-----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, SaSVpyqUNN2qNcQaSZYkcGum+H2rPR8N88HHCtjBcVRuF3dtPVSas6NGrf7A06Ad CdP37LQgv5mX00RGitTOog== 0000912057-97-011157.txt : 19970401 0000912057-97-011157.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011157 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09183 FILM NUMBER: 97569211 BUSINESS ADDRESS: STREET 1: 3700 W JUNEAU AVE CITY: MILWAUKEE STATE: WI ZIP: 53208 BUSINESS PHONE: 4143424680 10-K 1 10-K ================================================================================ 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, 1996 [ ] 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) Registrant's 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. [ ] Aggregate market value of the voting stock held by nonaffiliates of the registrant at March 21, 1997: $2,632,485,263. Number of shares of the registrant's common stock outstanding at March 21, 1997: 75,733,097 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 3, 1997. ================================================================================ PART I SPECIAL 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 import. 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 Motorcycles and Related Products ("Motorcycles") segment consists primarily of the Company's wholly-owned subsidiary Harley-Davidson Motor Company (the "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, riding apparel and collectibles. The Company, which is the only major American-based motorcycle manufacturer, has held the largest share of the United States heavyweight motorcycle market since 1987. The Company ended 1996 with an approximate 7% share of the European heavyweight (651+cc) market and an approximate 22% share of the Pacific Rim (Japan and Australia) heavyweight (651+cc) market. 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 retail motorcycle customers. In addition, Eaglemark has established a proprietary credit card for use in the Company's authorized dealerships. 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. The Company holds a 49% interest in, and is the exclusive distributor for, Buell Motorcycle Company, which manufactures motorcycles for select niches within the sport/performance market. 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 1996 consolidated financial statements for further information. 2 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 ----------- -------------- ----------- --------- 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 31 790,271 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 1994 ---- Revenue $1,158,887 $ n/a $ n/a $ n/a Operating income (loss) 163,510 n/a n/a (9,948) Identifiable assets as of December 31 494,362 110,886 n/a 71,415 - ------------------------------------------------------------------------------------------------------
(1) The Transportation Vehicles segment was reported as discontinued operations commencing in 1995. Prior year results have been reclassified in order to conform to this presentation. See note 3 to the 1996 consolidated financial statements for further information. (2) The Financial Services segment's 1996 and 1995 results of operations are included in operating income. During 1994, the equity in earnings of the Financial Services subsidiary was included in other income. See note 4 to the 1996 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 ------- ------- ------- ------- ----- 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 - -------------------------------------------------------------------------------------------------------------------------------- 1994 Revenue by segment: Motorcycles and Related Products $258,607 $296,843 $291,927 $311,510 $1,158,887 Financial Services n/a n/a n/a n/a n/a -------- -------- -------- -------- ---------- $258,607 $296,843 $291,927 $311,510 $1,158,887 Operating income (loss) by segment: Motorcycles and Related Products $ 34,984 $ 47,134 $ 37,832 $ 43,560 $ 163,510 Financial Services n/a n/a n/a n/a n/a Corporate (2,086) (3,217) (2,128) (2,517) (9,948) -------- -------- -------- -------- ---------- $ 32,898 $ 43,917 $ 35,704 $ 41,043 $ 153,562 Units: Harley-Davidson Motorcycles 23,056 25,006 22,503 25,246 95,811 - ---------------------------------------------------------------------------------------------------------------------------------
4 MOTORCYCLES AND RELATED PRODUCTS The primary business of the Motorcycles segment is to produce and sell premium heavyweight motorcycles. The 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 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 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 speed; touring, which emphasizes comfort and amenities for long-distance travel; and custom, which emphasizes styling and individual owner customization. Touring and custom models are the primary classes of heavyweight motorcycles the Company manufactures. The Company presently manufactures and sells 23 models of touring and custom heavyweight motorcycles, with suggested domestic retail prices ranging from approximately $5,200 to $18,500. 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 certain classic Harley-Davidson motorcycles. These motorcycles are highly customized through the use of trim and accessories. The 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 Company manufactures its own engines and frames. During 1993, the Company acquired a 49 percent interest in Buell Motorcycle Company ("Buell"), a manufacturer of performance motorcycles. This investment in Buell offers the Company the possibility of gradually gaining entry into select niches within the performance motorcycle market. Buell sold 2,762 units and 1,407 units in 1996 and 1995, respectively. Buell motorcycles were introduced in Japan during the second quarter of 1996 and are being introduced in Europe during the first quarter of 1997. Although there are some accessory differences between the Company's top-of-the line touring motorcycles and those of its competitors, suggested retail prices are generally comparable. The top of the Company's custom product line is typically priced as much as 50% more than its competitors' custom motorcycles. The custom portion of the product line represents the Company's highest unit volumes and continues to command a premium price because of its features, styling and high resale value. The Company's smallest displacement custom motorcycle (the 883cc Sportster-Registered Trademark-) is directly price competitive with competitors' comparable motorcycles. The 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 Company's research has consistently shown a repurchase intent in excess of 92% on the part of purchasers of its motorcycles, and the 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. Domestic motorcycle sales generated 53.0%, 49.3% and 50.3% of revenues in the Motorcycles segment during 1996, 1995 and 1994, respectively. 5 The major product categories for the Parts and Accessories business are replacement parts (Genuine Motor Parts-TM-), mechanical accessories (Genuine Motor Accessories-TM-) and specially formulated oil and other lubricants. Worldwide motorcycle Parts and Accessories sales comprised 13.7%, 14.2% and 14.0% of net sales in the Motorcycles segment in 1996, 1995 and 1994, respectively. Net sales from worldwide motorcycle Parts and Accessories have grown 64.5% over the last three years (since 1993). Net sales from the worldwide General Merchandise business, which includes MotorClothes-Registered Trademark- clothing and collectibles, comprised 5.9%, 7.4% and 8.1% of net sales in the Motorcycles segment in 1996, 1995 and 1994, respectively. The Company also provides a variety of services to its dealers and retail customers including service training schools, delivery of its motorcycles, motorcycling vacations, memberships in an owners club and customized software packages for dealers. The Company has had success under a program emphasizing modern store design and display techniques in the merchandising of parts and accessories by its dealers. Currently, 462 domestic and 149 international dealerships have completed store design renovation projects. LICENSING. In recent years, the Company has endeavored to create an awareness of the brand among the non-riding public and provide a wide range of product for enthusiasts by licensing its trademark "Harley-Davidson-Registered Trademark-" 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 and other clothing, jewelry, small leather goods and numerous other products, and is expanding its licensing activity in the toy category. In 1993, the licensed Harley-Davidson Cafe opened in Manhattan, New York. In 1995, the Company entered into an agreement for licensing three additional restaurants with the Cafe owners. Under this agreement, the Company anticipates the opening of a new Cafe in Las Vegas, Nevada during 1997. Although the majority of licensing activity occurs in the U.S., the Company has started to expand into international markets. This licensing activity provides the Company 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 brand and its use. Royalty revenues from licensing, included in Parts and Accessories revenue, were approximately $19 million, $24 million and $22 million during 1996, 1995 and 1994, 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 75% of the dealerships sell Harley-Davidson motorcycles exclusively. All dealerships carry genuine Harley-Davidson replacement parts and aftermarket accessories and perform servicing of Harley-Davidson 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 Company formed a riders club in 1983. The Harley Owners Group-Registered Trademark-, or "HOG-Registered Trademark-", currently has approximately 330,000 members 6 worldwide and is the industry's largest company-sponsored motorcycle enthusiast organization. The Company's expenditures on domestic marketing, selling and advertising were approximately $75.4 million, $71.5 million and $65.6 million during 1996, 1995 and 1994, respectively. RETAIL CUSTOMER AND DEALER FINANCING. The Motor Company believes that Eaglemark and other financial services companies provide adequate retail and wholesale financing to the Motor Company's 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 day delayed billing terms through Eaglemark. INTERNATIONAL SALES. International sales were $413 million, $395 million and $331 million, accounting for approximately 27%, 29% and 29% of net sales of the Motorcycles segment, during 1996, 1995 and 1994, respectively. The Company believes the international heavyweight market is growing and is significantly larger than the U.S. heavyweight market. The Company ended 1996 with an approximate 7% share of the European heavyweight (651+cc) market and an approximate 22% share of the Pacific Rim (Japan and Australia) heavyweight (651+cc) market. See Note 12 to the consolidated financial statements for additional information regarding foreign operations. The Company has five wholly owned foreign subsidiaries located in France, Germany, Japan, The Netherlands and the United Kingdom. The combined foreign subsidiaries have a network of 160 dealers of which approximately one-half sell the Company's motorcycles exclusively. Distribution through these subsidiaries allows the Company flexibility in responding to changing economic conditions in a variety of foreign markets as well as being able to focus on value-added customer services in these markets. The Company is represented throughout the rest of the world by an independent network of distributors and direct sales dealers. At the end of 1996, this network included 12 distributors serving 17 country markets with approximately 255 dealers. The remainder of the network includes 13 direct sales dealers serving 17 country markets. Japan, Germany, Canada and Australia, in that order, represent the Company's largest export markets and account for approximately 60% of export sales. During 1994, the Company established its European Distribution Centre in Rotterdam, The Netherlands, which consolidated the motorcycle and Parts and Accessories distribution. In 1995, the Company established Harley-Davidson's European headquarters in the United Kingdom which created a management team dedicated to improving the relationships between the Company and its distributors, dealers and customers. The management team's focus is on expansion of the dealer network, improved management information systems, better product development and the opening of new markets. During 1996, the Company completed a strategic plan for the Asia/Pacific region outlining growth objectives for the region and strategies for achieving them. Short-term growth opportunities continue to come from existing markets, led by Japan and Australia, while long-term growth will come from new markets. COMPETITION. The U.S. and international heavyweight 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 have larger overall sales volumes and are more diversified than the Company. The Company believes that the heavyweight motorcycle market is the most profitable segment of the U.S. motorcycle market. 7 During 1996, the heavyweight segment represented approximately 45% of the total U.S. motorcycle market in terms of new units registered. Domestically, the Company competes in the touring and custom segments of the heavyweight motorcycle market, which together accounted for 80%, 78% and 76% of total heavyweight retail unit sales in the U.S. during 1996, 1995 and 1994, respectively. The custom and touring motorcycles are generally the most expensive and most profitable vehicles in the market. For the last 9 years, the Company has led the industry in domestic (United States) sales of heavyweight motorcycles. The Company's share of the heavyweight market was 48.2% in 1996; up from 47.7% in 1995. The construction of a new manufacturing facility in Kansas City, Missouri is currently in process and is on schedule to be operational in 1998. In addition, expansion is also taking place at the Company's existing facilities to enable it to achieve its long-term goal of being able to produce more than 200,000 motorcycles per year by 2003. The Company currently estimates it will have the capacity to produce at least 130,000 motorcycles in 1997, more than 145,000 motorcycles in 1998 and more than 160,000 motorcycles in 1999, subject to the risks and uncertainties discussed with respect to this topic under Item 7 below. - -------------------------------------------------------------------------------- Shares of U.S. Heavyweight Motorcycle Market* (Engine Displacement of 651+cc)
Year Ended December 31, ------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- New U.S. Registrations (thousands of units): Total new registrations 165.7 151.2 140.8 123.8 104.2 Harley-Davidson new registrations 79.9 72.1 65.2 59.3 52.2 Percentage Market Share: Harley-Davidson 48.2% 47.7% 46.3% 47.9% 50.1% Honda 18.8 20.2 22.5 20.1 17.9 Suzuki 8.7 9.6 10.6 12.1 13.1 Kawasaki 12.2 10.6 9.8 9.7 9.1 Yamaha 5.9 5.8 5.6 5.8 5.3 Other 6.2 6.1 5.2 4.4 4.5 ----- ----- ----- ----- ----- 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. - -------------------------------------------------------------------------------- 8 On a worldwide basis, the 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 Company estimates its worldwide competitive position, using data reasonably available to the Company, to be as follows: - -------------------------------------------------------------------------------- Worldwide Heavyweight Motorcycle Registration Data (Engine Displacement of 651+cc)
(Units in Thousands) 1996 1995 1994 ---- ---- ---- North America(1): Total registrations 178.5 163.1 150.4 Harley-Davidson registrations 85.1 77.0 69.5 Harley-Davidson market share percentage 47.6% 47.2% 46.2% Europe(2): Total registrations 224.7 207.2 201.9 Harley-Davidson registrations 15.4 15.4 14.4 Harley-Davidson market share percentage 6.9% 7.4% 7.1% Japan/Australia(3): Total registrations 37.4 39.8 38.8 Harley-Davidson registrations 8.2 7.9 7.6 Harley-Davidson market share percentage 21.9% 19.8% 19.6%
(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 and warranties. The Company emphasizes quality, reliability and styling in its products and offers warranties which are generally comparable to those of its competitors. In general, resale prices of Harley-Davidson motorcycles, as a percentage of price when new, are significantly higher than resale prices of motorcycles sold by the Company's competitors. Domestic heavyweight registrations increased 10% and 7% during 1996 and 1995, 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. 9 MOTORCYCLE MANUFACTURING. In an effort to further control costs and maintain quality, the 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. The 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 Company has trained the majority of its manufacturing employees in problem solving and statistical methods. The York, Pennsylvania facility is transitioning to a high performance work organization which increases manufacturing flexibility through the maximization of employee involvement in planning and decision making. The Company is implementing a comprehensive motorcycle manufacturing strategy designed to, among other things, enable further increases in annual motorcycle production in order to be able to produce more than 200,000 motorcycles per year by 2003. "Plan 2003" calls for the enhancement of the Motorcycles segment's ability to increase capacity, increase flexibility to adjust to changes in the market place, improve quality and reduce costs. The strategy calls for the achievement of the increased capacity at the existing facilities (with some additions), the acquisition of a new engine plant and the construction of a new assembly plant in Kansas City, Missouri which is currently in process and is on schedule to be operational in 1998. The Company began implementing Plan 2003 in 1996 and exceeded its production goal of 115,000 units (118,771 units). In addition, the Company currently estimates it will have the capacity to produce at least 130,000 units in 1997, more than 145,000 units in 1998 and more than 160,000 units in 1999, subject to the risks and uncertainties discussed with respect to this topic under Item 7 below. RAW MATERIAL AND PURCHASED COMPONENTS. The Company is proceeding aggressively to establish with its suppliers long term mutually beneficial relationships. Through these relationships the 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 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 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 Company believes that research and development are significant factors in the Company's ability to continuously improve its competitive position. As a result, the Company completed construction of a new 210,000 square foot Product Development Center (PDC) in 1996. The PDC brings together employees from all areas of the product development cycle to speed the Company's time to market with new products. The Motorcycles segment incurred research and development expenses of approximately $37.7 million, $27.2 million and $22.1 million during 1996, 1995 and 1994, respectively. PATENTS AND TRADEMARKS. The Company owns certain patents which relate to its motorcycles and related products and processes for their production. The Company believes that the loss of any protection the Company's patents afford would not have a material effect upon its business. 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 its trademarks, prevent the unauthorized use of its trademarks and improve its image and customer goodwill. The Company believes that its "Harley-Davidson-Registered Trademark-" trademark is highly recognizable by the general public and one of its most valuable assets. The Company's Bar and Shield design trademark is also highly recognizable by the general public. Additionally, the Company has numerous trademarks, trade names and logos, registered both in the United States and abroad. The Company has continuously used the "Harley-Davidson" trademark since 1903 and the Bar and Shield trademark since 1910. 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 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. 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 (to 77dba). Accordingly, the Company anticipates 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, 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 Company has from time to time initiated certain voluntary recalls. During the last three years, the Company has initiated 4 voluntary recalls at a total cost of approximately $3.0 million. The Company fully reserves for all estimated costs associated with recalls in the period that they are announced. 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. 11 EMPLOYEES. As of December 31, 1996, the Motorcycles segment had approximately 5,200 employees. Production workers at the motorcycle manufacturing facilities in Wauwatosa, Menomonee Falls and Tomahawk, Wisconsin, 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 UPIU and the Wisconsin-IAM will expire on March 31, 2001, and the collective bargaining agreement with the Pennsylvania-IAM will expire on February 2, 2002. FINANCIAL SERVICES Eaglemark provides private label 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. HARLEY-DAVIDSON. Eaglemark's largest division provides both wholesale and retail financial services to Harley-Davidson dealers and customers and operates under the trade names Harley-Davidson-Registered Trademark- Credit and Harley-Davidson-Registered Trademark-Insurance. Wholesale financial services include floorplan 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 1996 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 Card-TM-, an exclusive credit card for use only in Harley-Davidson dealerships, and the brokerage of a range of motorcycle insurance products, including liability, casualty, and credit life and disability insurance policies, and extended service agreements. 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 private label wholesale and retail financial services through manufacturer participation programs to Holiday Rambler-Registered Trademark-, Boston Whaler-Registered Trademark-, Skeeter-Registered Trademark-, Mastercraft-TM- and WetJet-TM- 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, secured commercial paper borrowings, revolving credit facility borrowings, commercial paper conduit facility borrowings and securitization of its retail installment loans. Future growth is expected to be financed by using similar sources as well as internally generated funds. 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. 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. 12 The only significant national retail financing competitor for Harley-Davidson motorcycle installment loans is Greentree Financial. Greentree Financial does not offer insurance products or extended service contracts and focuses primarily on high volume Harley-Davidson dealers. In contrast, competition to provide retail financial services to 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 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 and MasterCraft 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, 1996, the Financial Services segment had approximately 270 employees. None of Eaglemark's personnel are represented by labor unions. 13 TRANSPORTATION VEHICLES (DISCONTINUED OPERATIONS) As previously discussed, on January 22, 1996, the Company announced its strategic decision to dispose of its Transportation Vehicles segment in order to concentrate 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 and recorded a gain on disposition of $22.6 million. The results of the Transportation Vehicles segment have been reported separately as discontinued operations. See Note 3 to the 1996 consolidated financial statements for further information. RECREATIONAL VEHICLES On March 6, 1996, the Company completed the sale of substantially all of the assets of its Holiday Rambler Recreational Vehicles Division to Monaco Coach Corporation ("Monaco"). Monaco acquired the Recreational Vehicles division's manufacturing operations located in Wakarusa, Indiana and 10 of its 14 Holiday World Recreational Vehicle Dealerships. During 1996, the remaining 4 dealerships were sold. COMMERCIAL VEHICLES On December 12, 1996, the Commercial Vehicles division was sold to senior management together with an investment group led by Kirkland Messina, a firm based in Los Angeles. OTHER PRODUCTS On December 12, 1996 B & B molders was sold to B & B management. 14 ITEM 2. PROPERTIES The following is a summary of the principal properties of the Company as of March 21, 1997. MOTORCYCLES AND RELATED PRODUCTS SEGMENT
Type of Facility Location Square Feet Status - ---------------- -------- ----------- ------ Executive Offices, Engineering & Warehouse Milwaukee, WI 512,100 Owned Product Development Center Wauwatosa, WI 210,000 Owned Manufacturing Wauwatosa, WI 443,000 Owned Manufacturing Menomonee Falls, WI 448,000 Owned Manufacturing Tomahawk, WI 112,250 Owned Manufacturing York, PA 1,027,135 Owned 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 Service Area Morfelden-Walldorf, 25,840 Lease expiring 2001 Germany Office Tokyo, Japan 7,145 Lease expiring 1997 Warehouse Yokohama, Japan 7,460 Lease expiring 1997 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, 8,400 Lease expiring 2001 The Netherlands Office Paris, France 5,650 Lease expiring 2005
The Motorcycles segment has three facilities that perform manufacturing operations: Wauwatosa, Wisconsin, a suburb of Milwaukee (motorcycle power train production); Tomahawk, Wisconsin (fiberglass parts production and painting); and York, Pennsylvania (motorcycle parts fabrication, painting and assembly). The facility in Menomonee Falls, Wisconsin was purchased in 1996 and is expected to begin producing motorcycle power train components in 1997. 15 The construction of a new 330,000 square foot manufacturing facility in Kansas City, Missouri is currently in process and is on schedule to be operational in 1998. In addition, expansion is also taking 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 being able to produce more than 200,000 motorcycles per year by 2003, 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 12,723 Lease expiring 2007 Office Carson City, Nevada 50,367 Lease expiring 2001 Office Plano,TX 13,283 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. 16 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 1996. EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth, as of March 21, 1997, the name, age and business experience for the last five years of each of the executive officers of Harley- Davidson. EXECUTIVE OFFICERS
Name Age ---- --- Richard F. Teerlink 60 Chairman, President and Chief Executive Officer Jeffrey L. Bleustein 57 President and Chief Operating Officer - Motor Company James M. Brostowitz 45 Vice President, Controller and Treasurer C. William Gray 55 Vice President, Human Resources James L. Ziemer 47 Vice President, Chief Financial Officer and Assistant Treasurer
All of these individuals have been employed by the Company in an executive capacity for more than five years. 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:
1996 Low High ---- --- ---- First quarter $26-3/8 $39-1/8 Second quarter 37-3/4 49-1/2 Third quarter 37-1/8 45-1/8 Fourth quarter 41-1/4 47 1995 Low High ---- --- ---- First quarter $22 $28 Second quarter 22-3/4 26-3/4 Third quarter 23 30-1/8 Fourth quarter 24 28-7/8
The Company paid the following dividends per share:
1996 1995 1994 ---- ---- ---- First quarter $.05 $.04 $.03 Second quarter .05 .04 .03 Third quarter .06 .05 .04 Fourth quarter .06 .05 .04
The Company has continuing authorization from its Board of Directors to repurchase up to 4 million shares of the Company's outstanding common stock. The repurchases are authorized to be made from time to time in the open market or in privately negotiated transactions. During 1995, the Company repurchased 1,650,000 shares of its common stock. As a result, the Company has 2,350,000 shares available to repurchase under this authorization. As of March 21, 1997, there were approximately 44,540 shareholders of record of Harley-Davidson, Inc. common stock. 18 ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands, except per share amounts) Income statement data: Net sales $1,531,227 $1,350,466 $1,158,887 $ 933,262 $ 822,929 Cost of goods sold 1,041,133 939,067 800,548 641,248 572,927 ---------- ---------- ---------- --------- --------- Gross profit 490,094 411,399 358,339 292,014 250,002 Operating income from financial services* 7,801 3,620 - - - Selling, administrative and engineering (269,449) (234,223) (204,777) (162,675) (154,942) ---------- ---------- ---------- --------- --------- Income from operations 228,446 180,796 153,562 129,339 95,060 Interest income (expense), net 3,309 96 1,682 994 (2,259) Other income (expense), net (4,133) (4,903) 1,196 (3,249) (1,611) ---------- ---------- ---------- --------- --------- Income from continuing operations before provision for income taxes, extraordinary items and accounting changes 227,622 175,989 156,440 127,084 91,190 Provision for income taxes 84,213 64,939 60,219 50,765 34,530 ---------- ---------- ---------- --------- --------- Income from continuing operations before extraordinary items and accounting changes 143,409 111,050 96,221 76,319 56,660 Income (loss) from discontinued operations, net of tax** 22,619 1,430 8,051 (57,904) (2,487) ---------- ---------- ---------- --------- --------- Income before extraordinary items and accounting changes 166,028 112,480 104,272 18,415 54,173 Extraordinary items, net of tax - - - - (388) ---------- ---------- ---------- --------- --------- Income before accounting changes 166,028 112,480 104,272 18,415 53,785 Cumulative effect of accounting changes, net of tax*** - - - (30,300) - ---------- ---------- ---------- --------- --------- Net income (loss) $ 166,028 $ 112,480 $ 104,272 $ (11,885) $ 53,785 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- Weighted average common shares assuming no dilution 75,457 75,085 76,198 75,900 71,778 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- Per common share: Income from continuing operations before extraordinary items and accounting changes $1.90 $1.48 $1.26 $1.00 $ .79 Income (loss) from discontinued operations, net of tax .30 .02 .11 (.76) (.03) Extraordinary items, net of tax - - - - (.01) Accounting changes, net of tax - - - (.40) - ----- ----- ----- ----- ----- Net income (loss) $2.20 $1.50 $1.37 $(.16) $ .75 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Dividends paid $ .22 $ .18 $ .14 $ .06 $ - ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Balance sheet data: Working capital $ 165,727 $ 98,773 $ 189,358 $ 142,996 $ 96,232 Finance receivables, net* 338,072 213,444 - - - Total assets 1,319,985 1,000,670 676,663 527,958 475,026 Short-term debt, including current maturities of long-term debt 2,580 2,691 1,431 4,190 912 Long-term debt, less current maturities 25,122 18,207 9,021 2,919 1,453 Finance debt* 258,065 164,330 - - - ---------- ---------- ---------- --------- --------- Total debt 285,767 185,228 10,452 7,109 2,365 Shareholders' equity 662,720 494,569 433,232 324,912 335,380
*Due to the Acquisition of Eaglemark Financial Services, Inc. in 1995. **1993 includes a $57.0 million charge related primarily to the write-off of goodwill at Holiday Rambler. ***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 1996 COMPARED TO 1995 OVERALL Net sales for 1996 of $1.53 billion were $180.7 million, or 13.4%, higher than net sales for 1995. Net income and earnings per share from continuing operations were $143.4 million and $1.90, respectively, for 1996 as compared with $111.1 million and $1.48, respectively, for 1995. The gain on disposition and earnings per share from discontinued operations were $22.6 million and $.30, respectively, for 1996 as compared with net income and earnings per share from discontinued operations of $1.4 million and $.02, 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 $.05 per share to $.06 per share which resulted in a total year payout of $.22 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 210.2 192.1 18.1 9.4 General Merchandise 90.7 100.2 (9.5) (9.5) Other 31.1 19.9 11.2 56.3 - -------------------------------------------------------------------------------- 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 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 market place, improve product quality and reduce costs. Buell Distribution Corporation, a wholly-owned subsidiary of the Company, and the exclusive distributor of Buell Motorcycle Company (a 49% owned subsidiary), increased sales (included in "Other" in the above table) to approximately $24 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. Buell motorcycles are being introduced in Europe during the first quarter of 1997. 20 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. The Company exceeded its scheduled production goal of 115,000 units in 1996 and anticipates 1997 production capacity will be at least 130,000 units. The construction of a new manufacturing facility in Kansas City, Missouri is currently in process and is on schedule to be operational in 1998. In addition, expansion is also taking 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 being able to produce more than 200,000 motorcycles per year by 2003. The following are forward-looking statements: The Company currently estimates it will have the capacity to produce at least 130,000 units in 1997, more than 145,000 units in 1998 and more than 160,000 units in 1999. The Company's ability to reach these production capacity 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 to its existing facilities and (iii) successfully construct and open the new manufacturing facility such that it will be fully operational in 1998. However, there is no assurance that the Company will continue to realize additional efficiencies. In addition, the Company could experience delays in making additions and changes to existing facilities and/or constructing the new manufacturing facility as a result of risks normally associated with the construction and operation of new manufacturing facilities, including unanticipated problems in construction, 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. 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 motorcycles (excluding Buell motorcycles) increased 10.8%. The Company ended 1996 with a domestic market share of 48.2% compared to 47.7% in 1995. This increase is a reflection of the increased availability of the Company's motorcycles due to the increased capacity. European data (provided by Giral S.A.) shows the Company with a 6.8% share of the heavyweight (651+cc) market, down from 7.4% for the same period in 1995. The European market grew at an 8.4% rate in 1996, while retail registrations for the Company's motorcycles were down slightly from last year. Most of the growth in the European market occurred in the performance motorcycle segment, an area in which the Company does not currently compete. Asia/Pacific (Japan and Australia) data (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 motorcycles increased 3.4%. Export revenues totaled $413.1 million during 1996, an increase of approximately $18.3 million (4.6%) over 1995. The Company has exported approximately 30% of its traditional motorcycle unit shipments since 1990. The Company has adjusted the international allocation of 1997 model year motorcycles to 28% of total production. The combination of continued strong demand in the United States and softening demand in Europe were the primary factors driving the allocation shift. In 1996, the Company distributed approximately 40% of its exported units through its wholly owned subsidiaries in Germany, United Kingdom, France, The Netherlands, and Japan. 21 During 1996, Parts and Accessories (P&A) sales totaled $210.2 million, an $18.1 million or 9.4% 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. The Company expects the long-term growth in P&A revenue to approximate the growth rate in motorcycle revenue. General Merchandise sales, which includes clothing and collectibles, totaled $90.7 million, down 9.5% compared to 1995. The Company does not anticipate any General Merchandise growth in 1997. 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. OPERATING EXPENSES (Dollars in Millions)
================================================================================ Increase/ 1996 1995 (Decrease) %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, engineering 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. 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 Financial Services, Inc. (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. 22 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 $.30 per share, which was recorded in the fourth quarter. 1995 COMPARED TO 1994 OVERALL Net sales for 1995 of $1.35 billion were $191.6 million, or 16.5%, higher than net sales for 1994. Net income and earnings per share from continuing operations were $111.1 million and $1.48, respectively, for 1995 as compared with $96.2 million and $1.26, respectively, for 1994. Net income and earnings per share from discontinued operations were $1.4 million and $.02, respectively, for 1995 as compared with $8.0 million and $.11, respectively, for 1994, which included a $4.6 million, or $.06 per share, tax benefit related to the legal reorganization of Holiday Rambler. 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 purchase price was approximately $45 million, which was paid from internally generated funds and short-term borrowings. The Company included the results of operations of the Financial Services segment ($3.6 million) 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. The Company increased its quarterly dividend payment in September, 1995 from $.04 per share to $.05 per share which resulted in a total year payout of $.18 per share. RESULTS OF OPERATIONS MOTORCYCLE UNIT SHIPMENTS AND NET SALES
================================================================================ Increase/ 1995 1994 (Decrease) %Change ---- ---- --------- ------- Motorcycle units (excluding Buell) 105,104 95,811 9,293 9.7% ================================================================================ Net sales (in millions): Motorcycles (excluding Buell) $1,038.3 $ 890.6 $147.7 16.6% Motorcycle Parts and Accessories 192.1 161.9 30.2 18.5 General Merchandise 100.2 94.4 5.8 6.2 Other 19.9 12.0 7.9 65.8 - -------------------------------------------------------------------------------- Total Motorcycles and Related Products $1,350.5 $1,158.9 $191.6 16.5% ================================================================================
The Motorcycles and Related Products (Motorcycles) segment's net sales increased 16.5% over 1994 primarily due to a 9,293 unit (9.7%) increase in motorcycle shipments, as well as an 18.5% increase in its Parts and Accessories business. The increase in motorcycle shipments was the result of ongoing implementation of the Company's manufacturing strategy and efforts to satisfy demand. Buell Distribution Corporation increased sales to approximately $14 million (1,407 units) in 1995 as compared to approximately $6 million (576 units) in 1994. (Included in "Other" in the above table.) The Company began 1995 at a scheduled motorcycle production rate of 395 units per day. As the implementation of the manufacturing strategy continued, the rate increased to 470 units per day by the end of the year. 23 Year-end data indicates that the domestic (United States) motorcycle market continued to grow throughout 1995. Compared to 1994, industry registrations of domestic heavyweight motorcycles were up 7.4%, while retail registrations of the Company's motorcycles increased 10.6%. The Company ended 1995 with a domestic market share of 47.7% compared to 46.3% in 1994. European data shows the Company with a 7.4% share of the heavyweight market, up from 7.1% for the same period in 1994. The European market grew at a 2.6% rate in 1995, while retail registrations for the Company's motorcycles increased 7.1%. Year-end data for the Asia/Pacific (Japan and Australia) market shows the company with a 20.1% share of the heavyweight market, up from 19.4% in 1994. The Asia/Pacific market increased .7% in 1995, while retail registrations for the Company's motorcycles increased 4.4%. Export revenues totaled $394.8 million during 1995, an increase of approximately $63.6 million (19.2%) over 1994. The Company has exported approximately 30% of its traditional motorcycle unit shipments since 1990. The Company distributed approximately one-half of its exported units through its wholly owned subsidiaries. During 1995, the Parts and Accessories business generated $192.1 million in revenue, an increase of 18.5% over 1994. General Merchandise sales totaled $100.2 million, an increase of 5.8% over 1994. The rate of increase was lower than experienced in recent years. The Company initiated several promotional programs in the fourth quarter of 1995 to increase dealer floor traffic in response to a slowdown in floor traffic in the fourth quarter. GROSS PROFIT Gross profit increased $53.1 million, or 14.8%, in 1995 as compared with 1994 primarily due to an increase in volume. The gross profit margin was 30.5% in 1995 as compared with 30.9% in 1994. The gross profit margin was negatively affected by the overtime incurred to produce additional motorcycle units and make up for production time lost because production employees were involved in numerous strategic planning sessions during 1995. OPERATING EXPENSES (Dollars in Millions)
================================================================================ Increase/ 1995 1994 (Decrease) %Change ---- ---- --------- ------- Motorcycles and Related Products $226.9 $194.8 $32.1 16.5% Corporate 7.3 10.0 (2.7) (27.0) - -------------------------------------------------------------------------------- Total operating expenses $234.2 $204.8 $29.4 14.4% ================================================================================
Total operating expenses for 1995 increased $29.4 million, or 14.4%, over 1994. The increase was primarily volume related. Engineering, information services and international operations were other principal areas of increased spending. The decrease in the Corporate charges was due to a one-time charge in 1994 related to the legal reorganization of Harley-Davidson, Inc. and its Holiday Rambler subsidiaries. OPERATING INCOME FROM FINANCIAL SERVICES The results of operations of the Financial Services segment for the year ended December 31, 1995 of $3.6 million were included in operating profit and the preacquisition earnings were deducted as part of non-operating expense. Prior to 1995, the Company accounted for its investment in Eaglemark using the equity method and included its share of earnings in other income. 24 OTHER EXPENSE Other expense for 1995 of $4.9 million was primarily comprised of Eaglemark preacquisition earnings of $1.9 million, charitable donations of $1.9 million and loss on sale of machinery and equipment due to the ongoing manufacturing reorganization of $1.2 million. CONSOLIDATED INCOME TAXES The Company's effective tax rate decreased in 1995 to 37.0% from 38.5% in 1994. The decrease was attributable primarily to the full year effect of a 1994 corporate restructuring. DISCONTINUED OPERATIONS The operations for the Transportation Vehicles segment were classified as discontinued operations. The results of operations, net of applicable income taxes, were net income of $1.4 million and $8.0 million in 1995 and 1994, respectively. 1994 included a tax benefit of $4.6 million related to the legal reorganization of the Transportation Vehicles segment. OTHER MATTERS ACCOUNTING CHANGES The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" which becomes effective January 1, 1997. Adopting SFAS No. 125 will have an immaterial effect. The Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," which becomes effective January 1, 1997. Adopting SOP 96-1 will have an immaterial effect. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No. 123, "Accounting for Stock-Based Compensation," which became effective January 1, 1996. Adopting SFAS No. 121 had no effect. As is permitted under SFAS No. 123, the Company continued to account for employee stock compensation under the APB 25 rules. NET DEFERRED TAX ASSET The Company had a net deferred tax asset of approximately $51 million and $42 million at December 31, 1996 and 1995, respectively. In considering the necessity of establishing a valuation allowance on deferred tax assets, management considered: the levels of taxes paid in prior years that would be available for carryback; its ability to offset reversing deferred tax assets against reversing deferred tax liabilities; and the Company's prospects for future earnings. Accordingly, it is the opinion of management that it is more likely than not that the gross deferred tax assets included in the consolidated balance sheet at December 31, 1996 will be realized in their entirety. Management evaluates the realizability of deferred tax assets on a quarterly basis. FOREIGN CURRENCY As discussed in Note 11 of the notes to the consolidated financial statements, the Company attempts to limit its foreign currency exposure (primarily against German Deutsche Marks and Canadian Dollars) by entering into forward exchange contracts. 25 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 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. 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 are not 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 which has the sole purpose of meeting environmental compliance obligations. During 1996, the Company spent approximately $1 million on equipment used to limit hazardous substances/ pollutants and anticipates approximately the same level of spending in 1997. The Company does not expect that these expenditures related to environmental matters will have a material effect on future operating results or cash flows. LIQUIDITY AND CAPITAL RESOURCES The Company recorded cash flows from operating activities of $228.3 million in 1996 compared to $171.9 million during 1995. Income from continuing operations added approximately $32.4 million to cash flow from operating activities compared to 1995. Depreciation and amortization increased approximately $13 million from continued investment in the manufacturing strategy. Accrued liabilities and inventories had significant impacts on cash flow from operations during 1996. Accrued liabilities at December 31, 1996 increased $32.4 million over the balance at December 31, 1995 related primarily to income taxes. Inventory levels at December 31, 1996 increased approximately $17 million over the balance at December 31, 1995. Approximately $10 million of this increase was due to an increase in Parts and Accessories inventory due to the 10.7% decline in fourth quarter sales combined with a planned increase of inventory to improve fill rates on forecasted sales. Also, inventory increased approximately $4 million due to the purchase of the Company's distributor in The Netherlands. In addition, inventory increased at the Company's wholly owned French and German distributors primarily due to softening demand in Europe. 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. In addition, the discontinued operations contributed $28.9 million to cash flows from operating activities during 1996 as compared to $4.0 million in 1995. 26 Capital expenditures amounted to approximately $179 million and $113 million during 1996 and 1995, respectively. The Company is pursuing a long-term manufacturing strategy to increase its motorcycle production capacity with a goal of having the capacity to manufacture in excess of 200,000 units per year by 2003. The strategy includes expansion in and near the Company's existing facilities and construction of a new manufacturing facility in Kansas City, Missouri. The following are forward looking statements: Due in part to this long-term manufacturing strategy, the Company anticipates 1997 capital expenditures will approximate $190-$210 million. Although the Company does not know the exact range of capital it will incur, it estimates the capital required in 1998 and 1999 will be in the range of $160-$180 million and $120-$140 million per year, respectively. The Company anticipates it will have the ability to fund all capital expenditures with internally generated funds and short-term financing. The Company (excluding Eaglemark) currently has nominal levels of long-term debt and has available lines of credit of approximately $50 million, of which approximately $46 million remained available at year-end. 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 purchase price was approximately $45 million, which was paid from internally generated funds and short-term borrowings. Eaglemark finances its business through a secured commercial paper program, a revolving credit facility, a commercial paper conduit facility and asset-backed securitizations. Eaglemark issues short-term commercial paper secured by either wholesale or retail motorcycle finance receivables with maximum issuance available of $175 million of which approximately $134 million was outstanding at year-end. Maturities of commercial paper issued range from 1 to 60 days. Eaglemark has in place a $150 million revolving credit facility, of which approximately $104 million was outstanding at December 31, 1996, to fund primarily United States and Canadian retail loan originations. Borrowings under the facility are limited to 110% of the outstanding loan balance of eligible receivables. The amount of net eligible receivables at December 31, 1996 was approximately $132 million. Eaglemark also has a $75 million commercial paper conduit facility, of which approximately $20 million was outstanding at December 31, 1996, secured by the outstanding loan balance of eligible retail motorcycle receivables. The amount of net eligible receivables at December 31, 1996 was approximately $28 million. During 1996, Eaglemark securitized and sold approximately $238 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 commercial paper and securitization programs. The Company has continuing authorization from its Board of Directors to repurchase up to 4 million shares of the Company's outstanding common stock. During 1995, the Company repurchased 1,650,000 shares of its common stock with cash on hand and short-term borrowings of $40 million. As a result, the Company has 2,350,000 shares available to repurchase under this authorization. The Company's Board of Directors declared quarterly cash dividends during 1996 and 1995 totaling $.22 and $.18 per share, respectively. 27 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page ---- Report of Ernst & Young LLP, independent auditors 29 Consolidated statements of operations 30 Consolidated balance sheets 31 Consolidated statements of cash flows 32 Consolidated statements of shareholders' equity 33 Notes to consolidated financial statements 34 Supplementary data Quarterly financial data (unaudited) 49 28 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, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, 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. ERNST & YOUNG LLP Milwaukee, Wisconsin January 18, 1997 29 HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1996, 1995 and 1994 (In thousands, except per share amounts)
1996 1995 1994 ---- ---- ---- Net sales $1,531,227 $1,350,466 $1,158,887 Cost of goods sold 1,041,133 939,067 800,548 ---------- ---------- ---------- Gross profit 490,094 411,399 358,339 Operating income from financial services 7,801 3,620 - Selling, administrative and engineering (269,449) (234,223) (204,777) ---------- ---------- ---------- Income from operations 228,446 180,796 153,562 Interest income 3,309 1,446 2,363 Interest expense - (1,350) (681) Other - net (4,133) (4,903) 1,196 ---------- ---------- ---------- Income from continuing operations before provision for income taxes 227,622 175,989 156,440 Provision for income taxes 84,213 64,939 60,219 ---------- ---------- ---------- Income from continuing operations 143,409 111,050 96,221 Discontinued operations: Income from operations, net of applicable income taxes - 1,430 8,051 Gain on disposition of discontinued operations, net of applicable income taxes 22,619 - - ---------- ---------- ---------- Net income $ 166,028 $ 112,480 $ 104,272 ---------- ---------- ---------- ---------- ---------- ---------- Per common share: Income from continuing operations $1.90 $1.48 $1.26 Income from discontinued operations .30 .02 .11 ----- ----- ----- Net income $2.20 $1.50 $1.37 ----- ----- ----- ----- ----- ----- Cash dividends per common share $ .22 $ .18 $ .14 ----- ----- ----- ----- ----- -----
The accompanying notes are an integral part of the consolidated financial statements. 30 HARLEY-DAVIDSON, INC. CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 (In thousands, except share amounts)
ASSETS 1996 1995 ---- ---- Current assets: Cash and cash equivalents $ 142,479 $ 31,462 Accounts receivable, net 141,315 128,955 Inventories 101,386 84,427 Deferred income taxes 25,999 19,805 Prepaid expenses 18,142 10,786 Net assets from discontinued operations - 56,548 ---------- ---------- Total current assets 429,321 331,983 Finance receivables, net 338,072 213,444 Property, plant, and equipment, net 409,434 284,775 Deferred income taxes 24,691 22,415 Goodwill 40,900 43,256 Other assets 77,567 49,789 Net assets from discontinued operations - 55,008 ---------- ---------- $1,319,985 $1,000,670 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable $ 2,580 $ 2,691 Accounts payable 100,699 102,563 Accrued and other liabilities 160,315 127,956 ---------- ---------- Total current liabilities 263,594 233,210 Finance debt 258,065 164,330 Long-term liabilities 69,805 44,991 Postretirement health care benefits 65,801 63,570 Commitments and contingencies (Note 7) Shareholders' equity: Series A Junior Participating preferred stock, none issued - - Common stock, 78,126,091 and 77,356,688 shares issued in 1996 and 1995, respectively 781 773 Additional paid-in capital 175,152 154,533 Retained earnings 530,782 381,897 Cumulative foreign currency translation adjustment (566) 593 ---------- ---------- 706,149 537,796 Less: Treasury stock (2,457,184 and 2,472,304 shares in 1996 and 1995, respectively), at cost (41,933) (41,903) Unearned compensation (1,496) (1,324) ---------- ---------- Total shareholders' equity 662,720 494,569 ---------- ---------- $1,319,985 $1,000,670 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 31 HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1996, 1995 and 1994 (In thousands)
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 166,028 $112,480 $104,272 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 55,282 42,329 32,863 Gain on disposition of discontinued operations (22,619) - - Deferred income taxes (8,470) (6,284) (4,689) Long-term employee benefits 7,089 4,201 11,993 Equity in net (income) loss of joint ventures 3,486 276 (56) Other 4,801 1,413 611 Net change in discontinued operations 28,862 2,525 (25,025) Net changes in other current assets and current liabilities (6,180) 14,937 (35,620) ----------- -------- -------- Total adjustments 62,251 59,397 (19,923) ----------- -------- -------- Net cash provided by operating activities 228,279 171,877 84,349 Cash flows from investing activities: Net capital expenditures (178,771) (112,985) (88,666) Investment in joint ventures (8,778) (46,918) (1,386) Finance receivables, net - (17,922) - Finance receivables acquired or originated (1,086,949) - - Finance receivables collected 722,825 - - Finance receivables sold 238,114 - - Proceeds from disposition of discontinued operations 100,313 - - Net change in discontinued operations - (8,449) (6,055) Other - net (519) (1,547) (1,856) ----------- -------- -------- Net cash used in investing activities (213,765) (187,821) (97,963) Cash flows from financing activities: Net increase (decrease) in notes payable (111) 1,260 (2,759) Net increase in finance debt 93,735 33,267 - Payments on long-term debt - (750) (978) Dividends paid (17,143) (13,593) (10,672) Stock repurchases - (39,972) - Issuance of stock under employee stock plans 20,022 2,716 12,202 Net change in discontinued operations - 6,594 (434) ----------- -------- -------- Net cash provided by (used in) financing activities 96,503 (10,478) (2,641) ----------- -------- -------- Net increase (decrease) in cash and cash equivalents 111,017 (26,422) (16,255) Cash and cash equivalents: At beginning of year 31,462 57,884 74,139 ----------- -------- -------- At end of year $ 142,479 $ 31,462 $ 57,884 ----------- -------- -------- ----------- -------- --------
The accompanying notes are an integral part of the consolidated financial statements. 32 HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 1996, 1995 and 1994 (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, 1993 38,452,490 $385 $137,150 $189,410 $ 186 $ (1,583) $ (636) Two-for-one common stock split 38,452,490 385 (385) - - - - Net income - - - 104,272 - - - Dividends - - - (10,672) - - - Restricted stock issuance - - 1,763 - - 2 (1,765) Amortization of unearned compensation - - - - - - 1,530 Exercise of stock options 251,272 2 1,870 - - - - Tax benefit of restricted shares and stock options - - 10,330 - - - - Foreign currency translation adjustment - - - - 988 - - ---------- ---- -------- -------- ------- -------- ------- Balance December 31, 1994 77,156,252 772 150,728 283,010 1,174 (1,581) (871) Net income - - - 112,480 - - - Dividends - - - (13,593) - - - Restricted stock issuance - - 740 - - 1 (741) Stock repurchase - - - - - (39,972) - Amortization of unearned compensation, net of cancellations - - - - - (351) 288 Exercise of stock options 200,436 1 1,715 - - - - Tax benefit of restricted shares and stock options - - 1,350 - - - - Foreign currency translation adjustment - - - - (581) - - ---------- ---- -------- -------- ------- -------- ------- Balance December 31, 1995 77,356,688 773 154,533 381,897 593 (41,903) (1,324) Net income - - - 166,028 - - - Dividends - - - (17,143) - - - Restricted stock issuance - - 574 - - 1 (575) Amortization of unearned compensation, net of cancellations - - - - - (31) 403 Exercise of stock options 769,403 8 12,211 - - - - Tax benefit of restricted shares and stock options - - 7,834 - - - - Foreign currency translation adjustment - - - - (1,159) - - ---------- ---- -------- -------- ------- -------- ------- Balance December 31, 1996 78,126,091 $781 $175,152 $530,782 $ (566) $(41,933) $(1,496) ---------- ---- -------- -------- ------- -------- ------- ---------- ---- -------- -------- ------- -------- -------
The accompanying notes are an integral part of the consolidated financial statements. 33 HARLEY-DAVIDSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year ended December 31, 1996 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 wholly owned subsidiaries (the Company), including the accounts of Harley-Davidson Motor Company (HDMC), Holiday Rambler LLC (Holiday Rambler) and Eaglemark Financial Services, Inc. (Eaglemark). All significant intercompany accounts and transactions are eliminated. As disclosed in Note 3, the operations of Holiday Rambler are classified as discontinued operations. Certain prior year balances have been reclassified in order to conform to current-year presentation. 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 and restricted cash balances held in connection with commercial paper programs to be cash equivalents. At December 31, 1996 and 1995, the Company had $1.9 million and $1.1 million in restricted cash balances, respectively. 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 considered 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 upon repossession and sale of the underlying collateral or at 120 days contractually past due. RETAIL INSTALLMENT LOANS SOLD WITH LIMITED RECOURSE; SECURITIZATION AND SERVICING INCOME - During 1996, Eaglemark securitized and sold $238.1 million of its retail installment loans to investors with limited recourse, with servicing rights being retained by Eaglemark. These transactions were treated as sales. As such, the receivables are removed from the balance sheet upon sale and a gain is recognized for the difference between the carrying value of the receivables 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 is required to adopt 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 will have an immaterial effect. 34 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, $25.5 million in 1996 and $16.9 million in 1995, 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 1996, the Company incurred approximately $7.3 million in start-up costs at the Kansas City and Menomonee Falls facilities. PRODUCT WARRANTY - Product warranty costs are charged to operations based upon the estimated warranty cost per unit sold. RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses were approximately $37.7 million, $27.2 million, and $22.1 million for 1996, 1995 and 1994, 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 is required to adopt SOP 96-1, "Environmental Remediation Liabilities," effective January 1, 1997. Adopting SOP 96-1 will have an immaterial effect. EARNINGS PER SHARE - Earnings per common share assuming no dilution is calculated by dividing elements of net income by the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding during 1996, 1995 and 1994 were 75.5 million, 75.1 million, and 76.2 million, respectively. Stock options were not materially dilutive during 1996, 1995 or 1994. IMPAIRMENT- The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective January 1, 1996. Adopting SFAS No. 121 had no effect. 2. ADDITIONAL BALANCE SHEET AND CASH FLOWS INFORMATION Accounts receivable consist of the following:
December 31 ----------------------- 1996 1995 ---- ---- (In thousands) Motorcycles and Related Products segment: Domestic $ 49,888 $ 53,621 Foreign 91,427 75,334 -------- -------- $141,315 $128,955 -------- -------- -------- --------
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. The allowance for doubtful accounts deducted from accounts receivable was $1.9 million and $1.5 million at December 31, 1996 and 1995, respectively. 35 2. ADDITIONAL BALANCE SHEET AND CASH FLOWS INFORMATION (CONTINUED)
December 31 ----------------------- 1996 1995 ---- ---- (In thousands) Inventories: Components at the lower of FIFO cost or market: Raw materials and work in process $ 33,275 $ 32,284 Finished goods 26,331 19,290 Parts and accessories 62,502 52,182 -------- -------- 122,108 103,756 Excess of FIFO over LIFO inventories 20,722 19,329 -------- -------- $101,386 $ 84,427 -------- -------- -------- -------- Property, plant and equipment, at cost: Land and land improvements $ 3,727 $ 2,139 Buildings and improvements 92,328 72,752 Machinery and equipment 406,062 312,535 Construction in progress 138,612 80,585 -------- -------- 640,729 468,011 Less accumulated depreciation 231,295 183,236 -------- -------- $409,434 $284,775 -------- -------- -------- -------- Accrued and other liabilities: Payroll, performance incentives, and related expenses $ 58,926 $ 47,001 Warranty/recalls 11,221 12,058 Dealer incentive programs 21,268 16,153 Product liability 8,888 8,338 Income taxes payable 29,416 8,978 Eaglemark acquisition cost - 9,400 Other 30,596 26,028 -------- -------- $160,315 $127,956 -------- -------- -------- --------
Supplemental cash flow information is as follows:
1996 1995 1994 ---- ---- ---- (In thousands) Net changes in other current assets and current liabilities: Accounts receivable $(12,360) $(35,623) $(40,335) Inventories (16,959) 5,453 (13,137) Prepaid expenses (7,356) (2,287) 481 Accounts payable and accrued liabilities 30,495 47,394 17,371 -------- -------- -------- $ (6,180) $ 14,937 $(35,620) -------- -------- -------- -------- -------- -------- Cash paid during the period for interest and income taxes is as follows (in thousands): Interest $ 14,400 $ 1,143 $ 702 -------- -------- -------- -------- -------- -------- Income taxes $ 71,029 $ 60,444 $ 47,612 -------- -------- -------- -------- -------- --------
Of the interest paid in 1996, approximately $2.1 million was capitalized. 36 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 components of net assets of discontinued operations included in the balance sheet at December 31, 1995 are as follows: Current assets (mainly trade receivables and inventory) $105,459 Accounts payable, accrued liabilities and other (48,911) -------- Net current assets $ 56,548 -------- -------- Property, plant and equipment, net $ 51,982 Other non-current assets 3,026 -------- Net long-term assets $ 55,008 -------- --------
The condensed statements of operations relating to discontinued operations are presented below:
Year ended December 31, 1995 1994 ---- ---- Net sales $443,950 $382,805 Costs and expenses 441,388 377,176 -------- -------- Income before income taxes 2,562 5,629 Provision (benefit) for income taxes 1,132 (2,422) -------- -------- Net income $ 1,430 $ 8,051 -------- -------- -------- --------
In 1994, the Company's tax provision included a benefit of $4.6 million related to its legal reorganization. Included in the 1996 gain on disposition of discontinued operations is a net tax benefit of $2.0 million, including benefits related to the 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, $2.5 million, and $1.6 million for 1996, 1995 and 1994, 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. 37 4. EAGLEMARK FINANCIAL SERVICES, INC. (CONTINUED) 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 results of operations for 1995 and 1994 on a pro forma basis, would not have been materially different from the reported amounts for 1995 or 1994 if the acquisition were assumed to have taken place at the beginning of 1994. Finance receivables originated or purchased by Eaglemark were as follows at December 31, (in thousands):
1996 1995 ---- ---- Wholesale $147,925 $119,817 Retail 169,432 84,574 Other 24,848 12,412 -------- -------- 342,205 216,803 Allowance for credit losses 4,133 3,359 -------- -------- $338,072 $213,444 -------- -------- -------- --------
Eaglemark's finance receivables include wholesale loans to dealers for the purpose of inventory financing and retail loans to consumers in the form of installment sales contracts and revolving charge receivables. Eaglemark holds titles to vehicles financed, and certain 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 and personal watercraft. On December 31, 1996, contractual maturities of finance receivables were as follows (in thousands): 1997 $183,808 1998 24,143 1999 21,220 2000 20,423 2001 20,996 Thereafter 71,615 -------- Total $342,205 -------- --------
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):
1996 1995 ---- ---- Balance at beginning of year $3,359 $2,638 Provision 1,382 1,275 Charge-offs (608) (554) ------ ------ Balance at end of year $4,133 $3,359 ------ ------ ------ ------
Eaglemark serviced with limited recourse $283.8 million and $160.2 million of retail installment loans as of December 31, 1996 and 1995, respectively. 38 4. EAGLEMARK FINANCIAL SERVICES, INC. (CONTINUED) Eaglemark's debt as of December 31, consisted of the following (in thousands):
1996 1995 ---- ---- Commercial paper $153,802 $131,830 Revolving credit facility 104,263 32,500 -------- -------- Total finance debt $258,065 $164,330 -------- -------- -------- --------
As of December 31, 1996, Eaglemark has in place a $150.0 million revolving credit facility provided by a diversified financial institutions group to primarily fund retail loan originations. This facility expires on October 31, 1997. Borrowings under this facility are limited to 110% of the outstanding loan balance of eligible receivables. The amount of net eligible receivables at December 31, 1996 was approximately $132.3 million. As of December 31, 1995, Eaglemark had in place a $60.0 million revolving credit facility provided by a syndicate of banks to fund primarily the United States and Canadian retail loan originations. This facility expired on October 31, 1996. During 1996, Eaglemark entered into a $75.0 million commercial paper conduit program with a large multi-national bank. The conduit issues commercial paper on behalf of the Company to provide short-term warehouse financing for United States retail motorcycle loan originations. This facility expires in March, 1997. Commercial paper borrowings under the facility are secured by the outstanding loan balance of eligible retail motorcycle receivables. The amount of net eligible receivables at December 31, 1996 was approximately $28.4 million. Eaglemark also issues short-term commercial paper secured by wholesale motorcycle finance receivables with maximum issuance available of $175.0 million. Maturities of commercial paper issued range from 1 to 60 days, and the current commercial paper program expires in December, 1997. The weighted average interest rate on outstanding commercial paper balances was 5.51% at December 31, 1996. 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 payment may be provided at the Company's option either as a capital contribution or as a loan. 5. NOTES PAYABLE As of December 31, 1996, the Company had unsecured lines of credit totaling approximately $50.0 million, of which approximately $45.7 million remained available after consideration of borrowings and outstanding letters of credit. 39 6. INCOME TAXES Details of income from continuing operations before provision for income taxes are as follows:
1996 1995 1994 ---- ---- ---- (In thousands) Income from continuing operations before taxes: Domestic $217,700 $159,046 $142,009 Foreign 9,922 16,943 14,431 -------- -------- -------- $227,622 $175,989 $156,440 -------- -------- -------- -------- -------- -------- Provision for income taxes consists of the following: Current: Federal $73,537 $56,384 $46,442 State 10,524 7,308 10,682 Foreign 6,254 8,279 7,124 ------- ------- ------- 90,315 71,971 64,248 Deferred: Federal (5,005) (5,895) (3,275) State (667) (780) (440) Foreign (430) (357) (314) ------- ------- ------- (6,102) (7,032) (4,029) ------- ------- ------- Total $84,213 $64,939 $60,219 ------- ------- ------- ------- ------- -------
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:
1996 1995 1994 ---- ---- ---- Provision at statutory rate 35.0% 35.0% 35.0% Foreign income taxes 1.0 1.2 1.0 Foreign tax credits (1.0) (1.2) (1.0) State taxes, net of federal benefit 2.9 2.6 4.0 Foreign sales corporation (1.3) (.8) (1.0) Other .4 .2 .5 ---- ---- ---- Provision for income taxes 37.0% 37.0% 38.5% ---- ---- ---- ---- ---- ----
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:
1996 1995 ---- ---- (In thousands) Deferred tax assets: Accruals not yet tax deductible $ 30,921 $ 25,409 Postretirement health care benefit obligation 27,719 25,935 Other, net 8,319 6,116 -------- -------- 66,959 57,460 Deferred tax liabilities: Depreciation, tax in excess of book (13,923) (10,665) Inventory adjustments (1,206) (2,808) Pension obligation (1,140) (1,767) -------- -------- (16,269) (15,240) -------- -------- Net deferred tax asset $ 50,690 $ 42,220 -------- -------- -------- --------
40 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 done 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, 1996, the Company was contingently liable for $18.3 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. 41 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, -------------------------------------- 1996 1995 1994 ---- ---- ---- Components of net periodic pension cost: Service cost - benefits earned during the year $ 6,243 $ 5,184 $ 5,324 Interest cost on projected benefit obligations 12,540 11,237 10,284 Actual return on plan assets (15,912) (16,547) (2,028) Net amortization and deferral 5,245 7,523 (5,208) -------- -------- ------- Net periodic pension cost $ 8,116 $ 7,397 $ 8,372 -------- -------- ------- -------- -------- -------
Reconciliation of funded status:
September 30, 1996 September 30, 1995 -------------------------- -------------------------- 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 $42,716 $ 82,185 $ 38,648 $ 69,003 Nonvested benefit obligation 5,473 12,117 5,706 7,071 ------- -------- -------- -------- Accumulated benefit obligation $48,189 $ 94,302 $ 44,354 $ 76,074 ------- -------- -------- -------- ------- -------- -------- -------- Projected benefit obligations for service rendered to date 68,785 107,834 $ 63,611 $ 90,010 Plan assets at fair value, consisting primarily of debt securities, bank common trust funds, common stock, and an immediate participation guarantee contract 54,345 83,569 46,899 68,012 ------- -------- -------- -------- Projected benefit obligation in excess of plan assets 14,440 24,265 16,712 21,998 Unrecognized net loss from past experience different from that assumed and changes in assumptions (9,952) (11,589) (13,033) (13,711) Unrecognized prior service cost (4,871) (12,309) (5,327) (6,999) Unrecognized transition asset 495 669 619 894 Additional minimum liability - 9,696 - 5,880 ------- -------- -------- -------- Accrued (prepaid) pension cost, September 30 112 10,732 (1,029) 8,062 Fourth quarter contribution - (403) - (510) ------- -------- -------- -------- Accrued (prepaid) pension cost, December 31 $ 112 $ 10,329 $ (1,029) $ 7,552 ------- -------- -------- -------- ------- -------- -------- --------
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. The Company has recorded an intangible asset in the same amount. 42 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:
1996 1995 1994 ---- ---- ---- 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%
Certain of the Company's plans relating to hourly employees have been amended to increase the scheduled benefits. The Company's plan relating to salaried employees was also 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 $2.0 million, $1.5 million and $1.4 million for matching contributions during 1996, 1995 and 1994, 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 ($2.3 million in 1996 and $1.8 million in 1995). Some of the plans require employee contributions to offset benefit costs. The status of the plans was as follows:
September 30 ------------------- 1996 1995 ---- ---- (In thousands) Accumulated postretirement benefit obligation: Retirees $16,134 $15,317 Fully eligible active plan participants 8,064 7,501 Other active plan participants 25,091 21,746 ------- ------- 49,289 44,564 Unrecognized net gain 14,611 16,843 Unrecognized prior service cost 2,382 2,621 Fourth quarter contribution (481) (458) ------- ------- Accrued postretirement benefit liability, December 31 $65,801 $63,570 ------- ------- ------- -------
The net periodic postretirement benefit cost includes the following:
Year Ended December 31 ---------------------- 1996 1995 ---- ---- (In thousands) Service cost - benefits earned during the year $ 2,036 $1,751 Interest cost on projected benefit obligation 3,524 3,879 Net amortization and deferral (1,065) (589) ------- ------ Net periodic postretirement benefit cost $ 4,495 $5,041 ------- ------ ------- ------
43 The weighted average health care cost trend rate used in determining the accumulated postretirement benefit obligation of the health care plans was 9% in 1996. 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, 1996 and the aggregate of service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997 would increase by $5.1 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, 1996 and 1995 was 8.25%. 10. CAPITAL STOCK The Company has 200 million authorized shares of $.01 par value common stock. The Company has continuing authorization from its Board of Directors to repurchase up to 4 million shares of the Company's outstanding common stock. During 1995, the Company repurchased 1,650,000 shares of its common stock with cash on hand and short-term borrowings. As a result, the Company has 2,350,000 million shares available to repurchase under this authorization. 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 400 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 four shares of common stock. 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-quarter 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 restricted 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 restricted stock upon death, disability or retirement as described in the plan. Unearned compensation was charged for the market value of the restricted 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. 44 10. CAPITAL STOCK (CONTINUED) Information with respect to restricted stock outstanding is as follows:
1996 1995 1994 ---- ---- ---- Outstanding at beginning of year at $4.73 to $26.94 per share 101,700 34,200 966,074 Restricted shares granted at $23.0625 to $35.06 16,400 67,500 - Restricted shares vested at $4.46 to $5.05 per share (34,200) - (931,874) ------- ------- -------- Total shares outstanding at end of year at $23.0625 to $35.06 per share 83,900 101,700 34,200 ------- ------- -------- ------- ------- -------- Weighted-average fair value of shares granted during the year $35.06 ------ ------
Expense in 1996, 1995 and 1994 associated with this restricted stock plan was $.4 million, $.3 million, and $.7 million, respectively. The Company has Stock Option Plans 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 3.3 million and 3.8 million at December 31, 1996 and 1995, respectively. The following table summarizes the transactions of the Company's Stock Option Plans for the three-year period ended December 31, 1996:
1996 1995 1994 ----------------------------- --------- --------- Weighted-Average Options Exercise Price Options Options --------- ---------------- --------- --------- Options outstanding at beginning of year 3,550,083 $16.32 3,018,058 2,583,482 Options granted 548,540 35.81 805,360 728,410 Options exercised (769,403) 13.05 (200,434) (252,772) Options cancelled (130,074) 25.78 ( 72,901) (41,062) --------- --------- --------- Options outstanding at end of year 3,199,146 20.07 3,550,083 3,018,058 --------- --------- --------- --------- --------- --------- Weighted-average fair value of options granted during the year $14.26 $10.89 ------ ------ ------ ------ Number of options exercisable at end of year 1,824,938 $12.71 2,104,240 1,806,038 --------- ------ --------- --------- --------- ------ --------- ---------
Options outstanding at December 31, 1996: Price range $3.11 to $20; weighted average contractual life of 4.2 years 1,450,709 $ 9.41 Price range $20.01 to $40; weighted average contractual life of 8.1 years 1,748,437 28.87 --------- 3,199,146 --------- ---------
45 10. CAPITAL STOCK (CONTINUED) 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., restricted 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. The Company's net income would not have been materially different had compensation expense for employee stock compensation been recognized consistent with SFAS No. 123. In determining the effect of SFAS No. 123, the Black-Scholes option pricing model was used with the following weighted-average assumptions for 1996: risk-free interest rate of approximately 5%, 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. These pro-forma calculations only include the effects of 1996 and 1995 grants. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, finance receivables, receivables from retail installment loan sales, debt and foreign currency exchange contracts. The book values of cash and cash equivalents, trade receivables and finance receivables are considered to approximate their respective fair values. The book value of receivables from retail installment loan sales is $24.8 million and is included with finance receivables on the balance sheet. The fair value of these receivables is estimated to be $26.0 million based on discounting future excess cash flows associated with these transactions. 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 exchange contracts to hedge against sales transactions denominated principally in European currencies. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that the eventual dollar cash flows resulting from the sale of products to foreign subsidiaries will be adversely affected by changes in exchange rates. At December 31, 1996, the Company had forward 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 $64.3 million and $29.4 million at December 31, 1996 and 1995, respectively. Eaglemark has also entered into Canadian forward contracts to hedge the Canadian dollar in connection with their wholesale finance program. At December 31, 1996 and 1995, respectively, Eaglemark had $19.0 million and $17.4 million of Canadian forward contracts outstanding. The current contracts have maturities of less than nine months. Unrealized gains and losses on these forward exchange contracts, which were not material at December 31, 1996 or 1995, are deferred and recognized at the time the hedged transaction is settled. Eaglemark has interest rate cap agreements to reduce the impact of fluctuations in interest rates on its floating rate debt. At December 31, 1996 and 1995, Eaglemark had approximately $20 million in interest rate caps outstanding. At December 31, 1996, the fair value of the caps, if Eaglemark were to terminate the agreements, was not material. 46 12. 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 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. 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 a proprietary credit card for use in the Company's independent dealerships. 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. 47 12. BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED) Information by industry segment is set forth below (in thousands):
1996 1995 1994 ---- ---- ---- Net sales: Motorcycles and Related Products $1,531,227 $1,350,466 $1,158,887 Financial Services (1) n/a n/a n/a ---------- ---------- ---------- $1,531,227 $1,350,466 $1,158,887 ---------- ---------- ---------- ---------- ---------- ---------- Income from operations: Motorcycles and Related Products $228,093 $184,475 $163,510 Financial Services (1) 7,801 3,620 - General corporate expenses (7,448) (7,299) (9,948) -------- -------- -------- $228,446 $180,796 $153,562 -------- -------- -------- -------- -------- --------
Motorcycles and Related Transportation Financial Products Vehicles (2) Services(1) Corporate Consolidated ----------- -------------- ----------- --------- ------------ 1996 Identifiable assets $790,271 n/a $387,666 $142,048 $1,319,985 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 $595,118 $111,556 $269,461 $24,535 $1,000,670 Depreciation and amortization 41,754 n/a 320 255 42,329 Net capital expenditures 112,579 n/a 221 185 112,985 1994 Identifiable assets $494,362 $110,886 n/a $71,415 $676,663 Depreciation and amortization 32,617 n/a n/a 246 32,863 Net capital expenditures 88,542 n/a n/a 124 88,666
(1) During 1996 and 1995, the results of operations for the majority-owned financial services subsidiary are included in Income from operations in the statements of operations. During 1994, the equity in earnings of the financial services subsidiary was included in other income. 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. There were no sales between business segments for the years ended December 31, 1996, 1995 or 1994. (b) FOREIGN OPERATIONS Included in the consolidated financial statements are the following amounts relating to foreign affiliates:
1996 1995 1994 ---- ---- ---- (In thousands) Assets $ 95,500 $ 66,658 $ 57,626 Net sales 216,957 221,193 176,521 Net income 4,098 9,021 7,621
Export sales of domestic subsidiaries to nonaffiliated customers were $196.0 million, $172.9 million and $155.2 million in 1996, 1995 and 1994, respectively. 48 SUPPLEMENTARY DATA QUARTERLY FINANCIAL DATA (UNAUDITED) (In millions, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ------------------ ------------------ ------------------ ------------------ 1996 1995 1996 1995 1996 1995 1996 1995 ---- ---- ---- ---- ---- ---- ---- ---- Net sales $371.1 $294.9 $392.8 $355.6 $385.8 $327.1 $381.5 $372.9 Gross profit 115.8 90.4 124.8 109.7 120.5 96.8 129.0 114.5 Income from continuing operations 33.0 23.8 39.9 33.2 33.2 23.5 37.3 30.6 Income (loss) from discontinued operations, net of tax - (.2) - .2 - .2 22.6 1.2 Net income 33.0 23.6 39.9 33.4 33.2 23.7 59.9 31.8 Per common share: Income from continuing operations .44 .31 .53 .45 .44 .32 .49 .40 Income from discontinued operations - - - - - - .30 .02 Net income .44 .31 .53 .45 .44 .32 .79 .42
49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 50 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 1997 annual meeting of shareholders, which will be filed within 120 days after the close of the Company's fiscal year ended December 31, 1996 (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. 51 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, 1996 30 Consolidated balance sheets at December 31, 1996 and 1995 31 Consolidated statements of cash flows for each of the three years in the period ended December 31, 1996 32 Consolidated statements of shareholders' equity for each of the three years in the period ended December 31, 1996 33 Notes to consolidated financial statements 34 Consolidated financial statement schedules for each of the three years in the period ended December 31, 1996 II - Valuation and qualifying accounts 55 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. 52 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* 1986 Stock Option Plan 10.3* 1988 Stock Option Plan 10.4* 1990 Stock Option Plan 10.5* 1995 Stock Option Plan 10.6* Consulting Agreement between the Registrant and Mr. Beals 10.7* Form of Transition Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Teerlink and Ziemer 10.8* Deferred Compensation Plan 10.9* Form of Life Insurance Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Teerlink and Ziemer 10.10* Harley-Davidson, Inc. Corporate Short Term Incentive Plan 10.11* Form of Restricted Stock Agreement between the Registrant and each of Messrs. Bleustein and Gray * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 53 LIST OF EXHIBITS [Items 14(a)(3)and 14(c)] Exhibit No. Description - ----------- ----------- 10.12* Form of Severance Benefits Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Teerlink and Ziemer 10.13* Form of Supplemental Executive Retirement Plan Agreement between the Registrant and each of Messrs. Bleustein, Gray and Teerlink 10.14* Harley-Davidson Pension Benefit Restoration Plan 10.15* Description of post-retirement life insurance equivalent 11 Computation of Primary and Fully Diluted Earnings Per Share 21 List of Subsidiaries 23 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedule * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 54 SCHEDULE II HARLEY-DAVIDSON, INC. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1996, 1995 and 1994 (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: 1996 $1,541 $ 377 $ 0 $1,918 ------ ------ ------- ------ ------ ------ ------- ------ 1995 $1,750 $ (123) $ (86) $1,541 ------ ------ ------- ------ ------ ------ ------- ------ 1994 $1,532 $ 253 $ (35) $1,750 ------ ------ ------- ------ ------ ------ ------- ------ Finance receivables - Allowance for doubtful accounts: 1996 $3,359 $1,382 $ (608) $4,133 ------ ------ ------- ------ ------ ------ ------- ------ 1995 $2,638 $1,275 $ (554) $3,359 ------ ------ ------- ------ ------ ------ ------- ------ Inventories - Allowance for obsolescence and loss (2): 1996 $2,232 $3,846 $(1,444) $4,634 ------ ------ ------- ------ ------ ------ ------- ------ 1995 $1,961 $1,857 $(1,586) $2,232 ------ ------ ------- ------ ------ ------ ------- ------ 1994 $2,783 $ 830 $(1,652) $1,961 ------ ------ ------- ------ ------ ------ ------- ------
(1) Represents amounts written off to the reserve, net of recoveries. (2) Stated in last-in, first-out (LIFO) cost. 55 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 27, 1997. HARLEY-DAVIDSON, INC. By: /S/ Richard F. Teerlink ------------------------------ Richard F. Teerlink Chairman, 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 27, 1997. Name Title ---- ----- /S/ Richard F. Teerlink Chairman, President, Chief Executive Officer ---------------------------- (Principal executive officer) and Director Richard F. Teerlink /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/ Jeffrey L. Bleustein Director ---------------------------- Jeffrey L. Bleustein /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 56 INDEX TO EXHIBITS [Items 14(a)(3) and 14(c)] Exhibit No. Description - ----------- ----------- 3.1 Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1- 9183)). 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. 1986 Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1- 9183)). 10.3* Harley-Davidson, Inc. 1988 Stock Option Plan (incorporated herein by reference to Exhibit 10.3 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1- 9183)). 10.4* Harley-Davidson, Inc. 1990 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Registrants' Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1- 9183)). 10.5* Harley-Davidson, Inc. 1995 Stock Option Plan. 10.6* 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)). * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 57 INDEX TO EXHIBITS [Items 14(a)(3) and 14(c)] Exhibit No. Description - ----------- ----------- 10.7* Form of Transition Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Teerlink and Ziemer. 10.8* 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)). 10.9* Form of Life Insurance Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Teerlink and Ziemer (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)). 10.10* 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). 10.11* Form of Restricted Stock Agreement between the Registrant and each of Messrs. Bleustein, and Gray. 10.12* Form of Severance Benefits Agreement between the Registrant and each of Messrs. Bleustein, Brostowitz, Gray, Teerlink and Ziemer. 10.13* Form of Supplemental Executive Retirement Plan Agreement between the Registrant and each of Messrs. Bleustein, Gray 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)). 10.14* 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)). 10.15* Description of post-retirement life insurance equivalent. 11 Computation of Primary and Fully Diluted Earnings Per Share. 21 List of Subsidiaries. 23 Consent of Ernst & Young LLP, Independent Auditors. 27 Financial Data Schedule. * Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 58 EX-10.5 2 EXHIBIT 10.5 EXHIBIT 10.5 HARLEY-DAVIDSON, INC. 1995 STOCK OPTION PLAN (amended through February 19, 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 3,800,000 provided that Options for not more than 200,000 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 be otherwise 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-10.7 3 EXHIBIT 10.7 EXHIBIT 10.7 TRANSITION AGREEMENT AGREEMENT dated the _____ day of _____________, 19__ between Harley- Davidson, Inc., a Wisconsin corporation (the "Corporation") and _____________ (the "Executive"). Unless otherwise indicated, terms used herein and defined in Schedule A shall have the meanings assigned to them in Schedule A. WHEREAS, the HDI Group desires to continue to attract and retain skilled and dedicated management employees, consistent with achieving the best possible price for its stockholders in any transition period or change in ownership and control of the Corporation; WHEREAS, the Executive has specific duties and unique talents which are of benefit to the HDI Group both presently and in any transition period; WHEREAS, the HDI Group and the Executive desire that the Executive be free of any conflict of interest with regard to the performance of the Executive's duties in evaluating any proposed change in ownership or control; NOW, THEREFORE, it is agreed as follows 1. The HDI Group currently employs the Executive as ____________________, Harley-Davidson, Inc. upon the terms and conditions currently reflected in the Executive's personnel file or in various minutes of the Board. 2. This Agreement shall become effective on the date hereof and shall terminate on the second [third for Mr. Teerlink] anniversary of the occurrence of a Change of Control Event; PROVIDED, HOWEVER, that no benefits shall be payable or accrue pursuant to this Agreement prior to the occurrence of a Change of Control Event. 3. During the two [three for Mr. Teerlink] year period following a Change of Control Event, so long as the Executive remains employed by the HDI Group he shall devote his full time, attention, and energies to the business of the HDI Group and shall not engage in any other business activity whether or not such business activity is pursued for gain, profit, or other pecuniary advantage; but this shall not be construed as preventing the Executive from (a) investing the Executive's assets in such form or manner as will not materially affect the Executive's ability to perform his duties and obligations to the HDI Group; or (b) continuing to serve as a director of any corporation of which he was a director immediately prior to the Change of Control Event. The Executive agrees that once a Change of Control Event occurs he will not voluntarily terminate his 2 employment with the HDI Group until ten days after such Change of Control Event has occurred. 4. The HDI Group agrees that following a Change of Control Event no termination of the Executive's employment with the HDI Group will be effective, unless it provides the Executive ten days prior written notice of such termination; PROVIDED, HOWEVER, that any Termination by the Executive shall provide the HDI Group Employer with ten days prior written notice. The Executive may waive the notice requirement for the HDI Group. 5. The Executive recognizes and acknowledges that the list of the HDI Group's customers, its product plans, forecasts and financial information, as well as other confidential information, as it may exist from time to time, is valuable, special, and unique asset of the HDI Group's business. The Executive will not, during or after the term of the Executive's employment, disclose any such information or any part thereof to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever. In the event of a breach or threatened breach by the Executive of the provisions of this section, the HDI Group shall be entitled to an injunction restraining the Executive from disclosing, in whole or in part, this information. The HDI Group will be free to pursue any other remedies as may in its discretion be deemed appropriate under the circumstances. 6. Upon the happening of a Change of Control Event, the HDI Group agrees, while the Executive is employed hereunder, to continue the Compensation of the Executive at a level, comparable in the aggregate, to that immediately preceding the Change of Control Event. 7. (a) (i) The Executive shall be entitled to receive upon Termination a lump-sum payment equal to the product of three multiplied by the sum of: (A) the Executive's highest annual rate of salary during the five year period preceding the Executive's termination of employment with the HDI Group; (B) the highest annual bonus paid to or accrued for the benefit of the Executive during the five year period preceding the Executive's termination of employment with the HDI Group under any bonus plan, program, or arrangement of the HDI Group which the HDI Group Employer maintains or has adopted; and (C) the product of 4 times the last quarterly payment, prior to the Change of Control Event, paid to the Executive 3 by the HDI Group, to the extent such payment was paid by the HDI Group in lieu of providing the Executive with various fringe benefits (the "Perquisite Payment"). In addition, if Executive has attained age 55 prior to the date of Termination, the Executive shall receive an additional amount, in lieu of any post-retirement life insurance, equal to his annual base salary, at its then current rate. (ii) In addition, the HDI Group shall, at the time the 10 day written notice prior to Termination is given, cause: (A) the Executive to be fully and immediately vested in his accrued benefit and any minimum years of service requirement will be deemed to have been satisfied under: the Harley-Davidson Retirement Savings Plan for Salaried Employees, the Retirement Annuity Plan for Salaried Employees of Harley-Davidson, the Harley-Davidson Pension Benefit Restoration Plan, the Harley-Davidson Supplemental Executive Retirement Plan, and any other pension or retirement plan in which Executive was entitled to participate at the time of the Change of Control Event or at any time prior to Termination; (B) all restricted stock awards made to the Executive to be fully and immediately vested; (C) all stock options granted pursuant to the Harley-Davidson, Inc. 1995 Stock Option Plan and any successor or predecessor plan, to be fully vested and become immediately exercisable; (D) all performance or other awards granted to the Executive pursuant to any HDI long-term incentive plan to be fully and immediately vested, as if all performance requirements have been satisfied; and (E) the HDI Group Employer to pay to Executive an amount in respect of any bonus under a short-term incentive or other annual bonus plan of the HDI Group equal to the higher of (a) Executive's target bonus for the year of Termination, or (b) the bonus Executive received in the year prior to the Change of Control Event, which amount shall be pro-rated by a fraction, the numerator of which is the number of days elapsed in the HDI Group's fiscal year on the date of Termination and the denominator of which is 365. (iii) The Executive will also receive, for a period of three years from the date of Termination: 4 (A) use of professional outplacement services by qualified consultants retained at the expense of the HDI Group Employer; and (B) continued coverage under HDI Group hospital, medical, life, disability insurance and other welfare benefit plans. (iv) Furthermore, unless the Perquisite Payment was substituted for the following, the Executive shall also receive a cash lump sum payment, calculated so as to equal the fair market value of three years of benefits, for: (A) automobiles and vehicles (or allowance in respect thereof) to which he was entitled either prior to the Change of Control Event or prior to Termination; and (B) all amounts in respect of club, association or similar fees and dues covering such Executive to which he was entitled either prior to the Change of Control Event or prior to Termination. (v) The Executive shall also be entitled to all amounts earned or accrued through the date of Termination but not paid as of such date, including base salary, reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the HDI Group during the period ending on the date of Termination, vacation pay, and sick leave (collectively, "Accrued Compensation"). (vi) All amounts payable pursuant to this Section 7(a) of this Agreement shall be paid to the Executive within 10 days following the date of Termination and all other benefits provided pursuant this Section 7(a) shall be provided or begun, as the case may be, on the date of Termination. (b) In the event the Executive's employment shall be terminated due to death within the two [three for Mr. Teerlink] year period following a Change of Control Event, for a period of one year following such termination (i) the HDI Group shall be obligated to make payments under then existing employee benefit programs, including, but not limited to, hospital, medical, life and disability insurance; and (ii) except as provided in (i) above, all payments under this Agreement shall cease, other than those payments which accrued, but were not yet paid, on the date of an event described in this Section 7(b). In addition, Executive shall also be entitled to all Accrued Compensation within 10 days of his date of termination. 5 (c) Nothing in this Agreement shall be construed to prevent the HDI Group Employer or the Board from terminating the Executive's employment under this Agreement for Cause. Such termination shall relieve the HDI Group of its obligation to make any other payments under this Agreement, except those that may be payable under then existing employee benefit programs. In order for the Executive to be terminated for Cause, the existence of Cause must be determined by a written resolution adopted by the affirmative vote of not less than two- thirds of all the Continuing Directors, excluding for this purpose the Executive, or in the event there are no Continuing Directors, by a unanimous vote of all the Directors, at a meeting duly called and held for that purpose after reasonable notice to the Executive and opportunity for the Executive and his counsel to be heard. Any such determination shall require that the Continuing Directors (or the entire Board) find that in their reasonable good faith judgment the conduct which was the basis for the hearing in fact occurred and is sufficient to warrant a termination for Cause. 8. (a) If the Executive receives any payments under this Agreement from the HDI Group which are "excess parachute payments" taxed under Section 4999 of the Code, the HDI Group Employer will pay, pursuant to subsection (b) below, an amount sufficient to offset such tax effects. (b) (i) In the event that the Executive becomes entitled to payments in connection with a Change of Control Event under this Agreement or otherwise ("the Payments"), if any of the Payments will be subject to the tax imposed by Section 4999 of the Code (the "Excise Tax") (or any similar tax that may hereafter be imposed), the HDI Group Employer shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payments and any federal and state income or other taxes and Excise Tax upon Gross-Up Payments provided for by this section, shall be equal to the Payment. (ii) For purposes of determining whether any of the Payments will be subject to the Excise Tax and the amount of such Excise Tax, (A) any other payments or benefits received or to be received by the Executive in connection with a Change of Control Event shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the HDI Group's independent auditors, and acceptable to the Executive, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such "excess parachute payments" (in whole or in part) represent reasonable compensation for services actually 6 rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (B) the amount of the Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (1) the total amount of the Payments or (2) the amount of excess parachute payments within the meaning of Section 280G(b)(1) of the Code (after applying clause (A), above), and (C) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the HDI Group's independent auditors in accordance with the principles of Section 280G(b)(3) and (4) of the Code. (iii) For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal and state income taxes at the highest marginal rate of federal and state income taxation in the calendar year in which the Gross-Up Payment is to be made. (iv) A Gross-Up Payment and Tax Adjustment Amount, if any, under subsection (v) shall be paid not later than the fifth day following the Executive's date of Termination; PROVIDED, HOWEVER, that if the amounts of such payment cannot be finally determined on or before such day, the HDI Group Employer shall pay to the Executive on such day an estimate, as determined in good faith by the HDI Group Employer of the minimum amount of such payments and shall pay the remainder of such payment (together with interest at the rate provided under Section 1274(b)(2)(B) of the Code) as soon as the amount can be determined but no later than the thirtieth day after the Executive's date of Termination. Notwithstanding the foregoing, a Gross-Up Payment and a Tax Adjustment Amount, if any, shall be paid prior to Termination, if necessary, and the event prompting such payment shall be substituted for "Termination" in this subsection (iv) for purposes of determining the date by which payments must be made. (v) In addition to the Gross-Up Payments under this Section 8, the HDI Group Employer shall pay to the Executive an additional amount (the "Tax Adjustment Amount") in the event any portion of the Payments are taxed (for state or federal income tax purposes) at income tax rates higher than the highest marginal federal and state income tax rates otherwise applicable to the Executive without considering the Payments ("Base Income Tax Rates"), such that the net amount retained by the Executive, after deduction of state and federal income taxes at their respective actual rates and any state and federal income taxes upon the Tax Adjustment Amount provided by this subsection (v), shall be equal to the Payments less state and federal income taxes thereon calculated at the Base Income Tax Rates. In the event any payments are required under this subsection (v), they 7 shall be included as "Payments" under subsections (a) and (b) of this Section 8. (vi) The Executive shall notify the HDI Group in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the HDI Group of a Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the HDI Group of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which the Executive gives such notice to the HDI Group (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the HDI Group notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (A) give the HDI Group any information reasonably requested by the HDI Group relating to such claim; (B) take such action in connection with contesting such claim as the HDI Group shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the HDI Group and reasonably satisfactory to the Executive; (C) cooperate with the HDI Group in good faith in order to effectively contest such claim; and (D) permit the HDI Group to participate in any proceedings related to such claim; PROVIDED, HOWEVER, that the HDI Group shall bear and pay directly all costs and expenses (including, but not limited to, additional interest and penalties and related legal, consulting or other similar fees) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after- tax basis, for any Excise Tax or other tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. (vii) The HDI Group shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund 8 or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the HDI Group shall determine; PROVIDED, HOWEVER, that if the HDI Group directs the Executive to pay such claim and sue for a refund, the HDI Group shall advance the amount of such payment to the Executive on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or other tax (including interest and penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and PROVIDED, FURTHER, that if the Executive is required to extend the statute of limitation to enable the HDI Group to contest such claim, the Executive may limit this extension solely to such contested amount. The HDI Group's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. In addition, no position may be taken nor any final resolution be agreed to by the HDI Group without the Executive's consent if such position or resolution could reasonably be expected to adversely affect the Executive (including any other tax position of the Executive unrelated to the matters covered hereby). (viii) As a result of the uncertainty in the application of Section 4999 of the Code, it is possible that Gross-Up Payments and Tax Adjustment Amounts which will not have been made by the HDI Group should have been made ("Underpayment"), consistent with the calculation required to be made hereunder. In the event that the HDI Group exhausts its remedies and the Executive thereafter is required to pay to the Internal Revenue Service an additional amount in respect of any Excise Tax, the HDI Group shall determine the amount of the Underpayment (including any Tax Adjustment Amount) that has occurred and any such Underpayment shall promptly be paid by the HDI Group to or for the benefit of the Executive. (ix) If, after the receipt by the Executive of an amount advanced by the HDI Group in connection with the contest of the Excise Tax claim, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall promptly pay to the HDI Group the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the HDI Group in connection with an Excise Tax claim, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the HDI Group does not notify the Executive in writing of its intent to 9 contest the denial of such refund prior to the expiration of 30 days after such determination, such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall be offset, to the extent thereof, by the amount of the Gross-Up Payment and the Tax Adjustment Amount. 9. The Executive agrees that during the term of his employment under this Agreement, he shall not, directly or indirectly, engage or participate in any business activity that is directly competitive with and likely to have a material adverse effect on the business of the HDI Group without prior written approval of the Board. In the event that, while employed by the HDI Group, the Executive engages in practices that are directly competitive and that are likely to have a material adverse effect on the HDI Group and the Executive fails to cease such competitive practices within 30 days after written notice is received from the Board, Executive shall be treated for purposes of this Agreement as terminated for Cause as of such 30th day. 10. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Milwaukee, Wisconsin or, at the option of the Executive, in the county where the Executive resides, in accordance with the Rules of the American Arbitration Association then in effect; PROVIDED, HOWEVER, that if the Executive institutes an action relating to this Agreement the Executive may, at his option, bring such action in a court of competent jurisdiction. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 11. The HDI Group shall pay all costs and expenses, including attorneys' fees and disbursements, of the HDI Group and, at least monthly, the Executive, in connection with any legal services or proceedings (including, but not limited to, arbitration), whether or not instituted by the HDI Group or the Executive, relating to the interpretation or enforcement of any provision of this Agreement. The HDI Group also agrees to pay prejudgment interest on any money judgment obtained by the Executive as a result of such proceedings, calculated at the reference rate or prime rate, as the case may be, of First Wisconsin National Bank of Milwaukee as in effect from time to time from the date that payment should have been made to the Executive under this Agreement. 12. This Agreement shall be binding upon, inure to the benefit of and be enforceable by the HDI Group and the Executive and their respective heirs, legal representatives, successors and assigns. If the HDI Group or any member of the HDI Group shall be merged into or consolidated with another entity, the provisions of this Agreement shall be binding upon and inure to 10 the benefit of the entity surviving such merger or resulting from such consolidation. The HDI Group will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the HDI Group or any member of the HDI Group, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the HDI Group would be required to perform it if no such succession had taken place. The provisions of this Section 12 shall continue to apply to each subsequent employer of the Executive hereunder in the event of any subsequent merger, consolidation or transfer of assets of such subsequent employer. 13. The HDI Group Employer will indemnify the Executive against expenses (including attorney's fees), amounts paid in settlement (whether with or without court approval), judgments and fines actually and reasonably incurred by him in connection with a threatened or actual action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the HDI Group, and with respect to any criminal action or proceeding, if he had no reasonable cause to believe that his conduct was unlawful, (and the HDI Group Employer will advance expenses for the Executive) if he becomes a party or is threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigation (if not by or in the right of the HDI Group Employer) by reason of the fact that he is or was a director, officer, employee or agent of the HDI Group or is or was serving at the request of the HDI Group as a director, officer, employee or agent or in any other capacity or in another corporation, or a partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or not taken by him while acting in any such capacity, to the fullest extent permitted by the HDI Group Employer's Articles of Incorporation and By-Laws. 14. Any provision of this Agreement which is held to be unenforceable or invalid in any respect in any jurisdiction shall be ineffective in such jurisdiction to the extent that it in unenforceable or invalid without affecting the remaining provisions hereof, which shall continue in full force and effect. The unenforceability or invalidity of a provision of this Agreement in one jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin applicable to contracts made and to be performed therein, without regard to conflict of law principles. 11 16. This instrument contains the entire agreement of the parties, and supersedes any earlier agreement between them, relative to a transition period or termination in the event of a Change of Control Event. It may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension, or discharge is sought. 17. The Executive shall not be required to mitigate damages or the amount of any payment to the Executive provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer after Termination. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. HARLEY-DAVIDSON, INC. By: ----------------------------- ATTEST: - ---------------------------- Assistant Secretary -------------------------------- Executive Schedule A CERTAIN DEFINITIONS As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "BASE INCOME TAX RATES" shall have the meaning ascribed to it in Section 8(b)(v) of the Agreement. "BOARD" means the Corporation's board of directors. "CAUSE" means the commission by the Executive of one or more acts for which the Executive is convicted of a felony under United States federal, state or local criminal law, or willful and gross misconduct on the part of the Executive that is materially and demonstrably detrimental to the HDI Group taken as a whole. "CHANGE OF CONTROL EVENT" means any one of the following: (a) Continuing Directors no longer constitute at least 2/3 of the Directors; (b) any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934), together with its affiliates, become the beneficial owner, directly or indirectly, of 20% or more of the Corporation's then outstanding Common Stock or 20% of more of the voting power of the Corporation's then outstanding securities entitled generally to vote for the election of the Corporation's Directors; (c) the approval by the Corporation's stockholders of the merger or consolidation of the Corporation with any other corporation, the sale of substantially all of the assets of the Corporation or the liquidation or dissolution, of the Corporation, unless, in the case of a merger or consolidation, the then Continuing Directors in office immediately prior to such merger or consolidation will constitute at least 2/3 of the Directors of the surviving corporation of such merger or consolidation and any parent (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of such corporation; or (d) at least 2/3 of the then Continuing Directors in office immediately prior to any other action proposed to be taken by the Corporation's stockholders or by the Board determines that such proposed action, if taken, would constitute a change of control of the Corporation and such action is taken. "CODE" means the Internal Revenue Code of 1986, as amended. "COMPENSATION" means the sum of all remuneration to which the Executive is entitled, including, but not limited to salary, participation in HDI Group bonus and benefit 2 plans, programs or arrangements and awards under any HDI Group bonus plans, long-term incentive compensation plans, stock option plans, restricted stock plans or any other deferred compensation plans in which the HDI Group Employer maintained or adopted prior to the Change of Control Event or the value to the Executive of the use of professional outplacement services by qualified consultants and use of automobiles or vehicles, (or allowances in respect thereof), and all amounts in respect of club, association or similar fees and dues covering such Executive. In the event that the HDI Group cannot provide the Executive with one or more benefits which it is obligated to provide to the Executive, pursuant to this Agreement, under its employee benefit plans, programs or arrangements then the HDI Group shall provide the Executive with equivalent benefits at the expense of the HDI Group Employer. "CONTINUING DIRECTOR" means any individual who is either (i) a member of the Board on the date hereof or (ii) a member of the Board whose election or nomination to the Board was approved by a vote of at least two- thirds of the Continuing Directors (other than a person whose election was as a result of an actual or threatened proxy or other control contest). "CORPORATION" means Harley-Davidson, Inc., a Wisconsin corporation. "EXCISE TAX" has the meaning ascribed to it in Section 8(b)(i) of the Agreement. "GROSS-UP PAYMENT" has the meaning ascribed to it in Section 8(b)(i) of the Agreement. "HDI GROUP" means Harley-Davidson, Inc. and its affiliates. "HDI GROUP EMPLOYER" means the member of the HDI Group that employed the Executive immediately prior to the Change of Control Event. "TAX ADJUSTMENT AMOUNT" has the meaning ascribed to it in Section 8(b)(v) of the Agreement. "TERMINATION" means any termination of Executive's employment following the occurrence of any Change of Control Event, and shall include any voluntary termination by the Executive, any termination in connection with retirement under any retirement plan of the HDI Group, or any termination resulting from a disability; PROVIDED, HOWEVER, 3 that such term shall not include any termination of the Executive's employment by the Corporation for Cause or as a result of the death of the Executive. "UNDERPAYMENT" has the meaning ascribed to it in Section 8(b)(viii) of the Agreement. EX-10.11 4 EXHIBIT 10.11 EXHIBIT 10.11 HARLEY-DAVIDSON, INC. RESTRICTED STOCK AGREEMENT AGREEMENT made as of the_____ day of _____________, 19__, between Harley-Davidson, Inc. (the "Company"), and ________________ (the "Participant"). Unless the context otherwise requires, as used herein the term "Company" shall include all subsidiaries of the Company. WHEREAS, on ________________ (the "Grant Date") the Company granted the Participant ______________________ (________) shares of restricted common stock of the Company subject to the terms of this Agreement (the "Restricted Stock"); and WHEREAS, the Participant desires to accept the grant of such restricted stock pursuant to the terms of this Agreement. NOW, THEREFORE, the parties agree as follows: 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: A. "Cause" shall mean (1) Participant's conviction of a felony or a plea by the Participant of no contest to a felony, (2) willful misconduct on the part of the Participant that is materially and demonstrably detrimental to the Company or (3) Participant's willful refusal to perform requested duties consistent with his office, position or status with the Company (other than as a result of the Participant's physical or mental disability). With respect to subsections (2) and (3) of this paragraph, Cause shall be determined by a majority of the Committee at a meeting held after reasonable notice to the Participant and including an opportunity for the Participant and his counsel to be heard. All determinations of the Committee hereunder shall be final. B. "Committee" shall mean the Human Resources Committee of the Board of Directors of the Company, or any successor committee thereto. C. "Restricted Period" shall mean the period beginning on the Grant Date and ending on the ________ (____) anniversary of the Grant Date or such earlier time as provided herein. 2. ISSUANCE OF SHARES. Subject to the restrictions set forth herein, the Company agrees to issue the Restricted Stock for the benefit of the Participant effective as of the Grant Date. 3. RESTRICTIONS ON THE RESTRICTED STOCK. During the Restricted Period, the Restricted Stock may not be sold, transferred, pledged or otherwise alienated or hypothecated. 4. TERMINATION OF EMPLOYMENT. If during the Restricted Period the Company terminates the Participant's employment with the Company for Cause or the Participant terminates his employment with the Company, all shares of the Restricted Stock shall upon such termination of employment be forfeited and returned to the Company. If during the Restricted Period the Participant dies or the Company terminates the Participant's employment with the Company other than for Cause, the Restricted Period shall terminate upon such termination of employment and all of the shares of Restricted Stock shall become free of the restrictions set forth herein other than Section 7 hereof. 5. REGISTRATION AND HOLDING CERTIFICATE. The Participant hereby waives during the Restricted Period any right to receive a certificate for the Restricted Stock registered in the Participant's name and agrees instead that the Company shall have the right to deliver the Restricted Stock to Firstar Trust Company, as custodian, or to its nominee, and to cause a certificate to be registered in the name of such custodian or its nominee, provided that the custodian agrees to pay to the Participant the net amount of all cash dividends received by it in respect of the Restricted Stock, determined after deducting any taxes required to be withheld in respect of such dividends, as contemplated by Section 6 hereof, and to vote such shares in accordance with the instructions of the Participant. If the Restricted Stock is forfeited pursuant to the terms of this Agreement, the custodian is authorized to transfer the Restricted Stock back to the Company. During the Restricted Period the certificates issued in respect of the Restricted Stock (including any stock dividends thereon) shall bear the following legend: The transferability of this Certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in an Agreement entered into between the beneficial owner and Harley-Davidson, Inc. A copy of such Agreement is on file in the office of the Secretary of Harley-Davidson, Inc., 3700 West Juneau Avenue, Milwaukee, Wisconsin 53208. In addition, certificates issued in respect of the Restricted Stock may bear a legend in substantially the following form, as determined by the Committee, both during and after the Restricted Period: The shares represented by this Certificate have not been registered under the Securities Act of 1933, as amended (the "Act"), or under any state securities laws. These shares may not be sold or otherwise transferred except pursuant to an effective registration statement filed under the Act and any applicable state securities laws or pursuant to an exemption therefrom. 6. PROVISION FOR WITHHOLDING TAXES. Within thirty (30) days after (i) the Restricted Period terminates; or (ii) the Grant Date (if the Participant has elected, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in gross income an amount equal to the fair market value of the Restricted Stock), the Participant (or his legal representative, beneficiary or heir) shall pay to the Company in cash an amount equal to the 2 Federal, state and local income taxes and all other taxes that the Company is required to withhold in respect of the Restricted Stock, or shall make such other arrangements for the proper payment of all such taxes as shall be satisfactory to the Company. Until such payment or other satisfactory arrangement shall have been made, the Company will not be required to make delivery of the Restricted Stock and, to the extent permitted by law, shall have the right (but not the obligation), without notice to the Participant, to retain or sell a sufficient number of shares of the Restricted Stock to cover the amount of any such taxes required to be withheld. In the event the Participant makes the election pursuant to Section 83(b) referred to above, the Participant shall submit to the Secretary of the Company within thirty (30) days after the Grant Date a copy of the statement required to be submitted by the Participant to the corporation pursuant to Treasury Regulation 1.83-2. In addition, the Company and the custodian shall have the right to withhold or deduct from any payment of any kind otherwise due to the Participant or any nominee (including any dividends payable with respect to the shares of Restricted Stock) the amount of any such taxes required to be withheld. 7. SALES SUBJECT TO RULE 144. If the Participant is an "affiliate" of the Company or the Restricted Stock constitutes "restricted securities", within the meaning of such quoted terms in Rule 144 promulgated under the Securities Act of 1933, as amended, at the time the Participant proposes to sell any shares of the Restricted Stock, the Participant will make any such sales only (i) in compliance with said Rule 144, including the requirement that, under certain circumstances, the Participant shall file a notice of such proposed sale on Form 144 with the Securities and Exchange Commission and the New York Stock Exchange, or (ii) pursuant to another applicable exemption from the registration requirements of the Securities Act of 1933, as amended. 8. NO EMPLOYMENT RIGHTS. The grant of Restricted Stock hereunder shall not confer on the Participant any right to be retained in the employ of the Company. The right of the Company to terminate (whether by dismissal, discharge or otherwise) the Participant's employment with it at any time or as otherwise provided in any agreement between the Company and the Participant is specifically reserved. 9. GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of Wisconsin. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date written above. HARLEY-DAVIDSON, INC. ATTEST: By: - ------------------------------- -------------------------------- - ------------------------------- 3 EX-10.12 5 EXHIBIT 10.12 EXHIBIT 10.12 HARLEY-DAVIDSON MOTOR COMPANY SEVERANCE BENEFITS AGREEMENT THIS AGREEMENT, entered into as of the ____ day of __________, 199_, by and between Harley-Davidson [Motor Company] [,Inc.], a Wisconsin corporation ("Employer"), and _________________________________ ("Executive"). WHEREAS, Employer desires to continue to attract and retain skilled and dedicated management employees; WHEREAS, Executive is currently employed by Employer in an executive capacity and has unique skills and abilities that are of benefit to Employer; and WHEREAS, Employer desires to provide Executive certain assurances regarding severance pay and other benefits in the event of a Covered Termination (as defined below). NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the parties hereby agree as follows: 1. NOT AN EMPLOYMENT AGREEMENT. This Agreement is not an employment agreement and shall not change the employment relationship between Employer and Executive. Except as expressly provided herein, this Agreement shall not amend or alter the terms of, or limit the benefits to Executive under, any existing or future employment, transition, change of control or other agreement between Executive and Employer. This Agreement shall not be amended by any such future agreement unless such future agreement specifically provides that the terms of this Agreement shall be amended. Anything in this Agreement to the contrary notwithstanding and subject to any existing or future employment or other agreement between Employer and Executive, (a) Executive may terminate Executive's employment with Employer at any time and for any reason and (b) Employer may terminate Executive's employment with Employer at any time and for any reason. 2. DEFINITIONS. a. AFFILIATE. "Affiliate" shall mean any parent, subsidiary or other affiliate of Employer. b. BASE SALARY AMOUNT. "Base Salary Amount" shall mean (1) the amount of Executive's average monthly base salary during either (i) if Executive has been employed by Employer for twelve (12) or more consecutive months immediately prior to the Termination Date, the twelve (12) consecutive months immediately prior to the Termination Date or (ii) if Executive has been employed by Employer for less than twelve (12) consecutive months immediately prior to the Termination Date, the consecutive months of Executive's employment with Employer immediately prior to the Termination Date, multiplied by (2) either (i) if Executive has been employed by Employer for twenty four (24) or more consecutive months immediately prior to the Termination Date, twelve (12) or (ii) if Executive has been employed by Employer for less than twenty four (24) consecutive months immediately prior to the Termination Date, six (6). c. BENEFIT PERIOD. "Benefit Period" shall mean (1) if Executive has been employed by Employer for twenty four (24) or more consecutive months immediately prior to the Termination Date, the twelve (12) consecutive months immediately following the Termination Date or (2) if Executive has been employed by Employer for less than twenty four (24) consecutive months immediately prior to the Termination Date, the six (6) consecutive months immediately following the Termination date. d. CAUSE. "Cause" shall mean: (1) the conviction of Executive of a felony or a crime involving moral turpitude, theft or fraud; or (2) Executive's refusal to perform duties as directed in good faith by Executive's supervisor, which failure is not cured within 10 days after written notice thereof from Employer to Executive; or (3) Executive's engaging in sexual harassment or any act involving theft or fraud with respect to Employer or any of its parents, subsidiaries or other affiliates, as determined by the Chief Executive Officer of Employer; or (4) Executive's reckless conduct or willful misconduct which results in substantial harm (in relation to Executive's annual compensation), as determined by the Chief Executive Officer of Employer, whether financial, reputational or otherwise, to Employer or any of its parents, subsidiaries or other affiliates. e. COVERED TERMINATION. "Covered Termination" shall mean Employer's termination of Executive's employment with Employer other than (1) for Cause or (2) in connection with the death or Disability of Executive. Notwithstanding the foregoing, the transfer of Executive's employment to any Affiliate shall not be a Covered Termination. f. DISABILITY. "Disability" shall have the meaning assigned to it in the long-term disability insurance policy then provided or made available to Executive by or through Employer. If there is then no such policy or such term is not defined therein, then "Disability" shall mean Executive's incapacity due to physical or mental illness causing Executive to be absent from the full-time performance of Executive's duties with Employer for sixty (60) consecutive days. 2 g. STOCK PLANS. "Stock Plans" shall mean Employer's 1986 Stock Option Plan, Employer's 1988 Stock Option Plan, Employer's 1990 Stock Option Plan, Employer's Long Term Incentive Plan, Employer's Long Term Incentive Plan II and any other existing or future employee benefit plans of Employer providing for the issuance of stock options, stock appreciation rights or restricted stock. h. TERMINATION DATE. "Termination Date" shall mean the date on which a Covered Termination is effective, which date shall not be less than twenty-five (25) days after the date the Termination Notice is delivered to Executive. i. TERMINATION NOTICE DATE. "Termination Notice Date" shall mean the date on which written notice is delivered by Employer to Executive stating that the Executive's employment is being terminated pursuant to a Covered Termination and setting forth the Termination Date. 3. SEVERANCE BENEFITS. In the event of a Covered Termination and in lieu of any benefits or other amounts that would otherwise be payable by Employer to Executive as a result of, arising out of or following such Covered Termination, Executive shall be entitled to all of the following: a. a lump sum payment, payable within thirty (30) days following the Termination Date, equal to the Base Salary Amount. b. during the Benefit Period or the period beginning on the Termination Date and ending on the date Executive becomes employed on a substantially full-time basis, whichever is shorter, Employer shall make available to Executive coverage under Employer's medical, dental and life insurance plans on the same terms as such plans are made available to Employer's salaried employees generally. c. during the Benefit Period or the period beginning on the Termination Date and ending on the date Executive becomes employed on a substantially full-time basis, whichever is shorter, Employer shall maintain any split-dollar life insurance on Executive's life owned by Employer and shall pay the premiums (for such period) due on any split- dollar life insurance on Executive's life owned by Executive. d. any other benefits payable pursuant to the terms of the Stock Plans (and applicable agreements thereunder) and any incentive compensation, pension, 401(k), retirement, savings or deferred compensation plans. e. reimbursement of any expenses incurred by Executive in the ordinary course of employment prior to the Termination Date consistent with Employer's then existing expense reimbursement policy. 3 4. NO MITIGATION. Executive shall not be required to mitigate the amount of any payment or benefit provided for in Section 3 hereof by seeking other employment or otherwise, nor will the amount provided for in Section 3(a) hereof be reduced by any compensation earned by Executive as a result of employment by another employer after the Termination Date. 5. EXCLUSIVITY. a. The benefits provided for herein are intended to constitute a minimum, but noncumulative, benefit package for Executive in the event of a Covered Termination. If Executive has or claims to have any Claims (as defined below), Executive may elect to assert such Claims. If, however, Executive does formally assert one or more Claims in a writing submitted to Employer, or an appropriate body to determine such Claims, for the legal enforcement of such Claims, such writing shall constitute an irrevocable waiver and disclaimer of Executive's benefits and rights under this Agreement. b. As a condition of receiving the benefits provided for herein, Executive shall be required to execute, prior to receiving any benefits hereunder, a release of all other claims against Employer arising out of such Covered Termination (the "Claims"), including but not limited to any and all claims arising out of contract (written, oral, or implied in law or in fact), tort (including negligent and intentional acts), or state, federal or local law (including discrimination on any basis whatsoever), in a form reasonably satisfactory to Employer. c. If Executive has received benefits under this Agreement for a Covered Termination and thereafter asserts any Claims, Executive shall, notwithstanding any other agreement to the contrary, return to Employer all benefits received hereunder as a condition of being allowed to assert any such Claims. If for any reason Executive cannot legally be compelled to return such benefits, Employer shall be given, to the extent allowed by law, credit for all amounts received by Executive under this Agreement against any other amounts otherwise due to Executive arising out of any such Claims. Notwithstanding the foregoing, this Section 5(c) shall not be construed to limit or otherwise modify the terms of any release executed by Executive pursuant to Section 5(b) hereof or otherwise. 6. OTHER TERMINATION. In the event Executive's employment with Employer terminates other than pursuant to a Covered Termination, including without limitation, a termination for Cause, termination by reason of Executive's death, Disability or retirement or a voluntary termination by Executive, Executive shall be entitled to no benefits or rights under this Agreement. 7. AMENDMENT, TERMINATION AND ASSIGNMENT. This Agreement may be amended, terminated or superseded only by a written instrument signed by Executive and Employer. This Agreement may not be assigned by Executive. 4 8. TRANSFER OF EMPLOYMENT. If Executive's employment is transferred to any Affiliate, such Affiliate shall assume Employer's obligations hereunder and following such transfer such Affiliate shall be deemed the "Employer" for purposes of this Agreement. 9. HEADINGS. Headings used herein are for convenience only and shall not constitute a part of or affect the meaning or interpretation of this Agreement. 10. GOVERNING LAW; VENUE. This Agreement shall be deemed to have been made and executed in the State of Wisconsin and the validity, interpretation and enforcement hereof shall be governed by the internal laws of the State of Wisconsin. In the event of any dispute arising from or in connection with this Agreement, Executive consents and agrees to IN PERSONAM jurisdiction and to venue exclusively in either the Circuit Court for Milwaukee County, Wisconsin, or the United States District Court for the Eastern District of Wisconsin, located in Milwaukee, Wisconsin. IN WITNESS WHEREOF, the parties have executed this Agreement at Milwaukee, Wisconsin as of the date first above written. EXECUTIVE: EMPLOYER: HARLEY-DAVIDSON [MOTOR COMPANY] [,INC] - ------------------------------- ------------------------------------ EX-10.15 6 EXHIBIT 10.15 Exhibit 10.15 Description of Post-Retirement Life Insurance Equivalent Certain senior managers of the Registrant, including Messrs. Bleustein, Brostowitz, Gray, Teerlink and Ziemer, are entitled to receive a lump sum payment equal to one year's salary plus applicable taxes upon retirement at or after age 55. This benefit has been adopted by the Registrant in lieu of providing post-retirement life insurance. EX-11 7 EXHIBIT 11 EXHIBIT 11 HARLEY-DAVIDSON, INC. COMPUTATION OF EARNINGS PER COMMON SHARE ASSUMING NO DILUTION (Unaudited) (In thousands, except per share amounts)
Year Ended December 31, 1996 1995 1994 ---- ---- ---- COMPUTATION OF NET INCOME Income from continuing operations $143,409 $111,050 $ 96,221 Income from discontinued operations 22,619 1,430 8,051 -------- -------- -------- Net income used in computing earnings per common share assuming no dilution $166,028 $112,480 $104,272 -------- -------- -------- -------- -------- -------- Weighted average common shares outstanding and shares used in computing earnings per common share assuming no dilution 75,457 75,085 76,198 ------ ------ ------ ------ ------ ------ Earnings per common share assuming no dilution: Income from continuing operations $1.90 $1.48 $1.26 Income from discontinued operations .30 .02 .11 ----- ----- ----- Net income $2.20 $1.50 $1.37 ----- ----- ----- ----- ----- -----
HARLEY-DAVIDSON, INC. COMPUTATION OF EARNINGS PER COMMON SHARE ASSUMING FULL DILUTION (Unaudited) (In thousands, except per share amounts)
Year Ended December 31, 1996 1995 1994 ---- ---- ---- COMPUTATION OF NET INCOME Income from continuing operations $143,409 $111,050 $ 96,221 Income from discontinued operations 22,619 1,430 8,051 -------- -------- -------- Net income used in computing earnings per common share assuming full dilution $166,028 $112,480 $104,272 -------- -------- -------- -------- -------- -------- COMPUTATION OF SHARES Weighted average common shares outstanding 75,457 75,085 76,198 Incremental shares created assuming exercise at the beginning of the period of stock options outstanding at the end of the period using period-end market price when higher than average 1,242 1,017 1,025 ------ ------ ------ Shares used in computing earnings per common share assuming full dilution 76,699 76,102 77,223 ------ ------ ------ ------ ------ ------ Earnings per common share assuming full dilution: Income from continuing operations $1.87 $1.46 $1.25 Income from discontinued operations .29 .02 .10 ----- ----- ----- Net income $2.16 $1.48 $1.35 ----- ----- ----- ----- ----- -----
EX-21 8 EXHIBIT 21 EXHIBIT 21 HARLEY-DAVIDSON, INC. SUBSIDIARIES
State/Country of Name Incorporation ---- ------------- H-D Michigan, Inc. Michigan Harley-Davidson Motor Company Wisconsin 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 Buell Distribution Corporation Wisconsin Renovation Realty Investment Services, Inc. Wisconsin Trihawk, Inc. Wisconsin Highland Insurance Service, Inc. Wisconsin HR, LLC Indiana HR Holding Corporation Wisconsin HR Leasing Corporation Wisconsin State Road Properties L.P. Delaware Holiday Holding Corporation Texas Holiday World, Inc. Indiana Holiday World, Inc. Washington Holiday World, Inc. Texas Holiday World, Inc. Florida Holiday World, Inc. New Mexico Holiday World, Inc. Oregon Holiday World, Inc. California RV Holiday World, Inc. Massachusetts 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
EX-23 9 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 18, 1997, 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, 1996. ERNST & YOUNG LLP Milwaukee, Wisconsin March 27, 1997 EX-27 10 EXHIBIT 27 FDS
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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 142,479 0 143,233 1,918 101,386 429,321 707,550 298,116 1,319,985 263,594 0 781 0 0 661,939 1,319,985 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 2.20 2.16
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