HNI Corporation Annual Report 1998

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FY1998 Annual Report · HNI Corporation

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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

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)

6
9
6

1
$

2
6
3

1
$

8
9
9
$

3
9
8
$

6
4
8
$

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

5,877

9,824*

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

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

10.1

3.8

6.3%

1997
100.0%

68.5

31.5

20.9

(cid:209)

10.6

10.2

3.8

6.4%

1996
100.0%

68.1

31.9

21.6

0.3

10.6

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)

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

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)

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

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

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)

27,200

95,000

80,000

(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

(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)

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)

24.74

32.50

(cid:209)

25.62

Number of
Shares

(cid:209)

156,000

(cid:209)

156,000

20,000

(cid:209)

176,000

(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

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)

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

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>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