30-day period following a Change of Control Event and to receive cash, in lieu of exercising the Option, in the amount by which the highest "COC Fair Market Value" (as hereinafter defined) of the number of shares of Common Stock covered by the Option during the 60 days preceding the date on which the Change of Control Event occurs exceeds the exercise price for the shares of Common Stock covered by the Option. For this purpose, the "COC Fair Market Value" of the Common Stock means the closing price of one share of Common Stock as reported on the New 5 York Stock Exchange Composite Tape. If the Common Stock is not listed or admitted to trading on the New York Stock Exchange, the COC Fair Market Value of the Common Stock shall be the closing price of one share of Common Stock on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market of the Common Stock, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices of the Common Stock as furnished by a professional market maker making a market in the Common Stock selected by the Board. If on any such date no market maker is making a market in the Common Stock or other Stock, the COC Fair Market Value shall be determined in good faith by the Continuing Directors who are not Disinterested Persons. For purposes of this Section 7.2: (a) "Change of Control Event" means any one of the following: (i) Continuing Directors no longer constitute at least two-thirds of the Directors constituting the Board; (ii) any person or groups (as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended ("Exchange Act")), together with its affiliates, becomes the beneficial owner, directly or indirectly, of 20% or more of Harley-Davidson, Inc.'s then outstanding Common Stock or 20% or more of the voting power of Harley-Davidson, Inc.'s then outstanding securities entitled generally to vote for the election of Harley-Davidson, Inc.'s Directors; (iii) the approval by Harley-Davidson, Inc.'s stockholders of the merger or consolidation of Harley-Davidson, Inc. with any other corporation, the sale of substantially all of Harley-Davidson, Inc.'s assets or the liquidation or dissolution of Harley-Davidson, Inc., unless, in the case of a merger or consolidation, the Continuing Directors in office immediately prior to such merger or consolidation constitute at least two-thirds of the directors constituting the board of directors of the surviving corporation of such merger or consolidation and any parent (as defined in Rule 12b-2 under the Exchange Act) of such corporation; or (iv) at least two-thirds of the Continuing Directors who are Disinterested Persons in office immediately prior to any other action proposed to be taken by Harley-Davidson, Inc.'s stockholders or by the Board determine that such proposed action, if taken, would constitute a change of control of Harley-Davidson, Inc. and such action is taken; and (b) "Continuing Director" means any person who either (i) was a Director on November 1, 1989, or (ii) was designated before such person's initial election as a Director as a Continuing Director by a majority of the Continuing Directors. ARTICLE VIII ADJUSTMENTS 8.1. If (a) the Company shall at any time be involved in a transaction to which Section 424(a) of the Code is applicable; (b) the Company shall declare a dividend payable in, or shall subdivide or combine, its Common Stock; or (c) any other event shall occur which in the judgment of the Committee necessitates an adjustment to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in such manner as it may deem equitable, adjust any or all of (i) the number and type of securities subject to the Plan and which thereafter may be the subject of Options; (ii) the number and type of securities subject to outstanding Options; (iii) the Option Price with respect to any Option; and (iv) the number of shares of Common Stock that may be issued pursuant to Options granted to an Optionee in any calendar year; provided, however, that each such adjustment, in the case of ISOs, shall be made in such a manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. The judgment of the Committee with respect to any matter referred to in this Article shall be conclusive and binding upon each Optionee. 6 ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1. The Board may at any time, or from time to time, suspend or terminate the Plan in whole or in part or amend it in such respects as the Board may deem appropriate, provided, however, that no such amendment shall be made, which would, without approval of the shareholders: a. materially modify the eligibility requirements for receiving Options; b. increase the aggregate number of Shares of Common Stock which may be issued pursuant to Options granted under the Plan, except as is provided for in accordance with Article VIII of the Plan; c. increase the number of shares of Common Stock which may be issued pursuant to Options granted to an Optionee in any calendar year, except as is provided for in accordance with Article VIII of the Plan; d. reduce the minimum Option Price, except as is provided for in accordance with Article VIII of the Plan; e. extend the period of granting Options; or f. materially increase in any other way the benefits accruing to Optionees. 9.2. No amendment, suspension or termination of this Plan shall, without the Optionee's consent, alter or impair any of the rights or obligations under any Option theretofore granted to an Optionee under the Plan. 9.3. The Board may amend this Plan, subject to the limitations cited above, in such manner as it deems necessary to permit the granting of Options meeting the requirements of future amendments or issued regulations, if any, to the Code. ARTICLE X GOVERNMENT AND OTHER REGULATIONS 10.1. The obligation of the Company to issue or transfer and deliver shares for Options exercised under the Plan shall be subject to all applicable laws, regulations, rules, orders and approvals which shall then be in effect and required by governmental entities and the stock exchanges on which Common Stock is traded. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1. PLAN DOES NOT CONFER EMPLOYMENT OR SHAREHOLDER RIGHTS: The right of the Employer to terminate (whether by dismissal, discharge, retirement or otherwise) the Optionee's employment with it at any time at will, or as otherwise provided by any agreement between the Company and the Optionee, is specifically reserved. Neither the Optionee nor any person entitled to exercise the Optionee's rights in the event of the Optionee's death shall have any rights of a shareholder with respect to the shares subject to each Option, except to the extent that, and until, such shares shall have been issued upon the exercise of each Option. 11.2. PLAN EXPENSES: Any expenses of administering this Plan shall be borne by the Company. 7 11.3. USE OF EXERCISE PROCEEDS: Payments received from Optionees upon the exercise of Options shall be used for the general corporate purposes of the Company, except that any stock received in payment may be retired, or retained in the Company's treasury and reissued. 11.4. INDEMNIFICATION: In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Committee and the Board shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except a judgment based upon a finding of bad faith; provided that upon the institution of any such action, suit or proceeding a Committee or Board member shall, in writing, give the Company notice thereof and an opportunity, at its own expense, to handle and defend the same before such Committee or Board member undertakes to handle and defend it on such member's own behalf. ARTICLE XII SHAREHOLDER APPROVAL AND EFFECTIVE DATES 12.1. The Plan shall become effective when it is approved by the shareholders of Harley-Davidson, Inc. at a shareholders meeting by the requisite vote under New York Stock Exchange Rules, Internal Revenue Code Section 162(m) and Rule 16b-3 under the Securities Exchange Act of 1934. Options may not be granted under the Plan after May 6, 1995. 8 EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 HARLEY-DAVIDSON, INC. 1995 STOCK OPTION PLAN (as amended through August 20, 1997) ARTICLE I PURPOSE The purpose of the Harley-Davidson, Inc. 1995 Stock Option Plan is to provide favorable opportunities for certain selected employees of Harley-Davidson, Inc. and its subsidiaries to purchase or receive shares of Common Stock of Harley-Davidson, Inc., or to benefit from the appreciation thereof. Such opportunities should provide an increased incentive for these employees to contribute to the future success and prosperity of Harley-Davidson, Inc., thus enhancing the value of the stock for the benefit of the shareholders, and increase the ability of Harley-Davidson, Inc. to attract and retain individuals of exceptional skill upon whom, in large measure, its sustained progress, growth and profitability depend. ARTICLE II DEFINITIONS The following capitalized terms used in the Plan shall have the respective meanings set forth in this Article: 2.1. BOARD: The Board of Directors of Harley-Davidson, Inc. 2.2. CODE: The Internal Revenue Code of 1986, as amended. 2.3. COMMITTEE: The Human Resources Committee of the Board; provided that if any member of the Human Resources Committee is not both a Disinterested Person and Outside Director, the Committee shall be comprised of only those members of the Human Resources Committee who are both Disinterested Persons and Outside Directors. 2.4. COMMON STOCK: The common stock of Harley-Davidson, Inc. 2.5. COMPANY: Harley-Davidson, Inc. and any of its Subsidiaries. 2.6. DISABILITY: Disability within the meaning of Section 22(e)(3) of the Code, as determined by the Committee. 2.7. DISINTERESTED PERSONS: Non-employee directors within the meaning of Rule 16b-3 as promulgated under the Securities Exchange Act of 1934, as amended. 2.8. EMPLOYER: The entity that employs the employee or Optionee. 2.9. FAIR MARKET VALUE: The average of the high and low reported sales prices of Common Stock on the New York Stock Exchange Composite Tape on the date for which fair market value is being determined. 2.10. ISO: An incentive stock option within the meaning of Section 422 of the Code and which is designated as an incentive stock option by the Committee. 2.11. NON-ISO: A stock option which is not an ISO. 2.12. OPTION: A stock option granted under the Plan. Options include both ISOs and Non-ISOs. 2.13. OPTION PRICE: The purchase price of a share of Common Stock under an Option. 2.14. OPTIONEE: A person who has been granted one or more Options. 2.15. OUTSIDE DIRECTORS: Outside Directors within the meaning of Section 162(m) of the Code and the regulations promulgated thereunder. 2.16. PARENT CORPORATION: The parent corporation, as defined in Section 424(e) of the Code. 2.17. PLAN: The Harley-Davidson, Inc. 1995 Stock Option Plan. 2.18. RETIREMENT: Retirement on or after age sixty-two or, with the consent of the Committee, at an earlier age. 2.19. SUBSIDIARY: A corporation, limited partnership, general partnership, limited liability company, business trust or other entity of which more than fifty percent (50%) of the voting power or ownership interest is directly and/or indirectly held by Harley-Davidson, Inc. 2.20. TERMINATION DATE: A date fixed by the Committee but not later than the day preceding the tenth anniversary of the date on which the Option is granted. ARTICLE III ADMINISTRATION 3.1. The Committee shall administer the Plan and shall have full power to grant Options, construe and interpret the Plan, establish and amend rules and regulations for its administration, and perform all other acts relating to the Plan, including the delegation of administrative responsibilities, which it believes reasonable and proper. 3.2. Subject to the provisions of the Plan, the Committee shall, in its discretion, determine who shall be granted Options, the number of shares subject to option under any such Options, the dates after which Options may be exercised, in whole or in part, whether Options shall be ISOs, and the terms and conditions of the Options. 3.3. Any decision made, or action taken, by the Committee arising out of or in connection with the interpretation and administration of the Plan shall be final and conclusive. ARTICLE IV SHARES SUBJECT TO THE PLAN 4.1. The total number of shares of Common Stock available for grants of Options under the Plan shall be 7,600,000 provided that Options for not more than 400,000 shares of Common Stock shall be granted to an Optionee in any calendar year under the Plan, which amount shall be reduced by the amount of Common Stock subject to options granted to such Optionee in such calendar year under any other stock option plan of the Company. The foregoing amounts shall be subject to adjustment in accordance with Article VIII of the Plan. If an Option or portion thereof shall expire, be canceled or terminate for any reason without having been exercised in full, the unpurchased shares covered by such Option shall be available for future grants of Options. An Option, or portion thereof, exercised through the exercise of a stock appreciation right pursuant to Section 6.7 of the Plan shall be treated, for the purposes of this Article, as though the Option, or portion thereof, had been exercised through the purchase of Common Stock, with the result that the shares of Common Stock subject to the Option, or portion thereof, that was so exercised shall not be available for future grants of Options. 2 ARTICLE V ELIGIBILITY 5.1. Options may be granted to key employees of the Company or to persons who have been engaged to become key employees of the Company. Key employees will comprise, in general, those who contribute to the management, direction and overall success of the Company, including those who are members of the Board. Members of the Board who are not employees of the Company shall not be eligible for Option grants. ARTICLE VI TERM OF OPTIONS 6.1. OPTION AGREEMENTS: All Options shall be evidenced by written agreements executed by the Company. Such Options shall be subject to the applicable provisions of the Plan, and shall contain such provisions as are required by the Plan and any other provisions the Committee may prescribe. All agreements evidencing Options shall specify the total number of shares subject to each grant, the Option Price and the Termination Date. Those Options that comply with the requirements for an ISO set forth in Section 422 of the Code and are designated ISOs by the Committee shall be ISOs and all other Options shall be Non-ISOs. 6.2. OPTION PRICE: The Option Price shall be set by the Committee; provided, however, that the price per share shall not be less than the Fair Market Value of a share of Common Stock on the date the Option is granted. 6.3. PERIOD OF EXERCISE: The Committee shall determine the dates after which Options may be exercised in whole or in part. If Options are exercisable in installments, installments or portions thereof that are exercisable and not exercised shall accumulate and remain exercisable. The Committee may also amend an Option to accelerate the dates after which Options may be exercised in whole or in part. However, no Option or portion thereof shall be exercisable after the Termination Date. 6.4. SPECIAL RULES REGARDING ISOS GRANTED TO CERTAIN EMPLOYEES: Notwithstanding any contrary provisions of Sections 6.2 and 6.3 of the Plan, no ISO shall be granted to any employee who, at the time the Option is granted, owns (directly or indirectly, within the meaning of Section 424(d) of the Code) more than ten percent of the total combined voting power of all classes of stock of the Employer or of any Subsidiary or Parent Corporation thereof, unless (a) the Option Price under such Option is at least 110 percent of the Fair Market Value of a share of Common Stock on the date the Option is granted and (b) the Termination Date of such Option is a date not later than the day preceding the fifth anniversary of the date on which the Option is granted. 6.5. MANNER OF EXERCISE AND PAYMENT: An Option, or portion thereof, shall be exercised by delivery of a written notice of exercise to the Company and payment of the full price of the shares being purchased pursuant to the Option. An Optionee may exercise an Option with respect to less than the full number of shares for which the Option may then be exercised, but an Optionee must exercise the Option in full shares of Common Stock. The price of Common Stock purchased pursuant to an Option, or portion thereof, may be paid: a. in United States dollars in cash or by check, bank draft or money order payable to the order of the Company. b. through the delivery of shares of Common Stock with an aggregate Fair Market Value on the date of exercise equal to the Option Price, or c. by any combination of the above methods of payment. 3 The Committee shall determine acceptable methods for tendering Common Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Common Stock to exercise an Option as it deems appropriate, including, without limitation, any limitation or prohibition designed to avoid certain accounting consequences which may result from the use of Common Stock as payment upon exercise of an Option. 6.6. WITHHOLDING TAXES: The Company may, in its discretion, require an Optionee to pay to the Company at the time of exercise the amount that the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise. Upon or prior to the exercise of an Option requiring tax withholding, an Optionee may make a written election to have shares of Common Stock withheld by the Company from the shares otherwise to be received. The number of shares so withheld shall have an aggregate Fair Market Value on the date of exercise sufficient to satisfy the applicable withholding taxes. The acceptance of any such election by an Optionee shall be at the sole discretion of the Committee. Where the exercise of an Option does not give rise to an obligation to withhold Federal income taxes on the date of exercise, the Company may, in its discretion, require an Optionee to place shares of Common Stock purchased under the Option in escrow for the benefit of the Company until such time as Federal income tax withholding is required on amounts included in the gross income of the Optionee as a result of the exercise of an Option. At such time, the Company, in its discretion, may require an Optionee to pay to the Company the amount that the Company deems necessary to satisfy its obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise of the Option, in which case the shares of Common Stock will be released from escrow to the Optionee. Alternatively, subject to acceptance by the Committee, in its sole discretion, an Optionee may make a written election to have shares of Common Stock held in escrow applied toward the Company's obligation to withhold Federal, state or local income or other taxes incurred by reason of the exercise of the Option, based on the Fair Market Value of the shares on the date of the termination of the escrow arrangement. Upon application of such shares toward the Company's withholding obligation, any shares of Common Stock held in escrow and not, in the judgment of the Committee, necessary to satisfy such obligation shall be released from escrow to the Optionee. 6.7. STOCK APPRECIATION RIGHTS: At or after the grant of an Option, the Committee, in its discretion, may provide an Optionee with an alternate means of exercising an Option, or a designated portion thereof, by granting the Optionee a stock appreciation right. A "stock appreciation right" is a right to receive, upon exercise of an Option or any portion thereof, in the Committee's sole discretion, an amount of cash equal to, and/or shares of Common Stock having a Fair Market Value on the date of exercise equal to, the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Option Price, multiplied by the number of shares of Common Stock that the Optionee would have received had the Option or portion thereof been exercised through the purchase of shares of Common Stock at the Option Price, provided that (a) such Option or portion thereof has been designated as exercisable in this alternative manner, (b) such Option or portion thereof is otherwise exercisable, and (c) the Fair Market Value of a share of Common Stock on the date of exercise exceeds the Option Price. 6.8. NONTRANSFERABILITY OF OPTIONS: Except as may otherwise be provided by the Committee, each Option shall, during the Optionee's lifetime, be exercisable only by the Optionee, and neither it nor any right hereunder shall be transferable otherwise than by will or the laws of descent and distribution or be subject to attachment, execution or other similar process. In the event of any attempt by the Optionee to alienate, assign, pledge, hypothecate or otherwise dispose of an Option or of any right hereunder, except as provided for herein, or in the event of any levy or any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Optionee and the Option shall thereupon become null and void. 6.9. CESSATION OF EMPLOYMENT OF OPTIONEE: a. CESSATION OF EMPLOYMENT OTHER THAN BY REASON OF RETIREMENT, DISABILITY OR DEATH. If an Optionee shall cease to be employed by the Company otherwise than by reason of Retirement, Disability, or death, each Option held by the Optionee, together with all rights hereunder, shall terminate on the date of cessation of employment, to the extent not previously exercised. 4 b. CESSATION OF EMPLOYMENT BY REASON OF RETIREMENT OR DISABILITY. If an Optionee shall cease to be employed by the Company by reason of Retirement or Disability, each Option held by the Optionee shall remain exercisable, to the extent it was exercisable at the time of cessation of employment, until the earliest of: i. the Termination Date, ii. the death of the Optionee, or such later date not more than one year after the death of the Optionee as the Committee, in its discretion, may provide pursuant to Section 6.9(c) of the Plan, iii. the third anniversary of the date of the cessation of the Optionee's employment, if employment ceased by reason of Retirement, or iv. the first anniversary of the date of the cessation of the Optionee's employment by reason of Disability; and thereafter all such Options shall terminate together with all rights hereunder, to the extent not previously exercised. c. CESSATION OF EMPLOYMENT BY REASON OF DEATH. In the event of the death of the Optionee while employed by the Company, an Option may be exercised at any time or from time to time prior to the earlier of the Termination Date or the first anniversary of the date of the Optionee's death, by the person or persons to whom the Optionee's rights under each Option shall pass by will or by the applicable laws of descent and distribution, to the extent that the Optionee was entitled to exercise such Option on the Optionee's date of death. In the event of the death of the Optionee while entitled to exercise an Option pursuant to Section 6.9(b), the Committee, in its discretion, may permit such Option to be exercised at any time or from time to time prior to the Termination Date during a period of up to one year from the death of the Optionee, as determined by the Committee, by the person or persons to whom the Optionee's rights under each Option shall pass by will or by the applicable laws of descent and distribution, to the extent that the Option was exercisable at the time of cessation of the Optionee's employment. Any person or persons to whom an Optionee's rights under an Option have passed by will or by the applicable laws of descent and distribution shall be subject to all terms and conditions of the Plan and the Option applicable to the Optionee. 6.10. NOTIFICATION OF SALES OF COMMON STOCK: Any Optionee who disposes of shares of Common Stock acquired upon the exercise of an ISO either (a) within two years after the date of the grant of the ISO under which the stock was acquired or (b) within one year after the transfer of such shares to the Optionee, shall notify the Company of such disposition and of the amount realized upon such disposition. ARTICLE VII LIMITATIONS AND ACCELERATIONS ON EXERCISABILITY 7.1. Notwithstanding any other provision of this Plan, in the case of an ISO, the aggregate Fair Market Value (determined at the time the ISO is granted) of the shares of Common Stock with respect to which all "incentive stock options" (within the meaning of Section 422 of the Code) are first exercisable by the Optionee during any calendar year (under this Plan and under all other incentive stock option plans of the Employer, any Subsidiary and any Parent Corporation) shall not exceed $100,000. 7.2. Each Option granted under the Plan shall have a limited right of surrender allowing the Optionee to surrender that Option within the 30-day period following a Change of Control Event and to receive cash, in lieu of exercising the Option, in the amount by which the highest "COC Fair Market Value" (as hereinafter defined) of the number of shares of Common Stock covered by the Option during the 60 days preceding the date on which the Change of Control Event occurs exceeds the exercise price for the shares of Common Stock covered by the Option. For this purpose, the "COC Fair Market Value" of the Common Stock means the closing price of one share of Common Stock as reported on the New 5 York Stock Exchange Composite Tape. If the Common Stock is not listed or admitted to trading on the New York Stock Exchange, the COC Fair Market Value of the Common Stock shall be the closing price of one share of Common Stock on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market of the Common Stock, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices of the Common Stock as furnished by a professional market maker making a market in the Common Stock selected by the Board. If on any such date no market maker is making a market in the Common Stock or other Stock, the COC Fair Market Value shall be determined in good faith by the Continuing Directors who are not Disinterested Persons. For purposes of this Section 7.2: (a) "Change of Control Event" means any one of the following: (i) Continuing Directors no longer constitute at least two-thirds of the Directors constituting the Board; (ii) any person or groups (as defined in Rule 13d-5 under the Securities Exchange Act of 1934, as amended ("Exchange Act")), together with its affiliates, becomes the beneficial owner, directly or indirectly, of 20% or more of Harley-Davidson, Inc.'s then outstanding Common Stock or 20% or more of the voting power of Harley-Davidson, Inc.'s then outstanding securities entitled generally to vote for the election of Harley-Davidson, Inc.'s Directors; (iii) the approval by Harley-Davidson, Inc.'s stockholders of the merger or consolidation of Harley-Davidson, Inc. with any other corporation, the sale of substantially all of Harley-Davidson, Inc.'s assets or the liquidation or dissolution of Harley-Davidson, Inc., unless, in the case of a merger or consolidation, the Continuing Directors in office immediately prior to such merger or consolidation constitute at least two-thirds of the directors constituting the board of directors of the surviving corporation of such merger or consolidation and any parent (as defined in Rule 12b-2 under the Exchange Act) of such corporation; or (iv) at least two-thirds of the Continuing Directors who are Disinterested Persons in office immediately prior to any other action proposed to be taken by Harley-Davidson, Inc.'s stockholders or by the Board determine that such proposed action, if taken, would constitute a change of control of Harley-Davidson, Inc. and such action is taken; and (b) "Continuing Director" means any person who either (i) was a Director on February 2, 1995, or (ii) was designated before such person's initial election as a Director as a Continuing Director by a majority of the Continuing Directors. ARTICLE VIII ADJUSTMENTS 8.1. If (a) the Company shall at any time be involved in a transaction to which Section 424(a) of the Code is applicable; (b) the Company shall declare a dividend payable in, or shall subdivide or combine, its Common Stock; or (c) any other event shall occur which in the judgment of the Committee necessitates an adjustment to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in such manner as it may deem equitable, adjust any or all of (i) the number and type of securities subject to the Plan and which thereafter may be the subject of Options; (ii) the number and type of securities subject to outstanding Options; (iii) the Option Price with respect to any Option; and (iv) the number of shares of Common Stock that may be issued pursuant to Options granted to an Optionee in any calendar year; provided, however, that each such adjustment, in the case of ISOs, shall be made in such a manner as not to constitute a "modification" within the meaning of Section 424(h)(3) of the Code. The judgment of the Committee with respect to any matter referred to in this Article shall be conclusive and binding upon each Optionee. 6 ARTICLE IX AMENDMENT AND TERMINATION OF PLAN 9.1. The Board may at any time, or from time to time, suspend or terminate the Plan in whole or in part or amend it in such respects as the Board may deem appropriate, provided, however, that no such amendment shall be made, which would, without approval of the shareholders: a. materially modify the eligibility requirements for receiving Options; b. increase the aggregate number of Shares of Common Stock which may be issued pursuant to Options granted under the Plan, except as is provided for in accordance with Article VIII of the Plan; c. increase the number of shares of Common Stock which may be issued pursuant to Options granted to an Optionee in any calendar year, except as is provided for in accordance with Article VIII of the Plan; d. reduce the minimum Option Price, except as is provided for in accordance with Article VIII of the Plan; e. extend the period of granting Options; or f. materially increase in any other way the benefits accruing to Optionees. 9.2. No amendment, suspension or termination of this Plan shall, without the Optionee's consent, alter or impair any of the rights or obligations under any Option theretofore granted to an Optionee under the Plan. 9.3. The Board may amend this Plan, subject to the limitations cited above, in such manner as it deems necessary to permit the granting of Options meeting the requirements of future amendments or issued regulations, if any, to the Code. ARTICLE X GOVERNMENT AND OTHER REGULATIONS 10.1. The obligation of the Company to issue or transfer and deliver shares for Options exercised under the Plan shall be subject to all applicable laws, regulations, rules, orders and approvals which shall then be in effect and required by governmental entities and the stock exchanges on which Common Stock is traded. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1. PLAN DOES NOT CONFER EMPLOYMENT OR SHAREHOLDER RIGHTS: The right of the Employer to terminate (whether by dismissal, discharge, retirement or otherwise) the Optionee's employment with it at any time at will, or as otherwise provided by any agreement between the Company and the Optionee, is specifically reserved. Neither the Optionee nor any person entitled to exercise the Optionee's rights in the event of the Optionee's death shall have any rights of a shareholder with respect to the shares subject to each Option, except to the extent that, and until, such shares shall have been issued upon the exercise of each Option. 11.2. PLAN EXPENSES: Any expenses of administering this Plan shall be borne by the Company. 7 11.3. USE OF EXERCISE PROCEEDS: Payments received from Optionees upon the exercise of Options shall be used for the general corporate purposes of the Company, except that any stock received in payment may be retired, or retained in the Company's treasury and reissued. 11.4. INDEMNIFICATION: In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Committee and the Board shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except a judgment based upon a finding of bad faith; provided that upon the institution of any such action, suit or proceeding a Committee or Board member shall, in writing, give the Company notice thereof and an opportunity, at its own expense, to handle and defend the same before such Committee or Board member undertakes to handle and defend it on such member's own behalf. ARTICLE XII SHAREHOLDER APPROVAL AND EFFECTIVE DATES 12.1. The Plan shall become effective when it is approved by the shareholders of Harley-Davidson, Inc. at a shareholders meeting by the requisite vote under New York Stock Exchange Rules, Internal Revenue Code Section 162(m) and Rule 16b-3 under the Securities Exchange Act of 1934. Options may not be granted under the Plan after April 26, 2005. 8 EX-21 6 EXHIBIT 21 EXHIBIT 21 HARLEY-DAVIDSON, INC. SUBSIDIARIES
State/Country of Name Incorporation ---- ------------- H-D Michigan, Inc. Michigan Harley-Davidson Motor Company Wisconsin Holiday Holding Corporation Texas Harley-Davidson Transportation Co., Inc. Delaware Harley-Davidson Foreign Sales Corporation Barbados Harley-Davidson Dealer Systems, Inc. Ohio Harley-Davidson Holding Co., Inc. Delaware Harley-Davidson Benelux B.V. Netherlands Harley-Davidson France SAS France Harley-Davidson GmbH Germany Harley-Davidson Japan, KK Japan Harley-Davidson Europe Limited England Harley-Davidson do Brazil Ltda. Brazil HD Hong Kong Ltd. Hong Kong Harley-Davidson Singapore, Inc. Delaware Buell Motorcycle Company Wisconsin Buell Distribution Corporation Wisconsin Renovation Realty Investment Services, Inc. Wisconsin Highland Insurance Service, Inc. Wisconsin HR, LLC Indiana Eaglemark Financial Services, Inc. Nevada Eaglemark Insurance Services, Inc. Nevada Eaglemark, Inc. Nevada Harley-Davidson Dealer Funding Corporation-I Nevada Eaglemark Leasing, Inc. Nevada Eaglemark Mortgage, Inc. Nevada Eaglemark Customer Funding Corporation-II Nevada Eaglemark Customer Funding Corporation-III Nevada Eaglemark Customer Funding Corporation-IV Nevada Eaglemark International, Inc. Delaware ODBH Limited United Kingdom
EX-23 7 EXHIBIT 23 EXHIBIT 23 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-33449, No. 33-35311, No. 33-48581 and No. 333-07551) pertaining to (a) the Harley-Davidson, Inc. 1986 Stock Option Plan and the Harley-Davidson, Inc. 1988 Stock Option Plan; (b) the Harley-Davidson Retirement Savings Plan for Salaried Employees, the Harley-Davidson Retirement Savings Plan for Milwaukee and Tomahawk Hourly Bargaining Unit Employees, and the Holiday Rambler LLC Employees Retirement Plan; (c) the Harley-Davidson, Inc. 1990 Stock Option Plan; and (d) the Harley-Davidson, Inc. 1995 Stock Option Plan of our report dated January 17, 1998, with respect to the consolidated financial statements and schedule of Harley-Davidson, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1997. ERNST & YOUNG LLP Milwaukee, Wisconsin March 30, 1998 EX-27.1 8 EXHIBIT 27-1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 147,642 0 104,345 1,548 117,475 704,021 891,460 362,591 1,598,901 361,688 0 0 0 1,572 825,096 1,598,901 1,762,569 1,762,569 1,176,352 1,176,352 1,572 0 (7,871) 276,302 102,232 174,070 0 0 0 174,070 1.15 1.13
EX-27.2 9 EXHIBIT 27-2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 142,479 0 143,233 1,918 101,386 613,129 707,550 298,116 1,299,985 251,098 0 0 0 1,562 661,158 1,299,985 1,531,227 1,531,227 1,041,133 1,041,133 4,133 0 (3,309) 227,622 84,213 143,409 22,619 0 0 166,028 1.10 1.09 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128, "EARNINGS PER SHARE," AND TO REFLECT THE TWO-FOR-ONE STOCK SPLIT DURING SEPTEMBER 1997.
EX-27.3 10 EXHIBIT 27-3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 31,462 0 132,751 1,541 84,427 337,238 468,011 183,236 1,000,670 233,210 0 0 0 773 493,796 1,000,670 1,350,466 1,350,466 939,067 939,067 235,506 0 (96) 175,989 64,939 111,050 1,430 0 0 112,480 .75 .74 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128, "EARNINGS PER SHARE," AND TO REFLECT THE TWO-FOR-ONE STOCK SPLIT DURING SEPTEMBER 1997.
EX-27.4 11 EXHIBIT 27-4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE THREE MONTHS ENDED MARCH 30,1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-30-1997 113,548 0 216,940 1,908 93,440 462,651 731,841 313,666 1,439,970 274,581 0 0 0 782 694,905 1,439,970 427,095 427,095 288,881 288,881 185 0 (1,574) 64,037 23,695 40,342 0 0 0 40,342 .27 .26 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128, "EARNINGS PER SHARE," AND TO REFLECT THE TWO-FOR-ONE STOCK SPLIT DURING SEPTEMBER 1997.
EX-27.5 12 EXHIBIT 27-5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 29,1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-29-1997 144,474 0 200,625 1,918 101,437 485,516 783,438 329,380 1,473,373 288,121 0 0 0 783 740,956 1,473,373 871,180 871,180 582,647 582,647 (2,003) 0 (3,666) 142,107 52,581 89,526 0 0 0 89,526 .59 .58 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128,"EARNINGS PER SHARE," AND TO REFLECT THE TWO-FOR-ONE STOCK SPLIT DURING SEPTEMBER 1997.
EX-27.6 13 EXHIBIT 27-6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-28-1997 105,365 0 375,805 1,945 112,144 633,399 819,054 345,355 1,486,442 282,793 0 0 0 1,572 786,575 1,486,442 1,315,403 1,315,403 881,687 881,687 (597) 0 (5,594) 207,345 76,719 130,626 0 0 0 130,626 .86 .85 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128, "EARNINGS PER SHARE".
EX-27.7 14 EXHIBIT 27-7
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 39,577 0 159,350 1,564 85,758 347,082 554,551 261,281 1,062,915 217,965 0 0 0 778 532,789 1,062,915 371,051 371,051 255,274 255,274 1,249 0 405 52,371 19,377 32,994 0 0 0 32,994 .22 .22 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128, "EARNINGS PER SHARE," AND TO REFLECT THE TWO-FOR-ONE STOCK SPLIT DURING SEPTEMBER 1997.
EX-27.8 15 EXHIBIT 27-8
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 96,273 0 160,844 1,588 80,316 392,001 582,122 273,936 1,104,375 235,750 0 0 0 780 572,236 1,104,375 763,855 763,855 523,217 523,217 1,781 0 (430) 115,783 42,841 72,942 0 0 0 72,942 .49 .48 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128, "EARNINGS PER SHARE," AND TO REFLECT THE TWO-FOR-ONE STOCK SPLIT DURING SEPTEMBER 1997.
EX-27.9 16 EXHIBIT 27-9
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-29-1996 114,046 0 178,475 1,853 91,480 426,208 616,574 286,007 1,221,531 258,687 0 0 0 781 602,821 1,221,531 1,149,698 1,149,698 788,592 788,592 801 0 (1,681) 168,469 62,323 106,146 0 0 0 106,146 .70 .69 EPS IS RESTATED TO REFLECT THE ADOPTION OF FAS 128, "EARNINGS PER SHARE," AND TO REFLECT THE TW0-FOR-ONE STOCK SPLIT DURING SEPTEMBER 1997.
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