HNI Annual Report 1998 | Quarterlytics

Plain-text annual report

HON INDUSTRIES 1998 ANNUAL REPORT p.1 (cid:210)WELCOME TO MY OFFICE.(cid:211) p.2 Letter to Shareholders Financial Highlights Eleven-Year Summary Management(cid:213)s Discussion and Analysis Consolidated Financial Statements and Notes Board of Directors and Officers Investor Information Corporate Overview 12 16 18 20 25 39 40 41 For many working Americans, going to work means going to the ofﬁce. Yet large or small, in a high-rise or a home, ofﬁces are not what they used to be. In little more than a decade, new technologies, new organizational structures, increased diversity, changing demographics, outsourcing, downsizing, and a host of other factors have revolutionized the ofﬁce landscape. Rather than simply being a place to work, ofﬁces have become a place for people— and technology— to work together. Environments that once simply pushed people to work harder now aim to help them be more creative, more comfortable, more open, more human. No longer are ofﬁces just about making a living, they’re about making a difference, and sometimes, achieving your dreams. And the revolution continues. No one knows more about today’s ofﬁces than hon industries. We have equipped America’s changing ofﬁces for half a century, and we have grown to become a leader in our industry. Our fur- niture and panel systems are found just about everywhere people work, across the country. Our distribution channels put our products within easy reach of end users, and our innovative solu- tions offer the beneﬁts and value that business people need to do their best work and to grow. So welcome to our offices. One of them just might be your office too. (cid:210)THERE(cid:213)S SOMETHING NICE ABOUT SHARING AN OFFICE WITH A SIX YEAR OLD.(cid:211) In the home ofﬁce About 30 percent of the workforce, more than 40 million people, spend at least some of their working hours at home. Perhaps they have joined the ranks of telecommuters, whose numbers have doubled since the early 1990s. Perhaps they have started new companies, the majority of which are begun at home. Others are among the growing number of professionals who seek a better balance between work and family— and less time stuck in trafﬁc. For these and other reasons, nearly one-quarter of all households now have a home ofﬁce, and the number is growing rapidly. hon industries is leading — and beneﬁting — from this trend. We’re a leading supplier to the superstores, warehouse clubs, and office furniture dealers where many people equip their home ofﬁces, and our extensive distribution network assures that they can ﬁnd the products they want when they want them. What’s more, our prod- ucts are known for being durable and functional, the two beneﬁts that home ofﬁce workers value the most. That’s why, for home ofﬁces, it’s home sweet hon. In the small ofﬁce In the U.S., new business start-ups continue to rise year after year. Small businesses drive the nation’s economic growth. The estimated 23 million small businesses in the U.S. employ more than half of the private workforce, generate more than half of the nation’s gross domestic product, and are the principal source both of new jobs and of innovation. hon industries offers innovative solutions to the needs of small business. Our Rapid Continuous Improvement program has helped us become one of the lowest-cost, highest-quality manufacturers in our industry, so we can meet the same high standards as premium-priced furniture and tight budgets too. What’s more, our furniture and systems are ﬂexible and adaptable, so they can grow with growing com- panies. Because we know that in every small business, someone is thinking big. (cid:210)FIRST WE(cid:213)LL PUT MONEY INTO THE BUSINESS. THEN WE(cid:213)LL PUT IT INTO OUR OFFICES.(cid:211) In the branch ofﬁce In the past 15 years, the team has come to dominate the American workplace. To speed the introduction of new products, improve productivity, reduce costs, and achieve their strategic objectives, companies are knocking down the walls between functions and bringing people together. Rigid hierarchy has given way to ﬂexible groups. Command and control has been replaced by give and take. hon industries gives teamworkers the home-ﬁeld advantage. Applying the lessons learned in developing our own cross-functional teams, our open ofﬁce furniture and systems streamline information ﬂow and promote interaction. Spaces can grow or shrink to adapt to new requirements — today’s conference room can become tomorrow’s workstations —while products such as height- adjustable tables give individuals the freedom to make themselves comfortable and productive. Meanwhile, complete, on-time deliveries, backed by one of the most extensive distribution networks in our industry, help assure that new ofﬁces can be up and running quickly. It’s one more example of how our team works—for yours. (cid:210)THIS IS WHERE OUR TEAM WORKS OUT.(cid:211) (cid:210)WE WANT PEOPLE TO SEE THAT WE(cid:213)RE COMMITTED TO QUALITY.(cid:211) In the corporate ofﬁce At a time of rapid change, when entire industries can rise and fall overnight, companies can survive only by attracting and motivating the best people — at every level. The right ofﬁces can help a company demonstrate its concern for its workers’ well-being and help it retain a workforce that is increasingly demanding, mobile, and diverse. The best ofﬁces engage the eyes, minds, and emotions of the people who use them to create an environment that fosters success. hon industries’ ofﬁces get the job done. We combine rich details and outstanding ﬁt and ﬁnish with the ability to handle all of the demands of the wired workplace. Our high quality ofﬁce environments help companies show, not simply say, that achievement is appreciated—and rewarded. Enduring, classic designs reﬂect a long-term perspective and strong values. And with a comprehensive portfolio of premium-quality products, as well as our value-priced products and systems, we can deliver single-source solutions to all of a company’s furniture needs. No matter where people work, we’re working with them. Away from the ofﬁce At the end of the day, the warm glow of a ﬁre relaxes and inspires. It’s no wonder that ﬁreplaces rank among the most desired amenities found in homes or that they bring a substantial return on investment. hon industries’ hearth products are designed to offer homeowners years of enjoyment while they help builders and dealers increase sales and proﬁtability. Innovative, energy-efﬁcient designs allow ﬁreplaces to be installed almost anywhere, and their proven perfor- mance reduces service calls and improves customer satisfaction. Our Heat-N-Glo, Heatilator, and Aladdin brands encompass every distribution channel and price point and allow us to apply our expertise in man- ufacturing steel products to another attractive — and growing — market. hon industries makes the office more productive and rewarding. And then we welcome you home. (cid:210)I DO SOME OF MY BEST WORK WHEN I(cid:213)M NOT AT THE OFFICE.(cid:211) p.13 A LETTER TO OUR SHAREHOLDERS jack d. michaels Chairman, President and CEO The Standard of Performance As I write from “My Ofﬁce” to yours, I’m pleased to report that hon industries achieved another record year. We strengthened our leading positions in both ofﬁce furniture and hearth products. And we are prepared to do even better in the future. By every measure, our gains were exceptional: > Our net sales rose over 24 percent to an all-time high of $1.7 billion, as all six of our operating companies reported record sales. > Operating income grew 23 percent to $179 million. > Net income increased 22 percent to $106 million. > Earnings per share rose to $1.72, an increase of nearly 19 percent. Our performance has not gone unrecognized —we appear on the list of Fortune’s “Most Admired” companies and on Forbes’ “Platinum List” for excellence in growth and proﬁtability. However, we are underappreciated on Wall Street. Fears of a general economic slowdown and anticipated slower rates of growth in our industry drove the price of our stock down by 17 percent from the ﬁrst of the year to year-end, and down signiﬁcantly from the yearly high. Our continued growth and superior ﬁnancial performance ultimately should bring us the valuation we think we deserve. In the meantime, we displayed our conﬁdence in the Company by repurchasing more than half a million shares of our common stock. As of year-end, we had $62.5 million remaining from our board of directors-approved stock repurchase authorization. Also, we expect our move to the New York Stock Exchange to increase awareness of the Company, along with our performance and, most of all, our prospects for proﬁtable growth. Our objective is clear: We want to double our earnings every ﬁve years. We have exceeded that goal. We are the market leader in the high quality, value segment of the ofﬁce furniture industry and in wood- and gas-burning ﬁreplaces and stoves and we consistently outpace the growth of our industries. In 1998, we grew three times faster than the ofﬁce furniture industry as a whole, to become the third largest ofﬁce furniture manufacturer in North American sales. The hearth products industry grew approximately 10 percent in 1998. Our hearth product sales grew by 20 percent. Both industries are very strong. Ofﬁce furniture, for example, has had only two down growth years in the past 25 years. It is equally clear that our strategies work. We have grown by rapidly introducing innovative, high quality products, by expanding our position with our distributor partners, by continually improving productivity, and by pursuing strategic, proﬁtable acquisitions. We are conﬁdent that these strategies will bring us even more growth. Innovation New products are the lifeblood of our success. We respond to end users’ emerging needs through the aggressive introduction of new products. Engineered to be easier to manufacture, new products allow us to offer a broad selection, with more features, greater performance, and higher quality, at attractive prices. In 1998, 44 percent of our sales came from products introduced in the past three years, surpassing our 40 percent goal. Cross-functional teams practice concurrent product development, tackling design, materials and manufacturing processes at the same time to reduce costs, provide higher quality products with greater performance, and quickly bring to market new products that solve customer needs. Examples of our new offerings include a new “best in class” desk, new lines of seating, enhanced systems furniture, and storage solutions with added features. Our Hearth Technologies business has the largest number of patents in its industry and also rapidly introduces new products. Innovation and technology, especially in gas heating products, drive our success in this business. The new outdoor division we established late in 1998 will bring our technological expertise to an entirely new family of products, such as weatherproof ﬁre- places, and will expand the markets we serve. (See a selected list of new products on page 41.) Distribution Our distributors are our direct customers, and we have a strong presence in nearly every major distribution channel. We are the number one or number two supplier to the nation’s largest ofﬁce furniture dealers, warehouse clubs, wholesalers, and superstores and in most channels account for more than half of the furniture pages in their catalogs. Our extensive distribution network puts us close to our customers and allows us to combine quick delivery with low freight costs. Our new dealer partner program adds even more value to our relationships by helping our distributors increase their sales to the contract segment of the ofﬁce furniture market. In hearth products, our partners are residential builder distributors, retail distributors, manufactured housing distributors, and home improvement centers. We meet the needs of builders by supplying innovative products that are easy to install and that add to the value and appeal of their homes. A broad selection of high quality, realistic looking, state-of-the-art products help retail distributors win the hearts of their customers. Also, quick-ship programs and complete-and-on-time delivery allow our distributors to meet customers’ demands during peak selling seasons without requiring large investments in inven- tories. In the home improvement centers, there is a new opportunity in the do-it-yourself market with the direct-vent gas ﬁreplace. NET SALES (millions of dollars) 4 . 6 9 6 , 1 $ 7 . 2 6 3 , 1 $ 1 . 8 9 9 $ 1 . 3 9 8 $ 0 . 6 4 8 $ 94 95 96 97 98 NET INCOME (millions of dollars) 3 . 6 0 1 $ 0 . 7 8 $ 1 . 8 6 $ 2 . 4 5 $ 1 . 1 4 $ 94 95 96 97 98 EARNINGS PER SHARE (dollars) 2 7 . 1 $ 5 4 . 1 $ 3 1 . 1 $ 7 8 . $ 7 6 . $ 94 95 96 97 98 RETURN ON BEGINNING ASSETS EMPLOYED (percent) % 3 . 8 % 2 9 . 5 2 % 7 . 3 2 % 7 . 4 2 % 9 . 7 1 94 95 96 97 98 Lean Manufacturing We know what our customers want: durable, high quality, innovative solutions, at attractive prices, with quick, complete, and on-time delivery. Our 52-year tradition of leadership and pride in manufacturing excellence — and the formal introduction of our Rapid Continuous Improvement (RCI) program in 1992 — help us meet their requirements. Over the past six years, improving productivity and eliminating waste have become a way of life. We have increased customer satisfaction signiﬁcantly, increased our sales per employee by 50 percent, and shortened our lead times to some of the lowest in the industry. In 1998, we continued our progress. Inventory turns increased to 18.4. From order to delivery, we now can deliver selected products to our customers in as little as four days. In an industry that has been known for its long lead times, our deliveries of mixed products to exact customer speciﬁcations is approaching two weeks and we plan to decrease this lead time even further. We continue to leverage our manufacturing expertise across our ofﬁce furniture and hearth products. We have made substantial gains in lowering costs. While we’re proud of the gains we’ve made, there’s plenty of room for improvement. In the ﬁrst quarter of 1999, we announced an intensiﬁed cost-savings initiative to increase our long-term proﬁtability, save $11.6 million annually, and achieve the best possible return on our assets. There will be a one-time impact on pre-tax earnings estimated at approximately $19.7 million, which translates to roughly $0.20 per diluted share in the ﬁrst quarter of 1999. To further strengthen our position as a low-cost producer and improve service to our customers, we are closing three U.S. plants and consolidating their operations with other plants in this country. We are building a new plant in Mexico to provide the best products with the lowest cost and the fastest lead times to our retail channel of distribution. Strategic Acquisitions Acquisitions expand our product offerings and our customer base, increase our economies of scale, and allow us to introduce new products to our distribution channels. In 1998, we acquired Aladdin Steel Products, Inc. to improve our position in the retail stove segment of our hearth products. We also worked to integrate the three furniture companies we acquired in 1997 into our operations. We added new products to their lines, increased production at their facilities, and achieved dramatic gains in their proﬁtability. The continued implementation of our lean manufacturing practices will bring additional improvements in their margins. The Power of People Plans and strategies are no more effective than the people who carry them out. At hon industries, those people think and act like owners of the Company, because they are. All of our employees—long regarded as members of this organization — are shareholders. A strong sense of ownership and shared responsibility are part of our culture and drive our continuing efforts to improve our performance and exceed the expectations of our customers. Our members also are members of the communities in which we do business and they get involved to make a positive difference. Just as we try to make ofﬁces better places to work, so we try to make our communities better places to live. One way is through our com- mitment to protecting the environment. Some examples of how we do this include recycling programs, using materials in creating our products that would otherwise end up in landﬁlls, and continuously working to eliminate emissions at their source. In all of our efforts, we beneﬁt from the counsel of an outstanding board of directors. We deeply appre- ciate the dedication and service of our retiring directors. We also are pleased to welcome the new members to our board. Their insights and experience, gained at some of America’s most well known companies, will be invaluable as we continue to grow in an increasingly complex and challenging marketplace. Looking Ahead It’s an exciting time to be in the furniture business. New technologies and changing lifestyles are revolutionizing the way that people work—and their ofﬁces as well. The phenomenal rise in new business start-ups, telecommuting, and home ofﬁces, combined with the growing interest in ofﬁce ergonomics, demand new solutions and open new opportunities as customers seek greater value in solving their work needs. At the same time, high-quality low-cost manufacturing and efﬁcient distribution are no longer simply strategic advantages, but imperatives for success. We have what it takes. Our low-price, high quality products are especially appealing to the small and mid-sized businesses that lead the nation’s economic growth, and to other customers as well. Our inno- vation, extensive distribution capabilities, lean manufacturing, acquisitions and, most of all, our people, will set us apart and enable us to continue to set the standard of performance for our industries. We expect another year of outstanding performance in 1999. Ofﬁce furniture order rates are encouraging as we enter the year. Hearth product orders remain at record levels. Our strong balance sheet and the investments we have made create a solid base for future growth. Capital expenditures, higher in 1998 as we invested in new product development and added distribution capacity, are anticipated to be lower in 1999. A steady stream of new products and ongoing proﬁt-enhancing initiatives will help us increase our share of our markets and answer increased competition from other manufacturers. An active share repurchase program will help build the value of our stock. I look forward to sharing more good news from this ofﬁce in the months—and years—ahead. jack d. michaels Chairman, President and CEO RETURN ON AVERAGE SHAREHOLDERS(cid:213) EQUITY (percent) % 0 . 9 2 % 1 . 9 2 % 4 . 7 2 % 2 . 5 2 % 0 . 0 2 94 95 96 97 98 CASH DIVIDENDS PER COMMON SHARE (dollars) 2 3 . $ 8 2 . $ 5 2 . $ 4 2 . 2 $ 2 . $ 94 95 96 97 98 HON INDUSTRIES INC. AND SUBSIDIARIES Financial Highlights Income Statement Data Net sales Gross profit Selling and administrative expenses Operating income Net income Net income as a % of: Net sales Average shareholders’ equity Per common share: Net income Book value Cash dividends Balance Sheet Data Current assets Total assets Current liabilities Current ratio Long-term debt and capital lease obligations Debt/capitalization ratio Shareholders’ equity Average shareholders’ equity Working capital Other Data Capital expenditures — net Cash flow from operations Weighted-average shares outstanding during year Price/earnings ratio at year-end Number of shareholders at year-end Members (employees) at year-end * Includes acquisitions completed during year. 1998 1997 1998 vs. 1997 $1,696,433,000 $1,362,713,000 523,436,000 429,556,000 344,259,000 284,397,000 179,177,000 145,159,000 106,313,000 86,955,000 6.3% 25.2% 6.4% 27.4% $(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)1.72 $(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)1.45 7.54 .32 6.19 .28 $(cid:214)˙290,329,000 $(cid:214)˙295,150,000 864,469,000 754,673,000 217,438,000 200,759,000 1.34 1.47 24.5% 21.9% 21.0% 23.4% 22.3% 18.6% 21.8% 14.3% (1.6)˙% 14.5% 8.3% $(cid:214)˙135,563,000 $(cid:214)˙134,511,000 0.8% 22.7% 26.1% $(cid:214)˙462,022,000 $(cid:214)˙381,662,000 421,842,000 317,030,000 72,891,000 94,391,000 $(cid:214)˙149,717,000 $(cid:214)(cid:214)˙85,491,000 146,792,000 141,385,000 61,649,531 59,779,508 14 5,877 9,824* 20 5,399 9,390* 21.1% 33.1% (22.8)˙% 75.1% 3.8% 3.1% 8.9% All appropriate common share and per common share amounts above have been retroactively restated to reﬂect a March 1998, two-for-one stock split in the form of a 100% stock dividend. Financial Review Eleven-Year Summary Management(cid:213)s Discussion and Analysis Consolidated Financial Statements and Notes Board of Directors and Officers Investor Information Corporate Overview 18 20 25 39 40 41 Our Vision: hon industries and its members are dedicated to achieving excellence through the pursuit of a philosophy, strategies, and day-to-day actions aimed at achieving rapid continuous improvement. We continuously strive to develop a culture where members, customers, suppliers, shareholders, and the public experience fairness and respect in their relations with the Company. Achieving excellence depends on individual and collective integrity and the relentless pursuit of the following long-standing beliefs. hon industries shall > be proﬁtable > be economically sound > pursue sound growth > supply quality products and services > be a good place to work > be a responsible corporate citizen When the Company is appreciated by its members, favored by its customers, supported by its suppliers, respected by the public, and admired by its shareholders, this vision is fulﬁlled. HON INDUSTRIES INC. AND SUBSIDIARIES Selected Financial Data (cid:209) Eleven-Year Summary Per Common Share Data Income from Continuing Operations Income from Discontinued Operations Cumulative Effect of Accounting Changes Gain on Sale of Discontinued Operations Net Income Cash Dividends Book Value Net Working Capital Operating Results (Thousands of Dollars) Net Sales Cost of Products Sold Gross Profit Interest Expense Income from Continuing Operations before Income Taxes Income before Income Taxes as a % of Net Sales Federal and State Income Taxes Effective Tax Rate for Continuing Operations Income from Continuing Operations Income from Continuing Operations as a % of Net Sales Income before Cumulative Effect of Accounting Changes Income from Discontinued Operations Net Income Cash Dividends and Share Purchase Rights Redeemed Addition to (Reduction of) Retained Earnings Net Income Applicable to Common Stock % Return on Average Shareholders’ Equity Depreciation and Amortization Distribution of Net Income % Paid to Shareholders % Reinvested in Business Financial Position (Thousands of Dollars) Current Assets Current Liabilities Working Capital Net Property, Plant, and Equipment Total Assets of Continuing Operations Total Assets of Discontinued Operations — Net Total Assets % Return on Beginning Assets Employed Long-Term Debt and Capital Lease Obligations Shareholders’ Equity Retained Earnings Current Ratio Current Share Data Number of Shares Outstanding at Year-End Weighted-Average Shares Outstanding During Year Number of Shareholders of Record at Year-End Other Operational Data 1998 1997 1996 1995 $(cid:214)(cid:214)(cid:214)(cid:214)˙1.72 (cid:209) (cid:209) (cid:209) 1.72 .32 7.54 1.19 $1,696,433 1,172,997 523,436 10,658 $(cid:214)(cid:214)(cid:214)(cid:214)˙1.45 (cid:209) (cid:209) (cid:209) 1.45 .28 6.19 1.53 $1,362,713 933,157 429,556 8,179 $(cid:214)(cid:214)(cid:214)1.13 (cid:209) (cid:209) (cid:209) 1.13 .25 4.25 .89 $998,135 679,496 318,639 4,173 $(cid:214)(cid:214)(cid:214)(cid:214).67 (cid:209) (cid:209) (cid:209) .67 .24 3.56 1.07 $893,119 624,700 268,419 3,569 170,109 139,128 105,267 65,517 10.03% $(cid:214)(cid:214)˙63,796 37.50% $(cid:214)˙106,313 10.21% $(cid:214)(cid:214)˙52,173 37.50% $(cid:214)(cid:214)˙86,955 10.55% $(cid:214)37,173 35.31% $(cid:214)68,094 7.34% $(cid:214)24,419 37.27% $(cid:214)41,098 6.27% 6.38% 6.82% 4.60% $(cid:214)˙106,313 (cid:209) 106,313 19,730 86,583 106,313 25.20% $(cid:214)(cid:214)˙52,999 $(cid:214)(cid:214)˙86,955 (cid:209) 86,955 16,736 37,838 86,955 27.43% $(cid:214)(cid:214)˙35,610 18.56% 81.44% 19.25% 80.75% $(cid:214)˙290,329 217,438 72,891 444,177 864,469 (cid:209) 864,469 23.74% $(cid:214)˙135,563 462,022 351,786 1.34 $(cid:214)˙295,150 200,759 94,391 341,030 754,673 (cid:209) 754,673 28.27% $(cid:214)˙134,511 381,662 265,203 1.47 $(cid:214)68,094 (cid:209) 68,094 14,970 33,860 68,094 29.06% $(cid:214)25,252 21.98% 78.02% $205,527 152,553 52,974 234,616 513,514 (cid:209) 513,514 25.93% $(cid:214)77,605 252,397 227,365 1.35 $(cid:214)41,098 (cid:209) 41,098 14,536 18,863 41,098 20.00% $(cid:214)21,416 35.37% 64.63% $194,183 128,915 65,268 210,033 409,518 (cid:209) 409,518 17.91% $(cid:214)42,581 216,235 193,505 1.51 61,289,618 61,659,316 59,426,530 60,788,674 61,649,531 5,877 59,779,508 5,399 60,228,590 5,319 60,991,284 5,479 Capital Expenditures — Net (Thousands of Dollars) Members (Employees) at Year-End $(cid:214)˙149,717 9,824* $(cid:214)(cid:214)˙85,491 9,390* $(cid:214)44,684 6,502* $(cid:214)53,879 5,933 *Includes acquisitions completed during year. 1994 1993 1992 1991 1990 1989 1988 $(cid:214)(cid:214)(cid:214)(cid:214).87 (cid:209) (cid:209) (cid:209) .87 .22 3.17 1.27 $845,998 573,392 272,606 3,248 $(cid:214)(cid:214)(cid:214)(cid:214).69 (cid:209) .01 (cid:209) .70 .20 2.83 1.23 $780,326 537,828 242,498 3,120 $(cid:214)(cid:214)(cid:214)(cid:214).59 (cid:209) (cid:209) (cid:209) .59 .19 2.52 1.23 $706,550 479,179 227,371 3,441 $(cid:214)(cid:214)(cid:214)(cid:214).51 (cid:209) (cid:209) (cid:209) .51 .18 2.32 1.07 $607,710 411,168 196,542 3,533 $(cid:214)(cid:214)(cid:214)(cid:214).65 (cid:209) (cid:209) (cid:209) .65 .15 2.03 .82 $663,896 458,522 205,374 3,611 $(cid:214)(cid:214)(cid:214)(cid:214).39 (cid:209) (cid:209) (cid:209) .39 .12 1.88 .83 $602,009 409,942 192,067 3,944 $(cid:214)(cid:214)(cid:214)(cid:214).34 .02 (cid:209) .11 .47 .10 1.98 1.29 $532,456 366,599 165,857 4,188 86,338 70,854 61,893 52,653 69,085 44,656 41,919 10.21% $(cid:214)31,945 37.00% $(cid:214)54,393 9.08% $(cid:214)26,216 37.00% $(cid:214)44,638 8.76% $(cid:214)23,210 37.50% $(cid:214)38,683 8.66% $(cid:214)19,745 37.50% $(cid:214)32,908 10.41% $(cid:214)25,907 37.50% $(cid:214)43,178 7.42% $(cid:214)17,193 38.50% $(cid:214)27,463 7.87% $(cid:214)16,139 38.50% $(cid:214)25,780 6.43% 5.72% 5.47% 5.42% 6.50% 4.56% 4.84% $(cid:214)54,393 (cid:209) 54,156 13,601 13,563 54,156 28.95% $(cid:214)19,042 25.11% 74.89% $188,810 111,093 77,717 177,844 372,568 (cid:209) 372,568 24.72% $(cid:214)45,877 194,640 174,642 1.70 $(cid:214)44,638 (cid:209) 45,127 12,587 17,338 45,127 26.35% $(cid:214)16,631 27.89% 72.11% $188,419 110,759 77,660 157,770 352,405 (cid:209) 352,405 22.14% $(cid:214)45,916 179,553 161,079 1.70 $(cid:214)38,683 (cid:209) 38,683 12,114 26,569 38,683 24.75% $(cid:214)15,478 31.32% 68.68% $171,309 91,780 79,529 145,849 322,746 (cid:209) 322,746 22.18% $(cid:214)50,961 163,009 143,741 1.87 $(cid:214)32,908 (cid:209) 32,908 11,656 18,182 32,908 23.41% $(cid:214)14,084 35.42% 64.58% $150,901 82,275 68,626 125,465 280,893 (cid:209) 280,893 19.66% $(cid:214)32,734 149,575 117,172 1.83 $(cid:214)43,178 (cid:209) 43,178 9,931 (11,952) 43,178 33.24% $(cid:214)13,973 23.00% 77.00% $146,591 93,465 53,126 124,603 276,984 (cid:209) 276,984 24.00% $(cid:214)37,250 131,612 98,990 1.57 $(cid:214)27,463 (cid:209) 27,463 8,298 (17,444) 27,463 19.92% $(cid:214)12,866 30.22% 69.78% $162,576 106,104 56,472 114,116 284,322 (cid:209) 284,322 16.32% $(cid:214)36,996 128,203 110,942 1.53 $(cid:214)25,780 9,515 35,295 7,956 20,986 35,295 25.77% $(cid:214)11,860 22.54% 77.46% $175,367 78,787 96,580 94,339 275,928 (cid:209) 275,928 18.46% $(cid:214)37,863 147,549 128,386 2.23 61,349,206 63,351,692 64,737,912 64,417,370 64,769,794 68,194,176 74,647,164 62,435,450 5,556 64,181,088 4,653 65,517,990 4,534 64,742,976 4,466 66,220,810 4,331 69,632,100 4,124 74,853,672 4,134 $(cid:214)35,005 6,131 $(cid:214)27,541 6,257 $(cid:214)26,626 5,926 $(cid:214)13,907 5,599 $(cid:214)20,709 6,073 $(cid:214)12,807 6,385 $(cid:214)10,299 5,423 HON INDUSTRIES INC. AND SUBSIDIARIES Management(cid:213)s Discussion and Analysis of Financial Condition and Results of Operations the following discussion of the company’s historical results of operations and of its liquidity and capital resources should be read in conjunction with the consolidated ﬁnancial statements of the company and related notes. Results of Operations The following table sets forth the percentage of consolidated net sales represented by certain items reﬂected in the Company’s statements of income for the periods indicated. Fiscal Net sales Cost of products sold Gross profit Selling and administrative expenses Gain on sale of subsidiary Operating income Interest expense (net) Income before income taxes Income taxes Net income 1998 100.0% 69.1 30.9 20.3 (cid:209) 10.6 .5 10.1 3.8 6.3% 1997 100.0% 68.5 31.5 20.9 (cid:209) 10.6 .4 10.2 3.8 6.4% 1996 100.0% 68.1 31.9 21.6 0.3 10.6 .1 10.5 3.7 6.8% The Company has two reportable core operating segments: ofﬁce furniture and hearth products. The “Operating Segment Information” note included in the notes to consolidated ﬁnancial statements provides more detailed ﬁnancial data with respect to these two segments. Fiscal Year Ended January 2, 1999, Compared to Fiscal Year Ended January 3, 1998 Net Sales Net sales, on a consolidated basis, increased by 24% to $1.7 bil- lion in 1998 from $1.36 billion in the prior year even though ﬁscal year 1998 was a normal 52-week year compared to 1997 being a 53-week year. The Company increased sales in both core operating segments due to the continued focus on superior customer service, rapid introduction of new innovative and compelling value products, and acquisitions. Ofﬁce furniture net sales increased 25% in 1998 to $1.5 billion from $1.16 bil- lion in 1997. Net sales of hearth products increased 20% to $245.1 million in 1998 from $204.5 million in 1997. Both core operating segments experienced another year of strong growth during 1998. The ofﬁce products industry reported an annual growth rate of 7.8% and hearth products an estimated 10%. The Company’s most recent ﬁve-year compounded annual growth rate is 17% in net sales. Gross Proﬁt Gross proﬁt increased 22% to $523.4 million in 1998 from $429.6 million in the prior year. Gross margin decreased to 30.9% for 1998 compared to 31.5% for 1997. This decrease was due to selling price reductions on select products to increase sales volume, which were only partially offset by productivity gains, and the adverse impact of the Allsteel acquisition not achieving the Company’s margin standards as rapidly as projected. Selling and Administrative Expenses Selling and administrative expenses increased by 21% to $344.3 million from $284.4 million in the prior year. Selling and administrative expenses, as a percentage of net sales, decreased to 20.3% in 1998 from 20.9% in 1997. Management places major emphasis on controlling and reducing selling and administrative expenses. The Company expects to leverage these costs as sales grow, however, increased costs to meet competitive conditions offset a portion of the efﬁciency and leveraging gains. Selling and administrative expenses include freight expense to the customer, product development costs and amortization expenses of intangible assets. The “Selling and Administrative Expenses” note included in the notes to consolidated ﬁnancial statements provides further information regarding the compara- tive expense levels for these major expense items. Operating Income Operating income increased by 23% to $179.2 million in 1998 from $145.2 million in 1997. The increase is due to increased sales and lower selling and administrative expenses as a percent of sales. Net Income Net income increased by 22% to $106.3 million in 1998 from $87.0 million in 1997. This increase is a result of the higher operating income being partially offset by an increase in interest expense associated with acquisition and capital expenditures. Net income per common share increased by 19% to $1.72 in 1998 from $1.45 in 1997. Average shares outstanding increased to 61.6 million in 1998 from 59.8 million in 1997 as a result of the weighting of the October 1997 primary stock offering. Fiscal Year Ended January 3, 1998, Compared to Fiscal Year Ended December 28, 1996 Net Sales Net sales, on a consolidated basis, increased by 37% to $1.36 bil- lion in 1997 from $998.1 million in the prior year. The Company increased net sales in both core segments by offering compelling value products through a combination of broad selection, features, quality, price, and service. Ofﬁce furniture products net sales increased 31% in 1997 to $1.16 billion from $887.3 million in 1996 due in part from the Company’s acquisitions of Allsteel Inc., Bevis Custom Furniture, Inc., and Panel Concepts, Inc. Hearth products net sales increased 84% in 1997 to $204.5 million from $110.8 million in 1996 due in part to the Company’s October 1996 acquisition of Heat-N-Glo Fireplace Products, Inc. Both core industry segments experienced strong growth during 1997. The ofﬁce products industry reported an annual growth rate of 15% and hearth products an estimated 10%. The Company’s compounded annual growth rate for the ﬁve-year period of 1993 to 1997 was 14% in net sales while the overall ofﬁce furniture industry’s sales growth rate was 8%. No comparable industry growth data is available for the hearth products industry. Gross Proﬁt Gross proﬁt increased by 35% to $429.6 million in 1997 from $318.6 million in the prior year. Gross margin decreased to 31.5% for 1997 compared to 31.9% for 1996. This lower margin is due to the combination of productivity gains and cost control initiatives being more than offset by strategic selling price reduc- tions on select products to increase market share and the impact of lower operating margins for certain 1997 acquisitions. Selling and Administrative Expenses Selling and administrative expenses increased by 32% to $284.4 million from $215.6 million in the prior year. Selling and administrative expenses, as a percentage of net sales, decreased to 20.9% in 1997 from 21.6% in 1996. This decrease was a result of continued commitment to develop more efﬁcient business processes which have improved member productivity, stringent control of expenses, and increased efﬁciencies associated with higher net sales. However, these results were partially offset by increased freight costs due to growth of unit volume, increased distribution costs for new warehouse capacity and product han- dling technologies that facilitate providing a higher level of service to customers, and the ongoing commitment to developing and marketing new products. This expense category, in addition to freight expense to the cus- tomer, also includes major costs related to product development and amortization expense of intangible assets. The “Selling and Administrative Expenses” note included in the notes to consoli- dated ﬁnancial statements provides further information regarding the comparative expense levels for these major expense items. Operating Income Operating income increased by 41% to $145.2 million in 1997 from $103.0 million, excluding a nonrecurring pre-tax gain on the sale of a subsidiary of $3.2 million in 1996. The increase is due to controlling operating costs and leveraging incremental sales. Net Income Net income increased by 32% to $87.0 million in 1997 from $66.1 million in 1996, excluding the $2.0 million nonrecurring after-tax gain on the sale of a subsidiary. This increase is a result of the higher operating income being partially offset by an increase in interest expense associated with acquisitions and the resumption of a more normal effective income tax rate. The effec- tive tax rate was 37.5% for 1997 compared to 35.3% for 1996. The rate for 1996 was favorably impacted by nonrecurring income tax credits of $2.1 million, or $0.04 per share, recorded in the third quarter of 1996. Net income per common share increased by 32% to $1.45 in 1997 from $1.10, excluding a nonrecurring after-tax gain of $0.03 per share in 1996. Average common shares outstanding decreased to 59.8 million in 1997 from 60.2 million in 1996. Fiscal Year Ended December 28, 1996 Compared to Fiscal Year Ended December 30, 1995 Net Sales Net sales, on a consolidated basis, increased by 12% to $998.1 million in 1996 from $893.1 million in the prior year. The increase in net sales for both core business segments was due to the Company’s offering of an ongoing stream of innovative and quality new products and a commitment to manufacturing excellence. Ofﬁce furniture products net sales increased 8% in 1996 to $887.3 million from $818.9 million in 1995. Hearth products net sales increased 49% in 1996 to $110.8 million from $74.2 million in 1995 due in part to the Company’s October 1996 acquisition of Heat-N-Glo Fireplace Products, Inc. Gross Proﬁt Gross proﬁt increased by 19% to $318.6 million in 1996 from $268.4 million in the prior year. The increase in gross proﬁt is primarily attributable to the Company’s sales growth in both operating segments, which has been driven by unit sales growth as opposed to pricing growth. Gross proﬁt margin increased to 31.9% for 1996 compared to 30.1% for 1995. This increase was a result of the elimination of production inefﬁciencies associated with two operations closed during 1995 and increased production unit volume, productivity improvements, and effective cost con- trol efforts, partially offset by continued price reductions on many of the Company’s products. Selling and Administrative Expenses Selling and administrative expenses increased by 7% to $215.6 million in 1996 from $201.7 million in the prior year. Selling and administrative expenses as a percentage of net sales decreased to 21.6% in 1996 from 22.6% in 1995. This decrease was a result of continued implementation of the Company’s rapid Management(cid:213)s Discussion and Analysis of Financial Condition and Results of Operations (continued) continuous improvement process, which led to more efﬁcient business processes and increased efﬁciencies associated with higher net sales. These decreases were partially offset by increases in marketing programs, greater use of cooperative advertising programs, freight costs escalating at a more rapid rate than prod- uct price increases, and additional costs of pursuing a proactive acquisition strategy. Operating Income Operating income increased by 54% to $103.0 million (exclud- ing a nonrecurring pre-tax gain on the sale of a subsidiary of $3.2 million) in 1996 from $66.7 million in 1995. The increase is a result of the increase in gross proﬁt and lower selling and administrative expenses as a percentage of net sales. Net Income Net income, excluding the $2.0 million nonrecurring after-tax gain on the sale of a subsidiary, increased by 61% to $66.1 mil- lion in 1996 from $41.1 million in the prior year. This increase is primarily attributable to increased operating income, lower net interest expense and a lower effective income tax rate. The effective tax rate was 35.3% for 1996 compared to 37.3% for 1995. The rate for 1996 was favorably impacted by non-recurring income tax credits of $2.1 million, or $0.04 per share, recorded in the third quarter of 1996. Net income per common share increased by 64% to $1.10 (excluding a nonrecurring after-tax gain of $0.03 per share) in 1996 from $0.67 for 1995. The Company’s net income per share performance for 1996 beneﬁted from the Company’s common stock repurchase program. During 1995 and 1996, the Company closed, consolidated, and sold several operations in an effort to concentrate further on its core strengths. In addition, the Company resolved several litigation uncertainties, reduced its workforce, addressed several asset realization concerns, and beneﬁted from special tax credits. The net effect of these nonrecurring business events was to reduce annual net income by $3.3 million, or $0.05 per share, in 1996, and $4.8 million, or $0.08 per share, in 1995. Liquidity and Capital Resources During 1998, cash from operations was $146.8 million which provided the funds necessary to meet working capital needs, help ﬁnance acquisitions, invest in capital improvements, repay long- term debt, and pay increased dividends. Cash Management Cash, cash equivalents, and short-term investments totaled $17.7 million compared to $46.3 million at the end of 1997 and $32.7 million at the end of 1996. These funds, coupled with cash from future operations and additional long-term debt, if needed, are expected to be adequate to ﬁnance operations, planned improvement, and internal growth. The Company places special emphasis on the management and reduction of its working capital with a particular focus on trade receivables and inventory levels. The success achieved in manag- ing receivables is in large part a result of doing business with quality customers and maintaining close communications with them. Trade receivable days outstanding have averaged about 36 days over the past three years. Inventory levels and turns con- tinue to improve as a function of reducing production cycle times. Inventory turns have been in the 17 to 18 range over the past three years with 1998 reaching 18.4 turns. The Company had a cash infusion during the fourth quarter of 1997 from its primary offering of 2,300,000 shares of common stock at an offering price of $26 per share. This transaction netted the Company approximately $56.8 million which was used to ﬁnance acquisitions and to repay a portion of debt associated with acquisitions. Capital Expenditure Investments Capital expenditures, net of disposals, were $149.7 million in 1998, $85.5 million in 1997, and $44.7 million in 1996. Expenditures during 1998, 1997, and 1996 have been consistently focused on machinery and equipment and facility expansion needed to support new products, process improvements, cost-saving initia- tives, and creating additional production and warehousing capacity. Acquisitions In February 1998, the Company completed the acquisition of Aladdin Steel Products, Inc. for a purchase price of approxi- mately $10.2 million. This acquisition allowed the Company to strengthen its position in the hearth products market. During 1997, the Company completed three ofﬁce furniture acquisitions: Allsteel Inc. in June, Bevis Custom Furniture, Inc. in November, and Panel Concepts, Inc. in December for a combined purchase price of approximately $119.5 million. In October 1996, the Company acquired Heat-N-Glo Fireplace Products, Inc., a leading hearth products manufacturer, for a pur- chase price of approximately $79 million. These acquisitions were accounted for under the purchase method of accounting and ﬁnanced by a combination of cash and long-term debt. Long-Term Debt Long-term debt, including capital lease obligations, was 23% of total capitalization at January 2, 1999, 26% at January 3, 1998, and 24% at December 28, 1996. The Company does not expect future capital resources to be a constraint on planned growth. Signiﬁcant additional borrowing capacity is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future capital needs. Cash Dividends Cash dividends were $0.32 per common share for 1998, $0.28 for 1997, and $0.25 for 1996. Further, the Board of Directors announced an 18.8% increase in the quarterly dividend from $0.08 to $0.095 per common share effective with the March 1, 1999, dividend payment. The previous quarterly dividend increase was from $0.07 to $0.08, effective with the February 28, 1998, dividend payment. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to con- tinue. The average dividend payout percentage for the most recent three-year period has been 26% of prior year earnings. Stock Split On February 11, 1998, the Board of Directors announced a two-for-one stock split in the form of a 100 percent stock divi- dend that was paid on March 27, 1998, to shareholders of record on March 6, 1998. Shareholders received one share of common stock for each share held on the record date. Common Share Repurchases During 1998, the Company repurchased 529,284 shares of its common stock at a cost of approximately $12.2 million, or an average price of $23.04. As of January 2, 1999, approximately $62.5 million of the $70.0 million authorized for repurchases remained unspent. During 1997, the Company repurchased 183,154 shares at a cost of approximately $4.1 million, or an average price of $22.30. During 1996, the Company repurchased 1,507,600 shares at a cost of approximately $21.9 million, or an average price of $14.54. Litigation and Uncertainties The Company is involved in various legal actions arising in the course of business. These uncertainties are referenced in the “Contingencies” note included in the notes to consolidated financial statements. Year 2000 Issue The Company is actively working a comprehensive Year 2000 (Y2K) readiness plan. The primary mission of the plan is to maintain business continuity by giving priority remediation and resolution to any Year 2000 issue, whether internally or externally based, that may disrupt or compromise normal business operations. The project is focused on three business fronts: (1) information technology (IT), which encompasses traditional computer hard- ware, software and related networks; (2) operations, which encompass material suppliers and embedded chips used by facil- ity, production, and distribution machinery, equipment, and support processes; and (3) customers and other non-operational service providers. Remediation progress achieved to date has been primarily in the information technology area, which has beneﬁted from having the earliest start. The other two focus areas are in various stages of identifying potential remediation targets, solutions, and conﬁrmation procedures. The IT issues addressed to date have been minor. Potential operational issues have been identiﬁed and are being aggressively pursued. None appear at this time to constitute a serious threat to the Company’s Y2K business continuity mission. Customers and other non-operational service providers represent a unique challenge inasmuch as the Company must rely primarily on indi- vidual Year 2000 readiness disclosures. In most instances, the Company is unable to independently conﬁrm readiness. However, no customer or service provider has been identiﬁed as constituting a serious threat to the business continuity mission. Total incre- mental out-of-pocket project remediation-related costs incurred through January 2, 1999, were less than $100,000. Internal pro- ject costs were negligible. All three project focus areas are on schedule to be completed during the second and third quarter of 1999, leaving the fourth quarter of 1999 primarily for follow-up compliance testing and contingency planning as needed. The Company is estimating its total incremental out-of-pocket project costs will not exceed the $1 million range, including some costs that, because of their nature, will be capitalized. All costs associated with this project are being expensed or capitalized in the period incurred. While the Company at this time does not expect any material business interruptions due to Year 2000 issues, even with the best of plans and the best follow-through efforts, there may be a variety of potential business risks. Management believes these business risks include, but are not necessarily limited to the following: higher than expected remediation costs, exclusion of coverage by insurers for losses/damages attributable to Year 2000 issues, loss of production, loss of sales, and litigation risk. HON INDUSTRIES INC. AND SUBSIDIARIES Report of Independent Public Accountants To the Board of Directors of HON INDUSTRIES Inc. We have audited the accompanying consolidated balance sheets of HON INDUSTRIES Inc. and subsidiaries as of January 2, 1999, January 3, 1998, and December 28, 1996, and the related consolidated statements of income, shareholders’ equity, and cash ﬂows for the ﬁscal years then ended. These ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audit. 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 consolidated ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall consolidated 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 ﬁnancial position of HON INDUSTRIES Inc. and subsidiaries as of January 2, 1999, January 3, 1998, and December 28, 1996, and its results of its operations and its cash ﬂows for the ﬁscal years then ended, in conformity with generally accepted accounting principles. Chicago, Illinois February 1, 1999 Management(cid:213)s Responsibility for Financial Statements Management is responsible for the preparation, integrity, and objectivity of the consolidated ﬁnancial statements and other ﬁnancial information presented in this report. The accompanying consolidated ﬁnancial statements and related notes were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. HON INDUSTRIES’ internal controls are designed to provide reasonable assurance as to the integrity and reliability of the ﬁnancial statements and to adequately safeguard, verify, and maintain accountability of assets. Such controls are based on established written poli- cies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties, and are monitored through a comprehensive internal audit program. These policies and procedures prescribe that the Company and all its members are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach. Arthur Andersen LLP, independent public accountants, is retained to audit HON INDUSTRIES’ ﬁnancial statements. Their accompa- nying report is based on audits conducted in accordance with generally accepted auditing standards, which includes the consideration of the Company’s internal controls to establish a basis for reliance thereon in determining the nature, timing, and extent of audit tests to be applied. The Board of Directors exercises its responsibility for these ﬁnancial statements through its Audit Committee, which consists entirely of independent nonmanagement board members. The Audit Committee meets periodically with the independent public accountants and with the Company’s internal auditors, both privately and with management present, to review accounting, auditing, internal controls, and ﬁnancial reporting matters. Jack D. Michaels Chairman, President and Chief Executive Ofﬁcer David C. Stuebe Vice President and Chief Financial Ofﬁcer Consolidated Statements of Income For the Years Net sales Cost of products sold Gross Profit Selling and administrative expenses Gain on sale of subsidiary Operating Income Interest income Interest expense 1998 1997 1996 $1,696,433,000 $1,362,713,000 1,172,997,000 933,157,000 $998,135,000 679,496,000 523,436,000 429,556,000 318,639,000 344,259,000 284,397,000 (cid:209) (cid:209) 215,646,000 3,200,000 179,177,000 145,159,000 106,193,000 1,590,000 10,658,000 2,148,000 8,179,000 3,247,000 4,173,000 Income Before Income Taxes 170,109,000 139,128,000 105,267,000 Income taxes Net Income 63,796,000 52,173,000 37,173,000 $(cid:214)˙106,313,000 $(cid:214)(cid:214)˙86,955,000 $(cid:214)68,094,000 Net Income Per Common Share $(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)1.72 $(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)1.45 $(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)(cid:214)˙1.13 The accompanying notes are an integral part of the consolidated ﬁnancial statements. HON INDUSTRIES INC. AND SUBSIDIARIES Consolidated Balance Sheets As of Year-End Assets Current Assets Cash and cash equivalents Short-term investments Receivables Inventories Deferred income taxes Prepaid expenses and other current assets Total Current Assets Property, Plant, and Equipment Goodwill Other Assets Total Assets Liabilities and Shareholders(cid:213) Equity Current Liabilities Accounts payable and accrued expenses Income taxes Note payable and current maturities of long-term debt Current maturities of other long-term obligations Total Current Liabilities Long-Term Debt Capital Lease Obligations Other Long-Term Liabilities Deferred Income Taxes Minority Interest in Subsidiary Commitments and Contingencies Shareholders(cid:213) Equity Common stock Paid-in capital Retained earnings Receivable from HON Members Company Ownership Plan Accumulated other comprehensive income Total Shareholders(cid:213) Equity 1998 1997 1996 $(cid:214)17,500,000 $(cid:214)46,080,000 $(cid:214)31,196,000 169,000 183,576,000 67,225,000 12,477,000 260,000 158,408,000 60,182,000 14,391,000 1,502,000 109,095,000 43,550,000 9,046,000 9,382,000 15,829,000 11,138,000 290,329,000 444,177,000 108,586,000 21,377,000 295,150,000 341,030,000 98,720,000 19,773,000 205,527,000 234,616,000 51,213,000 22,158,000 $864,469,000 $754,673,000 $513,514,000 $193,859,000 $183,738,000 $127,910,000 1,921,000 8,133,000 2,574,000 15,769,000 2,545,000 16,244,000 5,889,000 6,343,000 5,825,000 $217,438,000 128,069,000 7,494,000 18,067,000 31,379,000 (cid:209) $200,759,000 123,487,000 11,024,000 18,601,000 19,140,000 (cid:209) $152,553,000 71,285,000 6,320,000 20,183,000 10,726,000 50,000 61,290,000 48,348,000 351,786,000 61,659,000 55,906,000 265,203,000 29,713,000 360,000 227,365,000 (cid:209) (1,099,000) (5,041,000) 598,000 (7,000) (cid:209) 462,022,000 381,662,000 252,397,000 Total Liabilities and Shareholders(cid:213) Equity $864,469,000 $754,673,000 $513,514,000 The accompanying notes are an integral part of the consolidated ﬁnancial statements. Consolidated Statements of Shareholders(cid:213) Equity Common Stock Additional Paid-in Capital Receivable from Co. ESOP Retained Earnings Accumulated Other Comprehensive Income Total Shareholders(cid:213) Equity $30,394,000 $(cid:214)(cid:214)(cid:214)550,000 $(8,214,000) $193,505,000 $(cid:214)(cid:214)(cid:214)(cid:214)˙(cid:209) $216,235,000 68,094,000 (14,970,000) (19,264,000) 68,094,000 (cid:209) 68,094,000 (14,970,000) (21,914,000) 1,779,000 3,173,000 (754,000) (1,896,000) 73,000 1,706,000 3,173,000 29,713,000 360,000 (5,041,000) 227,365,000 (cid:209) 252,397,000 (7,000) 86,955,000 (16,736,000) (30,830,000) (1,551,000) 86,955,000 (7,000) 86,948,000 (16,736,000) (cid:209) (4,084,000) 56,766,000 2,429,000 3,942,000 30,830,000 (92,000) (2,441,000) 1,150,000 55,616,000 58,000 2,371,000 3,942,000 61,659,000 55,906,000 (1,099,000) 265,203,000 (7,000) 381,662,000 106,313,000 106,313,000 605,000 605,000 (19,730,000) (529,000) (11,672,000) 160,000 4,114,000 1,099,000 106,918,000 (19,730,000) (12,201,000) 4,274,000 1,099,000 Balance, December 30, 1995 Comprehensive income: Net income Other comprehensive income Comprehensive income Cash dividends Common shares — treasury: Shares purchased Shares issued under Members Stock Purchase Plan and stock awards Principal repaid by HON Members Company Ownership Plan Balance, December 28, 1996 Comprehensive income: Net income Other comprehensive income Comprehensive income Cash dividends Stock split effected in the form of a 100% stock dividend Common shares — treasury: Shares purchased Shares issued through public stock offering Shares issued under Members Stock Purchase Plan and stock awards Principal repaid by HON Members Company Ownership Plan Balance, January 3, 1998 Comprehensive Income: Net income Other comprehensive income Comprehensive income Cash dividends Common shares — treasury: Shares purchased Shares issued under Members Stock Purchase Plan and stock awards Principal repaid by HON Members Company Ownership Balance, January 2, 1999 $61,290,000 $˙48,348,000 (cid:209) $351,786,000 $598,000 $462,022,000 The accompanying notes are an integral part of the consolidated ﬁnancial statements. Consolidated Statements of Cash Flows For the Years 1998 1997 1996 Net Cash Flows From (To) Operating Activities: Net income Noncash items included in net income: Depreciation and amortization Gain on sale of subsidiary, net of tax Other postretirement and postemployment benefits Deferred income taxes Other — net Changes in working capital, excluding acquisition and disposition: Receivables Inventories Prepaid expenses and other current assets Accounts payable and accrued expenses Accrued facilities closing and reorganization expenses Income taxes Increase in other liabilities Net cash flows from (to) operating activities Net Cash Flows From (To) Investing Activities: Capital expenditures — net Acquisition spending, net of cash acquired Net proceeds from sale of subsidiary Principal repaid by HON Members Company Ownership Plan Short-term investments — net Other — net Net cash flows from (to) investing activities Net Cash Flows From (To) Financing Activities: $˙106,313,000 $(cid:214)˙86,955,000 $(cid:214)˙68,094,000 52,999,000 35,610,000 (cid:209) (cid:209) 1,529,000 13,816,000 8,000 (24,238,000) (4,286,000) 6,517,000 3,895,000 64,000 (7,419,000) (2,406,000) 1,397,000 7,128,000 (35,000) (15,169,000) 3,134,000 (1,574,000) 16,789,000 (256,000) 6,881,000 525,000 25,252,000 (2,016,000) 1,398,000 5,103,000 252,000 (5,085,000) 184,000 (2,613,000) 998,000 (1,147,000) (3,971,000) 6,860,000 146,792,000 141,385,000 93,309,000 (149,717,000) (11,470,000) (cid:209) 1,099,000 91,000 80,000 (85,491,000) (121,424,000) (cid:209) 3,942,000 442,000 1,792,000 (44,684,000) (79,136,000) 7,336,000 3,173,000 12,392,000 (976,000) (159,917,000) (200,739,000) (101,895,000) Purchase of HON INDUSTRIES common stock (12,206,000) (4,085,000) (21,912,000) Proceeds from public offering of HON INDUSTRIES common stock Proceeds from long-term debt Payments of note and long-term debt Proceeds from sale of HON INDUSTRIES common stock to members Dividends paid Net cash flows from (to) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest Income taxes (cid:209) 73,237,000 (60,079,000) 3,323,000 (19,730,000) (15,455,000) (28,580,000) 46,080,000 56,766,000 100,238,000 (64,374,000) 2,429,000 (16,736,000) 74,238,000 14,884,000 31,196,000 (cid:209) 51,072,000 (8,416,000) 1,777,000 (14,970,000) 7,551,000 (1,035,000) 32,231,000 $(cid:214)˙17,500,000 $(cid:214)˙46,080,000 $(cid:214)˙31,196,000 $(cid:214)˙10,867,000 $(cid:214)˙56,787,000 $(cid:214)(cid:214)˙8,404,000 $(cid:214)˙38,246,000 $(cid:214)(cid:214)˙3,334,000 $(cid:214)˙36,318,000 The accompanying notes are an integral part of the consolidated ﬁnancial statements. HON INDUSTRIES INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Nature of Operations HON INDUSTRIES Inc., with its subsidiaries (the Company), is a national manufacturer and marketer of ofﬁce furniture and hearth products. Both industries are reportable segments; how- ever, the Company’s ofﬁce furniture business is its principal line of business. Refer to the “Operating Segment Information” note for further information. Ofﬁce furniture products are sold through a national system of dealers, wholesalers, mass merchan- disers, warehouse clubs, retail superstores, end-user customers, and to federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas-burning factory-built ﬁreplaces, ﬁreplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, and large regional contractors. The Company’s products are marketed predominantly in the United States and Canada. The Company exports select products to a limited number of markets outside North America, principally Latin America and the Caribbean, through its export subsidiary; however, based on sales, it is not signiﬁcant. Summary of Significant Accounting Policies Principles of Consolidation and Fiscal Year-End The consolidated ﬁnancial statements include the accounts and transactions of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company follows a 52/53-week ﬁscal year which ends on the Saturday nearest December 31. Fiscal year 1998 ended on January 2, 1999; 1997 ended on January 3, 1998; and 1996 ended on December 28, 1996. The ﬁnancial statements for ﬁscal year 1997 are based on a 53-week period, ﬁscal years 1998 and 1996 are on a 52-week basis. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash and commercial paper. These securities have original maturity dates not exceeding three months from date of purchase. Short-Term Investments Short-term investments are classiﬁed as available-for-sale and are highly liquid debt and equity securities. These investments are stated at cost which approximates market value. Receivables Accounts receivable are presented net of an allowance for doubtful accounts of $2,816,000, $3,277,000, and $1,830,000 for 1998, 1997, and 1996, respectively. Inventories Inventories are valued at the lower of cost or market, determined principally by the last-in, ﬁrst-out (LIFO) method. Property, Plant, and Equipment Property, plant, and equipment are carried at cost. Depreciation has been computed by the straight-line method over estimated useful lives: land improvements, 10 – 20 years; buildings, 10 – 40 years; and machinery and equipment, 3 –12 years. The Company capitalized interest costs of $22,000 and $95,000 in 1997 and 1996, respectively. Goodwill and Patents Goodwill represents the excess of cost over the fair value of net identiﬁable assets of acquired companies. Goodwill is being amortized on a straight-line basis predominantly over 30 years. Patents are being amortized on a straight-line basis over their estimated useful lives, which range from 7 to 16 years. Patents are reported by the Company as “Other Assets.” The carrying value of goodwill and patents is reviewed by the Company whenever signiﬁcant events or changes occur which might impair recovery of recorded costs. Based on its most recent analysis, the Company believes no material impairment of these intangible assets exists at January 2, 1999. (In thousands) Goodwill Patents Less accumulated amortization 1998 $113,812 1997 $100,667 16,450 16,450 1996 $52,051 16,060 8,570 3,781 838 $121,692 $113,336 $67,273 Product Development Costs Product development costs relating to the development of new products and processes, including signiﬁcant improvements and reﬁnements to existing products, are expensed as incurred. The amounts charged against income were $15,707,000 in 1998, $15,371,000 in 1997, and $10,423,000 in 1996. Stock-Based Compensation The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which results in no charge to earn- ings when options are issued at fair market value. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock- Based Compensation.” Use of Estimates The preparation of ﬁnancial statements in conformity with gener- ally 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. Notes to Consolidated Financial Statements (continued) New Accounting Standards The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Beneﬁts,” as of January 4, 1998, the beginning of its 1998 ﬁscal year; SFAS No. 128, “Earnings Per Share,” and SFAS No. 129, “Disclosure of Information about Capital Structure,” as of January 3, 1998, year-end 1997; and SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets to be Disposed Of,” in the ﬁrst quarter of 1996. Their adoption had no material effect on ﬁnancial condition or results of operations. Earnings Per Share Net income per common share is based on the weighted-average number of shares of common stock outstanding during each year including allocated and unallocated ESOP shares. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share,” and SFAS No. 129, “Disclosure of Information about Capital Structure,” as of January 3, 1998, which is the end of its 1997 ﬁscal year. The effect of adoption was immaterial. Comprehensive Income The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” as of January 4, 1998, the beginning of its 1998 ﬁscal year. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company’s net income or shareholders’ equity. The Company’s comprehensive income consists of an unrealized holding gain on equity securi- ties available-for-sale under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and nominal foreign currency adjustments. Prior years’ ﬁnancial statements have been reclassiﬁed to conform to these requirements. Reclassiﬁcations Certain prior year information has been reclassiﬁed to conform to the current year presentation. Business Combinations The Company acquired Aladdin Steel Products, Inc. on February 20, 1998. Aladdin is a manufacturer of wood-, pellet-, and gas-burning stoves and inserts. Aladdin is being operated by Hearth Technologies Inc., the Company’s hearth products sub- sidiary. The transaction was accounted for under the purchase method. The cash purchase price and preliminary allocation is shown below: (In millions) Purchase Price Preliminary Allocation of Purchase Price: Working capital, other than cash Property, plant, and equipment Goodwill $10.2 .2 1.8 8.2 The Company completed three ofﬁce furniture business acquisi- tions during ﬁscal year 1997. Allsteel Inc. was a stock purchase acquired on June 17, 1997, from ACI America Holdings Inc., a subsidiary of BTR plc, for approximately $66 million. It manu- factures and markets a line of quality, mid-priced ofﬁce furniture with manufacturing and distribution facilities in Jackson and Milan, Tennessee; Verona, Mississippi; and West Hazleton, Pennsylvania. Bevis Custom Furniture, Inc. was an asset purchase acquired on November 13, 1997, from Hunt Manufacturing Co. for approximately $45.1 million. It manufactures and markets a line of affordably priced ofﬁce furniture with a manufacturing operation located in Florence, Alabama. Allsteel and Bevis operate as part of the Company’s division, The HON Company. Panel Concepts, Inc. was a stock purchase acquired December 1, 1997, from Standard Paciﬁc Corp. for approximately $8.4 million. It manufactures and markets innovative panel-based ofﬁce systems with a manufacturing plant located in Santa Ana, California. Panel Concepts operates as part of the Company’s subsidiary, BPI Inc. Each of the transactions was accounted for under the purchase method of accounting and all were ﬁnanced by a combi- nation of cash and long-term debt. Assuming the acquisitions of Heat-N-Glo Fireplace Products, Inc., Allsteel Inc., Bevis Custom Furniture, Inc., and Panel Concepts, Inc. had occurred on December 31, 1995, the beginning of the Company’s 1996 ﬁs- cal year, instead of the actual dates, the Company’s pro forma consolidated net sales would have been approximately $1.5 bil- lion and $1.3 billion for 1997 and 1996, respectively. Pro forma consolidated net income and net income per share for 1997 and 1996 would not have been materially different than the reported amounts. In October 1996, the Company acquired Heat-N-Glo Fireplace Products, Inc., located in Savage, Minnesota, for a combination of cash and debt totaling approximately $79 million. The transac- tion was accounted for under the purchase method. The Company merged Heat-N-Glo into Heatilator Inc., which changed its name to Hearth Technologies Inc. Both Heatilator and Heat-N-Glo are engaged in the manufacturing and marketing of quality hearth products and operate as divisions of Hearth Technologies Inc. Assuming this transaction had occurred as of the beginning of ﬁscal year 1995, the Company’s pro forma consolidated net sales would have been approximately $1.07 billion and $971.6 million in 1996 and 1995, respectively. Assuming the acquisition of Heat-N-Glo Fireplace Products, Inc., Allsteel Inc., Bevis Custom Furniture, Inc., Panel Concepts, Inc., and Aladdin Steel Products, Inc. had occurred on December 29, 1996, the beginning of the Company’s 1997 ﬁscal year, instead of the actual dates reported above, the Company’s pro forma consolidated net sales would have been approximately $1.7 bil- lion and $1.5 billion for 1998 and 1997, respectively. Pro forma consolidated net income and net income per share for 1998 and 1997 would not have been materially different than the reported amounts. Business Disposition On January 24, 1996, the Company sold the outstanding stock of Ring King Visibles, Inc., a wholly owned subsidiary, for $8.0 million in cash and the forgiveness of intercompany receivables of approximately $2.0 million. The sale resulted in an approximate $3.2 million pre-tax gain for the Company (an after-tax gain of $2.0 million, or $0.03 per share) which was recorded in the ﬁrst quarter of ﬁscal year 1996. Inventories (In thousands) Finished products Materials and work in process LIFO allowance Property, Plant, and Equipment (In thousands) Land and land improvements Buildings Machinery and equipment Construction and equipment installation in progress Less allowances for depreciation 1998 $˙24,955 53,320 (11,050) 1997 $˙26,352 48,186 (14,356) 1996 $˙20,303 36,184 (12,937) $˙67,225 $˙60,182 $˙43,550 1998 $(cid:214)12,156 144,559 411,238 85,782 653,735 209,558 1997 $(cid:214)10,059 111,387 333,216 60,832 515,494 174,464 1996 $(cid:214)(cid:214)9,114 92,509 231,780 42,507 375,910 141,294 Accounts Payable and Accrued Expenses (In thousands) Trade accounts payable Compensation Profit sharing and retirement expense Vacation pay Marketing expenses Casualty self-insurance expense Other accrued expenses Long-Term Debt (In thousands) Industrial development revenue bonds, various issues, payable through 2018 with interest at 3.44–8.125% per annum Note payable to bank, term loan payable in 2001 with interest at 7.11% per annum Note payable to bank, revolving credit agreement with interest at a variable rate (5.25–5.8125% at year-end 1998)* Convertible debenture payable to individuals, due in 1999 with interest at 7.0% per annum Other notes and amounts 1998 $(cid:214)75,895 1997 $(cid:214)76,623 1996 $(cid:214)44,762 6,789 6,339 6,331 20,355 11,751 45,833 6,271 26,965 15,013 10,879 38,096 5,201 31,587 11,736 8,064 36,550 3,787 16,680 $193,859 $183,738 $127,910 1998 1997 1996 $(cid:214)25,293 $(cid:214)23,549 $24,063 (cid:209) (cid:209) 27,200 95,000 80,000 (cid:209) (cid:209) 7,776 12,000 7,938 12,000 8,022 $128,069 $123,487 $71,285 * The revolving bank credit agreement is payable in the year 2002 with a maximum borrowing limit of $200,000,000. Aggregate maturities of long-term debt are as follows (in thousands): 1999 2000 2001 2002 2003 $444,177 $341,030 $234,616 Thereafter $12,574 3,282 3,207 95,710 833 25,037 The note and convertible debenture payable to individuals are payable to the former owners of a business acquired by the Company in 1996. These individuals continue as ofﬁcers of a subsidiary of the Company following the merger. The convert- ible debenture is convertible into shares of common stock of Hearth Technologies Inc., a subsidiary of the Company, repre- senting 10% of the current issued and outstanding stock of Hearth Technologies Inc. Notes to Consolidated Financial Statements (continued) Certain of the above borrowing arrangements include covenants which limit the assumption of additional debt and lease obliga- tions. The fair value of the Company’s outstanding long-term debt obligations at year-end 1998 approximates the recorded aggregate amount. Property, plant, and equipment, with net carrying values of approximately $54,227,000 at the end of 1998, are mortgaged. Selling and Administrative Expenses (In thousands) Freight expense to customer Amortization of intangible assets Product development costs General selling and administrative expense 1998 $(cid:214)96,258 1997 $(cid:214)73,261 1996 $(cid:214)51,662 4,789 15,707 2,943 15,371 838 10,423 purposes. Signiﬁcant components of the Company’s deferred tax liabilities and assets are as follows: (In thousands) Net long-term deferred tax liabilities: Tax over book depreciation OPEB obligations Other — net Total net long-term deferred tax liabilities Net current deferred tax assets: Workers’ compensation, general, and product liability accruals Vacation accrual 1998 1997 1996 $(33,118) $(25,743) $(17,584) 3,305 (1,566) 3,920 2,683 2,947 3,911 (31,379) (19,140) (10,726) 2,315 2,531 1,026 6,605 2,054 892 2,631 8,814 1,548 1,855 580 5,063 12,477 14,391 9,046 $(18,902) $(cid:214)(4,749) $(cid:214)(1,680) 227,505 192,822 152,723 Inventory $344,259 $284,397 $215,646 Income Taxes Signiﬁcant components of the provision for income taxes are as follows: obsolescence reserve Other — net Total net current deferred tax assets Net deferred tax (liabilities) assets (In thousands) Current: Federal State Deferred 1998 1997 1996 Shareholders(cid:213) Equity and Earnings Per Share $44,525 $38,989 $27,958 5,363 49,888 13,908 4,695 43,684 8,489 3,932 31,890 5,283 $63,796 $52,173 $37,173 1998 1997 1996 Common Stock, $1 Par Value Authorized 200,000,000 100,000,000 100,000,000 Issued and outstanding 61,289,618 61,659,316 59,426,530 Preferred Stock, $1 Par Value Authorized Issued and outstanding 1,000,000 1,000,000 1,000,000 (cid:209) (cid:209) (cid:209) A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows: Federal statutory tax rate State taxes, net of federal tax effect Federal and state tax credits Other — net Effective tax rate 1998 35.0% 2.6 (.1) (cid:209) 37.5% 1997 35.0% 2.6 (.2) .1 37.5% 1996 35.0% 2.7 (2.2) (.2) 35.3% The Company recognized one-time federal and state research and development and new jobs tax credits totaling $2.1 million, or $0.04 per share, in 1996 related to prior tax years. Deferred income taxes reﬂect the net tax effects of temporary dif- ferences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for income tax On February 11, 1998, the Company’s Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend paid on March 27, 1998, to shareholders of record on the close of business on March 6, 1998. In May 1998, sharehold- ers authorized an increase of capital stock of the Company from 101,000,000 shares to 201,000,000 shares, consisting of 200,000,000 shares of common stock, $1.00 par value, and 1,000,000 shares of preferred stock, $1.00 par value. The Company purchased 529,284; 183,154; and 1,507,600 shares of its common stock during 1998, 1997, and 1996, respec- tively. The par value method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over their par value is allocated to Paid-In Capital with the excess charged to Retained Earnings. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income,” as of January 4, 1998, the beginning of its 1998 ﬁscal year. The Company has changed the format of its consolidated state- ments of shareholders’ equity to present comprehensive income. Components of other comprehensive income (loss) consists of the following: (In thousands) Foreign currency translation adjustments — net of tax Change in unrealized gains on marketable securities — net of tax Other comprehensive income (loss) 1998 $(cid:214)42 563 $605 1997 $˙(7) (cid:209) $˙(7) 1996 $(cid:209) (cid:209) $(cid:209) 419,460 shares were available for issuance under the plan at January 2, 1999. The effect of the application of adopting Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation,” was not material to the Company. Shares of common stock were issued in 1998, 1997, and 1996 pursuant to a members stock purchase plan as follows: Shares issued Average price per share 1998 101,108 $23.58 1997 84,552 $20.77 1996 122,740 $12.45 The Company ﬁled a Registration Statement with the Securities and Exchange Commission in September 1997 for a primary offering of 2,000,000 shares of its common stock which was com- bined with a secondary offering of 4,790,000 shares of Company stock by Bandag, Incorporated, a major shareholder. The com- bined public offering was priced at $26.00 per share on October 23, 1997, and closed on October 29, 1997. The Company granted the underwriters an option to purchase 1,018,500 additional shares at the same price to cover over-allotments, if any, of which 300,000 shares were subsequently purchased. The Company’s net proceeds from the sale of its 2,300,000 shares were used to ﬁnance acquisitions and to repay debt associated with acquisitions. In May 1997, the Company registered 400,000 shares of its common stock under its 1997 Equity Plan for Non-Employee Directors which was approved by shareholders at the May 1997 annual shareholders’ meeting. This plan permits the Company to issue to its non-employee directors options to purchase shares of Company common stock, restricted stock of the Company, and awards of Company stock. The plan also permits non- employee directors to elect to receive all or a portion of their annual retainers and other compensation in the form of shares of Company common stock. During 1998 and 1997, 4,250 and 5,400 shares of Company common stock were issued under the plan, respectively. Cash dividends declared and paid per share for each year are: (In dollars) Common shares 1998 $.32 1997 $.28 1996 $.25 Pursuant to the 1994 Members Stock Purchase Plan, 1,000,000 shares of the Company’s common stock were registered for issuance to participating members. Members who have one year of employment eligibility and work a minimum of 20 hours per week have rights to purchase stock on a quarterly basis. The price of the stock purchased under the plan is 85% of the closing price on the applicable purchase date. No member may purchase stock under the plan in an amount which exceeds the lesser of 20% of his or her gross earnings or 4,000 shares, with a maximum fair market value of $25,000 in any calendar year. An additional The Company has a shareholders rights plan which will expire August 20, 2008. The plan becomes operative if certain events occur involving the acquisition of 20% or more of the Company’s common stock by any person or group in a transaction not approved by the Company’s Board of Directors. Upon the occur- rence of such an event, each right entitles its holder to purchase an amount of common stock of the Company with a market value of $400 for $200, unless the Board authorizes the rights be redeemed. The rights may be redeemed for $0.01 per right at any time before the rights become exercisable. In certain instances, the right to purchase applies to the capital stock of the acquirer instead of the common stock of the Company. The Company has reserved pre- ferred shares necessary for issuance should the rights be exercised. The Company has entered into change in control employment agreements with corporate ofﬁcers and certain other key employ- ees. According to the agreements, a change in control occurs when a third person or entity becomes the beneﬁcial owner of 20% or more of the Company’s common stock or when more than one- third of the Company’s Board of Directors is composed of persons not recommended by at least three-fourths of the incumbent Board of Directors. Upon a change in control, a key employee is deemed to have a two-year employment with the Company, and all his or her beneﬁts are vested under Company plans. If, at any time within two years of the change in control, his or her position, salary, bonus, place of work, or Company-provided beneﬁts are modiﬁed, or employment is terminated by the Company for any reason other than cause or by the key employee for good reason, as such terms are deﬁned in the agreement, then the key employee is entitled to receive a severance payment equal to two times annual salary and the average of the prior two years’ bonuses. Stock Options Under the Company’s 1995 Stock-Based Compensation Plan, as amended and restated effective May 13, 1997, the Company may award options to purchase shares of the Company’s common stock and grant other stock awards to executives, managers, and Notes to Consolidated Financial Statements (continued) key personnel. The Plan is administered by the Human Resources and Compensation Committee of the Board of Directors. Stock options awarded under the Plan must be at exercise prices equal to or exceeding the fair market value of the Company’s common stock on the date of grant. Stock options are generally subject to four-year cliff vesting and must be exercised within ten years from the date of grant. The Company accounts for executive stock options issued under this Plan using Accounting Principles Board Opinion No. 25, which results in no charge to earnings when options are issued at fair market value. The Company has elected the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” If compensation costs had been determined based on the fair value at the grant dates for awards under this Plan, consistent with SFAS No.123, the impact on net earnings and earnings per share would be less than one-cent per share. The weighted- average fair value of options granted during 1998 and 1997 estimated on the date of grant using the Black-Scholes option- pricing model was $15.51 and $11.85, respectively. The fair value of 1998 and 1997 options granted is estimated on the date of grant using the following assumptions: dividend yield of 0.90% to 1.31%, expected volatility of 30.90% to 31.40%, risk-free interest rate of 5.53% to 6.71%, and an expected life of 10 years depending on grant date. The status of the Company’s stock option plans is summarized below: Outstanding at December 28, 1996 Granted Exercised Forfeited Outstanding at January 3, 1998 Granted Exercised Forfeited Outstanding at January 2, 1999 Options exercisable at: January 2, 1999 January 3, 1998 Weighted-Average Exercise Price (cid:209) $24.74 (cid:209) (cid:209) 24.74 32.50 (cid:209) (cid:209) 25.62 Number of Shares (cid:209) 156,000 (cid:209) (cid:209) 156,000 20,000 (cid:209) (cid:209) 176,000 (cid:209) (cid:209) The following table summarizes information about ﬁxed stock options outstanding at January 2, 1999: Options Outstanding Range of Exercise Prices $24.50˙—˙$28.25 $32.50 Number Outstanding 156,000 20,000 Weighted- Average Remaining Contractual Life 8.5 years 9.1 years Weighted- Average Exercise Price $24.74 $32.50 Options Exercisable Number Exercisable at January 2, 1999 0 0 Retirement Benefits The Company has deﬁned contribution proﬁt-sharing plans covering substantially all employees who are not participants in certain deﬁned beneﬁt plans. The Company’s annual contribu- tion to the deﬁned contribution plans is based on employee eligible earnings and results of operations and amounted to $20,101,000, $14,558,000, and $11,118,000 in 1998, 1997, and 1996, respectively. The Company sponsors deﬁned beneﬁt plans which include a limited number of salaried and hourly employees at certain sub- sidiaries. The Company’s funding policy is generally to contribute annually the minimum actuarially computed amount. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, “Employer’s Disclosures about Pensions and Other Postretirement Beneﬁts,” as of January 4, 1998, the begin- ning of its 1998 ﬁscal year. Net pension costs relating to these plans were $-0-, $93,000, and $146,000 for 1998, 1997, and 1996, respectively. The actuarial present value of obligations, less related plan assets at fair value, is not signiﬁcant. The Company also participates in a multiemployer plan, which provides deﬁned beneﬁts to certain of the Company’s union employees. Pension expense for this plan amounted to $306,000, $327,000, and $275,000 in 1998, 1997, and 1996, respectively. In 1992, the Company established a trust to administer a lever- aged employee stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company contributions based on employee eligible earnings and dividends on the shares are used to make loan interest and principal payments. As the loan is repaid, shares are distributed to the ESOP trust for allocation to partici- pants. During 1998, the ﬁnal shares in the Plan were allocated to participants, and the Plan was subsequently merged into the Company’s deﬁned contribution proﬁt-sharing plan. Selected ﬁnancial data pertaining to the ESOP is as follows: (In thousands, except share data) Company contribution to ESOP Dividend income of ESOP Company interest expense on ESOP loan Shares of common stock allocated to ESOP participant accounts Shares held in suspense (unallocated) by ESOP as of year-end Fair value of shares held in suspense by ESOP as of year-end Closing market price of common stock as of year-end 1998 $(cid:214)˙656 533 1997 $3,735 487 1996 $3,348 446 (cid:209) (cid:209) 555 96,304 351,574 305,466 (cid:209) 96,304 447,878 (cid:209) $2,757 $7,264 $23.94 $28.63 $16.22 Postretirement Health Care The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Beneﬁts,” as of January 4, 1998. The Company adopted SFAS No. 106, “Employers’ Accounting for Postretirement beneﬁts Other Than Pensions,” as of January 3, 1993, and recorded the cumulative effect of the accounting change on the deferred recognition basis. The following table sets forth the funded status of the plan, recon- ciled to the accrued postretirement beneﬁts cost recognized in the Company’s balance sheet at: (In thousands) Reconciliation of benefit obligation Obligation at beginning of year Service cost Interest cost Benefit payments Actuarial (gains) losses Obligation at end of year Funded status Funded status at end of year Unrecognized transition obligation Unrecognized prior-service cost Unrecognized gain (loss) Net amount recognized Net periodic postretirement benefit cost include: Service cost Interest cost Amortization of transition obligation over 20 years Amortization of prior service cost Amortization of (gains) and losses Net periodic postretirement benefit cost 1998 1997 1996 $˙15,409 419 1,045 (974) 1,442 $˙17,341 $˙15,259 480 1,115 (796) (649) $˙15,409 $˙21,559 810 1,629 (865) (7,874) $˙15,259 $˙17,341 $˙15,409 $˙15,259 (10,075) (2,484) 4,031 $(cid:214)˙8,813 (10,788) (2,630) 6,586 $(cid:214)˙8,577 (11,501) (2,776) 6,919 $(cid:214)˙7,901 $(cid:214)(cid:214)(cid:214)419 1,045 $(cid:214)(cid:214)(cid:214)480 1,115 $(cid:214)(cid:214)(cid:214)810 1,629 713 146 713 146 (767) (922) 713 146 (cid:209) $(cid:214)˙1,556 $(cid:214)˙1,532 $(cid:214)˙3,298 The discount rates at ﬁscal year-end 1998, 1997, and 1996 were 6.75%, 7.0%, and 7.5%, respectively. The pre-65 1999 gross trend rates begin at 10% for the medical and prescription drug coverages and grade down to 5% in eight years and remain at this level for all future years. The post-64 gross trend rates begin at 8% for the medical coverage and decrease until the maximum Company subsidy (cap) is reached in 2003. For the prescription drug coverage, the 1999 gross trend rates begin at 10% and decrease until the cap is reached in 2003. Assumed health care cost trend rates have a signiﬁcant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects: (In thousands) 1% Increase 1% Decrease Effect on total of service and interest cost components of net periodic postretirement health care benefit cost Effect on the health care component of the accumulated postretirement benefit obligation $(cid:214)˙136 $(109) $1,954 $(414) Leases The Company leases certain warehouse and plant facilities and equipment. Commitments for minimum rentals under noncan- cellable leases at the end of 1998 are as follows: (In thousands) 1999 2000 2001 2002 2003 Thereafter Total minimum lease payments Less amount representing interest Present value of net minimum lease payments, including current maturities of $3,195,000 Capitalized Leases $(cid:214)4,210 Operating Leases $(cid:214)9,915 8,048 6,569 5,269 3,896 4,036 $37,733 3,757 2,398 1,078 211 1,646 13,300 2,611 $10,689 Property, plant, and equipment at year-end include the following amounts for capitalized leases: (In thousands) Buildings Machinery and equipment Less allowances for depreciation 1998 $(cid:214)3,299 15,805 19,104 1997 $(cid:214)3,299 15,805 19,104 1996 $(cid:214)3,299 8,419 11,718 8,978 6,139 4,854 $10,126 $12,965 $(cid:214)6,864 Notes to Consolidated Financial Statements (continued) Rent expense for the years 1998, 1997, and 1996 amounted to approximately $10,150,000, $7,555,000, and $6,788,000, respectively. The Company has operating leases for ofﬁce and production facilities with annual rentals totaling $578,000 with the former owners of a business acquired in 1996. These individu- als continue as ofﬁcers of a subsidiary of the Company following the merger. Contingent rent expense under both capitalized and operating leases (generally based on mileage of transportation equipment) amounted to $596,000, $581,000, and $353,000 for the years 1998, 1997, and 1996, respectively. Contingencies The Company is involved in various legal actions which have arisen in the course of business. Management believes the out- come of these matters will not have a material effect on the ﬁnancial condition or results of operations of the Company. Operating Segment Information The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” effective with its 1998 ﬁscal year beginning January 4, 1998. This segment disclosure is essentially unchanged from the format used by the Company historically in complying with SFAS No. 14, “Financial Reporting for Segments of a Business Enterprise,” and SFAS No. 30, “Disclosures of Information about Major Customers.” That is, management views the Company as being in two oper- ating segments: ofﬁce furniture and hearth products, with the former being the principal segment. The ofﬁce furniture segment manufactures and markets a broad line of metal and wood commercial and home ofﬁce furniture which includes ﬁle cabinets, desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding ofﬁce partitions and panel systems, and other related products. The hearth products segment manufactures and markets a broad line of manufactured gas-, pellet-, and wood-burning ﬁreplaces and stoves, ﬁreplace inserts, gas logs, and chimney systems principally for the home. The Company’s October 2, 1996, acquisition of Heat-N-Glo Fireplace Products, Inc., resulted in hearth products becoming a reportable segment. Prior to this acquisition, the Company had only one reportable segment, ofﬁce furniture. Refer to the “Business Combinations” note for additional information regarding this acquisition. The Company’s two operating segments are somewhat seasonal with the third (July-September) and fourth (October-December) ﬁscal quarters historically having higher sales than the prior quar- ters. In ﬁscal 1998, 51% of the Company’s consolidated net sales of ofﬁce furniture were generated in the third and fourth quarters and 55% of consolidated net sales of hearth products were gener- ated in the third and fourth quarters. For purposes of segment reporting, intercompany sales transfers between segments are not material, and operating proﬁt is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net costs of the Company’s corporate operations, interest income, and interest expense. Management views interest income and expense as corporate ﬁnancing costs and not as an operating segment cost. In addition, management applies an effective income tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. Identiﬁable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, and corporate ofﬁce real estate and related equipment. No geographic information for revenues from external customers or for long-lived assets is disclosed inasmuch as the Company’s primary market and capital investments are concentrated in the United States. Reportable segment data reconciled to the consolidated ﬁnancial statements for the years ended 1998, 1997, and 1996 is as follows: (In thousands) Net sales: Ofﬁce furniture Hearth products Operating proﬁt: Ofﬁce furniture Hearth products Total operating proﬁt Unallocated corporate expenses Income before income taxes Identiﬁable assets: Ofﬁce furniture Hearth products General corporate Depreciation and amortization expense: Ofﬁce furniture Hearth products General corporate Capital expenditures — net: Ofﬁce furniture Hearth products General corporate 1998 1997 1996 $1,451,328 245,105 $1,696,433 $1,158,228 204,485 $1,362,713 $887,299 110,836 $998,135 $(cid:214)˙165,314 31,478 196,792 $(cid:214)˙139,710 24,817 164,527 $106,824 14,155 120,979 (26,683) $(cid:214)˙170,109 (25,399) $(cid:214)˙139,128 (15,712) $105,267 $(cid:214)˙660,626 154,817 49,026 $(cid:214)˙864,469 $(cid:214)˙551,120 128,361 75,192 $(cid:214)˙754,673 $330,575 122,037 60,902 $513,514 $(cid:214)(cid:214)˙42,562 9,120 1,317 $(cid:214)(cid:214)˙52,999 $(cid:214)(cid:214)˙27,633 6,590 1,387 $(cid:214)(cid:214)˙35,610 $(cid:214)˙128,482 18,162 3,073 $(cid:214)˙149,717 $(cid:214)(cid:214)˙73,659 13,055 (1,223) $(cid:214)(cid:214)˙85,491 $(cid:214)21,140 2,813 1,299 $(cid:214)25,252 $(cid:214)41,186 4,060 (562) $(cid:214)44,684 One ofﬁce furniture customer accounted for approximately 12% of consolidated net sales in 1998, 1997, and 1996. Summary of Unaudited Quarterly Results of Operations The following table presents certain unaudited quarterly ﬁnancial information for each of the past twelve quarters. In the opinion of the Company’s management, this information has been prepared on the same basis as the consolidated ﬁnancial statements appearing elsewhere in this report and includes all adjustments (consisting only of normal recurring accruals) necessary to present fairly the ﬁnan- cial results set forth herein. Results of operations for any previous quarter are not necessarily indicative of results for any future period. (In thousands, except per share data) Year-End 1998: (a) Net sales Cost of products sold Gross profit Selling and administrative expenses Operating income Interest income (expense) — net Income before income taxes Income taxes Net income Net income per common share Weighted-average common shares outstanding As a Percentage of Net Sales Net sales Gross profit Selling and administrative expenses Operating income Income taxes Net income Year-End 1997: (b) Net sales Cost of products sold Gross profit Selling and administrative expenses Operating income Interest income (expense) — net Income before income taxes Income taxes Net income Net income per common share Weighted-average common shares outstanding As a Percentage of Net Sales Net sales Gross profit Selling and administrative expenses Operating income Income taxes Net income First Quarter $418,263 291,571 126,692 88,563 38,129 (2,172) 35,957 13,484 $(cid:214)22,473 $(cid:214)(cid:214)(cid:214)(cid:214).36 61,648 100.0% 30.3 21.2 9.1 3.2 5.4 $282,859 194,194 88,665 60,453 28,212 (1,142) 27,070 10,152 $(cid:214)16,918 $(cid:214)(cid:214)(cid:214)(cid:214).28 59,400 100.0% 31.3 21.4 10.0 3.6 6.0 Second Quarter $401,417 278,107 123,310 83,213 40,097 (2,691) 37,406 14,027 $(cid:214)23,379 $(cid:214)(cid:214)(cid:214)(cid:214).38 61,663 100.0% 30.7 20.7 10.0 3.5 5.8 $296,567 200,969 95,598 64,303 31,295 (1,141) 30,154 11,307 $(cid:214)18,847 $(cid:214)(cid:214)(cid:214)(cid:214).32 59,384 100.0% 32.2 21.7 10.6 3.8 6.4 Third Quarter $448,679 309,080 139,599 88,162 51,437 (2,025) 49,412 18,530 $(cid:214)30,882 $(cid:214)(cid:214)(cid:214)(cid:214).50 61,691 100.0% 31.1 19.6 11.5 4.1 6.9 $391,348 268,147 123,201 80,641 42,560 (2,209) 40,351 15,132 $(cid:214)25,219 $(cid:214)(cid:214)(cid:214)(cid:214).43 59,356 100.0% 31.5 20.6 10.9 3.9 6.4 Fourth Quarter $428,074 294,239 133,835 84,321 49,514 (2,180) 47,334 17,755 $(cid:214)29,579 $(cid:214)(cid:214)(cid:214)(cid:214).48 61,596 100.0% 31.3 19.7 11.6 4.1 6.9 $391,939 269,847 122,092 79,000 43,092 (1,539) 41,553 15,582 $(cid:214)25,971 $(cid:214)(cid:214)(cid:214)(cid:214).42 61,011 100.0% 31.2 20.2 11.0 4.0 6.6 (In thousands, except per share data) Year-End 1996: (c) Net sales Cost of products sold Gross profit Selling and administrative expenses Gain on sale of subsidiary Operating income Interest income (expense) — net Income before income taxes Income taxes Net income Net income per common share Weighted-average common shares outstanding As a Percentage of Net Sales Net sales Gross profit Selling and administrative expenses Operating income Income taxes Net income First Quarter $233,477 160,006 73,471 49,846 3,200 26,825 (119) 26,706 9,881 $(cid:214)16,825 $(cid:214)(cid:214)(cid:214)(cid:214).28 60,690 100.0% 31.5 21.3 11.5 4.2 7.2 Second Quarter $219,260 150,227 69,033 49,507 (cid:209) 19,526 (8) 19,518 7,222 $(cid:214)12,296 $(cid:214)(cid:214)(cid:214)(cid:214).20 60,340 100.0% 31.5 22.6 8.9 3.3 5.6 Third Quarter $255,254 176,403 78,851 53,605 (cid:209) 25,246 91 25,337 7,430 $(cid:214)17,907 $(cid:214)(cid:214)(cid:214)(cid:214).30 60,126 100.0% 30.9 21.0 9.9 2.9 7.0 Fourth Quarter $290,144 192,860 97,284 62,688 (cid:209) 34,596 (890) 33,706 12,640 $(cid:214)21,066 $(cid:214)(cid:214)(cid:214)(cid:214).35 59,758 100.0% 33.5 21.6 11.9 4.4 7.3 (a)First quarter 1998 includes partial quarterly results of operation of Aladdin Steel Products, Inc. acquisition acquired February 20, 1998. (b)Third quarter 1997 represents 14 weeks of business activity compared to 13 weeks for the same quarter in 1996 and 1995. In addition, the quarter includes the ﬁrst quarterly results of the Allsteel Inc. acquisition acquired June 17, 1997. Fiscal year 1997 similarly represents 53 weeks compared to 52 weeks in 1998 and 1996. Fourth quarter includes partial quarterly results of operation of two acquisitions: Bevis Custom Furniture, Inc., acquired November 13, 1997, and Panel Concepts, Inc., acquired December 1, 1997. (c) First quarter 1996 includes $3,200,000 pre-tax gain on the sale of Ring King Visibles, Inc. (after-tax gain of $2,000,000, or $0.03 per share). Third quarter includes one-time federal and state income tax credits of $2,100,000, or $0.04 per share. Fourth quarter includes the results of operation of Heat-N-Glo Fireplace Products, Inc., acquired October 2, 1996. Subsequent Events On February 11, 1999, the Company announced a cost savings initiative to increase long-term proﬁtability. It will close three ofﬁce fur- niture manufacturing operations and consolidate substantially all production into other U.S. manufacturing operations that have created capacity primarily through ongoing rapid continuous improvement initiatives. The operations will close following an orderly transition of production to other facilities which is expected to be completed during the second and third quarters of 1999. A charge to pre-tax earnings of approximately $19.7 million, or $0.20 per diluted share, will be taken in the ﬁrst quarter of 1999 in connection with this consolidation. Common Stock Market Prices and Dividends (Unaudited) Quarterly 1998 — 1997 Common Stock Market Price and Price/Earnings Ratio (Unaudited) Fiscal Years 1998 — 1988 1998 by Quarter 1st 2nd 3rd 4th Total Dividends Paid 1997 by Quarter 1st 2nd 3rd 4th Total Dividends Paid High $373⁄16 36qs(cid:214) 32uk(cid:214) 28qf(cid:214) High $21qs 27qk 32qk 31(cid:214)˙ Low $27ef 26qf 21qs 20(cid:214)˙ Low $15uk(cid:214)˙ 17qs(cid:214)˙ 22qk(cid:214)˙ 2313⁄16 Dividends per Share $.08 .08 .08 .08 $.32 Dividends per Share $.07 .07 .07 .07 $.28 Year 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 Market Price* High 373⁄16 32qk(cid:214) 21ek(cid:214) 15tk(cid:214) 17(cid:214)(cid:214)˙ 14tk(cid:214) 11ef(cid:214) 10qf(cid:214) 11qs(cid:214) 95⁄16 5qk(cid:214) Low 20(cid:214)(cid:214)(cid:214) 15uk(cid:214)˙ 9qf(cid:214)˙ 11qs(cid:214)˙ 12(cid:214)(cid:214)(cid:214) 10ef(cid:214)˙ 8qf(cid:214)˙ 6tk(cid:214)˙ 6ef(cid:214)˙ 4ek(cid:214)˙ 315⁄16 Eleven-Year Average *Adjusted for the effect of stock splits Earnings per Share* 1.72 1.45 1.13 .67 .87 .70 .59 .51 .65 .39 .47 Price/Earnings Ratio High 22 22 19 23 20 21 20 20 18 25 11 20 Low 12 11 8 17 14 15 14 13 10 11 8 12 thank you to our nearly 10,000 member-owners who with their strong commitment to excellence made 1998 another outstanding year. Board of Directors robert w. cox Chairman Emeritus Baker & McKenzie w august hillenbrand President and CEO Hillenbrand Industries, Inc. stanley m. howe Chairman Emeritus hon industries inc. robert l. katz President Robert L. Katz and Associates jack d. michaels Chairman, President and CEO hon industries inc. celeste c. michalski Adviser/Consultant Officers HON INDUSTRIES Inc. jack d. michaels Chairman, President and CEO jeffrey d. fick Vice President, Member and Community Relations james i. johnson Vice President, General Counsel and Secretary melvin l. mcmains Vice President and Controller thomas k. miller Vice President, Marketing and International moe s. nozari Group Vice President, Consumer and Ofﬁce Markets Group 3M frank s. ptak Vice Chairman Illinois Tool Works Inc. richard h. stanley Vice Chairman hon industries inc. Chairman, SC Companies, Inc. Chairman, Stanley Consultants, Inc. brian e. stern President, Xerox Technology Enterprises Xerox Corporation lorne r. waxlax Retired Executive Vice President The Gillette Company william f. snydacker Treasurer david w. strohl Vice President, Technical Development david c. stuebe Vice President and CFO Division The HON Company george j. koenigsaecker iii President Subsidiaries BPI Inc. jean m. reynolds President Committees of the Board audit Celeste C. Michalski, Chairperson Robert L. Katz Frank S. Ptak Brian E. Stern human resources and compensation Lorne R. Waxlax, Chairperson W August Hillenbrand Richard H. Stanley public policy and corporate governance Robert W. Cox, Chairperson Stanley M. Howe Moe S. Nozari special thanks to our retiring directors W. James Farrell Lee Liu Michael S. Plunkett Herman J. Schmidt The Gunlocke Company john m. stevens President Hearth Technologies Inc. daniel c. shimek President bradley d. determan President, Heat-N-Glo Division david b. cribb President, Heatilator Division alan j. trusler President, Aladdin Hearth Products Division Holga Inc. brian r. oken President HON INDUSTRIES INC. AND SUBSIDIARIES Investor Information Schedule of Quarterly Results The Company operates on a ﬁscal year ending on the Saturday nearest December 31. Quarterly results are typi- cally announced within 20 days after the end of each quarter, and audited results are typically announced within 40 days after year-end. Fiscal 1999 Quarter-End Dates First Quarter >Saturday, April 3 Second Quarter >Saturday, July 3 Third Quarter >Saturday, October 2 Fourth Quarter >Saturday, January 1, 2000 Annual Meeting The Company’s annual shareholders’ meeting will be held at 10:30 a.m. on Tuesday, May 11, 1999, at the Holiday Inn, Highways 61 & 38 North, Muscatine, Iowa. Shareholders and other interested investors are encouraged to attend the meeting. 10-K Report A copy of the Company’s annual report ﬁled with the Securities and Exchange Commission on Form 10-k is available, without charge, upon written request to David C. Stuebe, Vice President and CFO, at the Company’s corporate headquarters address. Corporate Headquarters hon industries Inc. 414 East Third Street P.O. Box 1109 Muscatine, IA 52761-0071 Telephone: 319-264-7400 Fax: 319-264-7217 Website: www.honi.com Independent Public Accountants Arthur Andersen LLP 33 West Monroe Street Chicago, IL 60603-5385 Transfer Agent Shareholders may report a change of address or make inquiries by writing or calling: Financial Information and Inquiries Shareholders or other interested investors are welcome to call or write with questions or requests for additional information. Inquiries should be directed to: Harris Trust and Savings Bank P. O. Box A3504 Chicago, IL 60690-3504 Telephone: 312-360-5346 David C. Stuebe, Vice President and CFO or Elizabeth P. Coronelli, Investor Relations Manager hon industries Inc. P. O. Box 1109 Muscatine, IA 52761-0071 Telephone: 319-264-7400 Fax: 319-264-7655 Year 2000 Readiness Disclosure The Company maintains an electronic copy of its latest Year 2000 Readiness Disclosure at its website location at www.honi.com or a paper copy is available, without charge, upon written request to David C. Stuebe, Vice President and CFO, at the Company’s corporate head- quarters address. Common Stock hon industries common stock trades on the New York Stock Exchange under the symbol: HNI. Stock price quotations can be found in major daily newspapers and The Wall Street Journal. Safe Harbor Statement Statements in this annual report that are not strictly historical, including statements as to plans, objectives, and future ﬁnancial performance, are “forward-looking” state- ments that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward- looking statements involve known and unknown risks, which may cause the Company’s actual results in the future to differ materially from expected results. These risks include, among others, com- petition within the office furniture and fireplace industries; the relationship between supply and demand for value- priced ofﬁce products, as well as direct vent gas and wood ﬁreplaces; the effects of economic conditions; issues associated with the acquisition and integration of acquisitions; operating risks; the ability of the Company to realize cost savings and productivity improvements; the ability of the Company’s distributors to success- fully market and sell the Company’s products; and the availability of capital to ﬁnance planned growth, as well as the risks, uncertainties, and other factors described from time to time in the Company’s filings with the Securities and Exchange Commission. Corporate Overview TM ® o g a c i h C , y a d a M m o T : y h p a r g o t o h p o g a c i h C , l l e c w o D M + y e n g a C : n g i s e d >hon industries is the third largest ofﬁce furniture manufacturer in North American sales, with the number one position in the value-priced segment of the market, and the nation’s leading manufacturer of gas- and wood-burning ﬁreplaces. >The hon Company is America’s leader in value-priced ofﬁce furniture. The company offers a complete line of ofﬁce furnishings, including panel systems, seating, desks, tables, and ﬁles, under the brands hon ®, Allsteel®, and Bevis®. >BPI specializes in panel systems products and services, a market that represents approximately 35 percent of the total ofﬁce furniture industry. BPI and Panel Concepts brand products offer a full range of features and price points. >The Gunlocke Company handcrafts high- quality, natural wood ofﬁce furniture. It offers executive case goods and a wide range of seating, lounge furniture, and conference tables as well as custom products built to designer speciﬁcations. >Holga manufactures high-density stor- age, shelving, and mobile ﬁling systems, as well as steel case goods. Sales are made to end users through a network of com- mercial and high-density storage dealers. >Hearth Technologies is the leader in gas- and wood-burning ﬁreplaces and participates in the electric ﬁreplace, stove, and gas log markets. Its Heat-N-Glo, Heatilator, and Aladdin Hearth Products divisions serve the residential construction and home improvement markets. >The hon industries International Group markets hon industries’ products on a worldwide basis. Selected 1998 New Product Introductions and Redesigns The HON Company Concensys®, Terrace® Plus, and Inter|change® Systems Furniture; TrooperTM, TiempoTM, and TalbotTM Seating; Steel Desk Series; ExpectationsTM Commercial Computer Furniture BPI ParallelTM Cantilevered Systems Furniture, TL2TM Floor to Ceiling Systems Furniture, BPI® Lateral Files, and BPI® Conference Tables The Gunlocke Company PrismTM Systems Furniture, HarlowTM and CredentialsTM Seating, and additional product offerings in MosaicTM and MedleyTM Executive Wood Case Goods Holga OptiStorTM Rotating Cabinet, FourFlex® Shelving System, and SmartSpaceTM Filing System Hearth Technologies Heat-N-Glo 7000 Series Upper-end Direct Vent Gas Fireplaces, CFX-36T Top Vent Gas Fireplaces (ceramic ﬁber), CFX-ZC Direct Vent Gas Inserts (ceramic ﬁber), 32E-XL Electric Fireplaces, SlimLineTM Builder Series Gas Fireplaces, and Patio CampﬁreTM Gas Log Set Heatilator AcceleratorTM Series Wood Fireplaces, CaliberTM Classic Direct Vent Gas Fireplaces, Simplicity Gas Fireplaces, Night FireTM Outdoor Gas Fueled Campﬁre, X Burn Upgrade for Novus Heaters, and Electric Series Fireplaces Aladdin Hearth Products Arrow® DVI25 and DVI35 Gas Inserts, Dovre® DV450 Gas Stove, and Quadra-Fire® DV40 Step Top Gas Stove

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