HNI
Annual Report 2001

Plain-text annual report

H O N I N D U S T R I E S Protecting your interests, building your investment. 2 0 0 1 A N N U A L R E P O R T TA B L E O F C O N T E N T S 1 Letter to Shareholders 2 Financial Highlights 5 Q&A with Jack Michaels 6 Editorial 20 At a Glance 22 Management’s Discussion and Analysis 26 Consolidated Financial Statements and Notes 40 Eleven-Year Summary 42 Auditors’ Report 43 Corporate Responsibility 44 Board of Directors and Officers IBC Investor Information Dear Shareholders: There’s no doubt about it, these are challenging times to be in business. Nearly every annual report you will read for the past year will speak of an economy that affected results – drove decreased sales, intensified competition, and pressured margins. Our business was no exception. By nearly every measure, the office furniture industry experienced unprecedented decline in 2001. But we are confident we are doing the right things to manage the impact the downturn has on your investment. We’re controlling costs, simplifying our business, and generating cash while maintaining a strong emphasis on developing new products and bolstering industry-leading quality and customer service. Our focus is as simple as it is intense: protecting your short- term interests during the downturn while we position ourselves to deliver maximum long-term shareholder value. Along these lines, we believe we have some encouraging news to report for the year 2001. H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 1 F I N A N C I A L H I G H L I G H T S Amounts in thousands, except for per share data 2001 2000 Change Income Statement Data Net sales Gross profit Selling and administrative expenses Provision for closing facilities and reorganization 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. $1,792,438 611,298 464,206 24,000 123,092 74,407 4.2% 12.8% $«««««««««1.26 10.10 .48 $«««319,657 961,891 230,443 1.39 $«««««80,830 12.0% $«««592,680 583,011 89,214 $«««««36,851 227,800 59,087,963 22 6,694 9,029* $2,046,286 665,882 487,848 – 178,034 106,217 5.2% 19.8% $«««««««««1.77 9.59 .44 $«««330,141 1,022,470 264,868 1.25 $«««128,285 18.3% $«««573,342 537,307 65,273 $«««««59,840 204,920 60,140,302 14 6,563 11,543* (12.4) (8.2) (4.8) (30.9) (29.9) % % % % % % (28.8) (5.2) % 9.1 % (3.2) (5.9) (13.0) (37.0) % % % % 3.4 % 8.5 % 36.7 % (38.4) % 11.2 % % (1.7) 2.0 % % (21.8) 3 6 3 1 , 7 0 7 1 , 1 0 8 1 , 6 4 0 2 , 2 9 7 1 , 7 8 6 0 1 7 8 6 0 1 4 7 4 . 7 2 2 . 5 2 1 . 8 1 8 . 9 1 8 . 2 1 5 4 1 . 2 7 1 . 4 4 1 . 7 7 1 . 6 2 1 . 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 Net Sales Millions of Dollars Net Income Millions of Dollars Return On Average Shareholders’ Equity Percent 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 Earnings Per Share Dollars 2 H O N I N D U S T R I E S I n c . a n d S U B S I D I A R I E S With the economy driving a historic downturn in 2001, it was a tough year for the office furniture industry. After the tragic events of September 11, orders and bid activity fell even further. Overall, office furniture industry sales fell by 17.4 percent for the year, an unprecedented decline. The hearth products industry remained at historically high levels, but did experience a slight contraction. Many of HON INDUSTRIES’ results reflected industry decline. Sales were $1.8 billion, down 12 percent compared with the record sales we posted in 2000. Net income was down as well, decreasing 15 percent year- over-year to $89.8 million prior to an after-tax restructuring charge of $15.4 million. Earnings per share for the company, before the charge of $.26, were $1.52 in 2001; for comparison, we achieved EPS of $1.77 in 2000. O P E R AT I O N A L E X C E L L E N C E L E S S E N E D T H E I M PAC T O F T H E D OW N T U R N . The news, however, was not all bad. Our net income as a percent of sales reached 5.0 percent prior to the restructuring charge. Our gross profit was up 1.6 percentage points compared with 2000. Our gross profit margins remained strong, setting a record in the third quarter and ending the year at 34.1 percent. Our cash flow was excellent, which is all-important during difficult economic times. Your company’s balance sheet is solid. As the office furniture industry struggled throughout 2001, we were able to protect your interests by continuing to improve our operations and adjusting our cost structure to keep profitability in line. We closed four manufacturing facilities, which drove dramatic productivity improvements in our remaining operations – over the past three years, we’ve eliminated eight plants, reducing total floor space by 12 percent. We made the difficult decision to reduce our workforce by 2,500 in 2001, a reflection of continued business simplification efforts and efficiency improvements combined with the decline in customer orders. In short, even though the economic outlook remains unclear, HON INDUSTRIES is in an excellent position to ride it out. W E R E M A I N F O C U S E D O N B U I L D I N G YO U R I N V E S T M E N T. I believe we are doing all the right things to build the long-term value of your investment in HON INDUSTRIES. While we continue to identify ways to improve our operations, we have intensified our focus on driving growth by aggressively building our market-leading brands and developing exciting new products across the entire business. Jack D. Michaels Chairman, President and CEO Your company is also benefiting from the decision a little more than two years ago to sharpen our focus by splitting our largest office furniture operating company into The HON Company and Allsteel Inc. The move has allowed each unit to concentrate its efforts on the unique needs of its respective market – The HON Company on business and individual consumers through commercial and retail channels; Allsteel on designers and project managers through the contract channel. Further, we created a separate Wood Products Group to focus on enhanced profitability. During 2001, each met our performance expectations in a challenging marketplace. Meanwhile, our Hearth Technologies business continued to build upon its market leadership in 2001 with top brands and a steady stream of innovative, award-winning new products. Hearth Technologies delivered solid results for the year, driven in part by its growing position in the new construction market. Our Alliance Partner Program, in which we work in close concert with independent distributors in select markets, was another important contributor to our success during the year. O U R P E O P L E A R E O U R S T R E N G T H . In my view, people are the key factor in our success. I have always felt that a big part of my role as the leader of this company is to make sure we have talented people at all levels and set direction. They will drive our success. We added such a person in Peter R. Atherton, our new Chief Technology Officer, who came to us from General Electric in June 2001. His mandate is to help us increase shareholder value by rapidly introduc- ing innovation into our products and processes. Longer term, we seek either technology- or product-related breakthroughs to enable HON INDUSTRIES to play a leadership role in the workplace of the future. We are managing well through these challenging times. I want to thank our members for their perfor- mance – for their efforts to fulfill our customers’ needs, their ongoing dedication to help us contain costs, and more importantly, their teamwork, because no one does it alone. I hope you will agree that HON INDUSTRIES is an excellent investment. We have proven we can perform during a downturn – I look forward to proving what we can do when the economy improves. 4 H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T Jack D. Michaels Chairman, President and CEO Q: A: Q: A: Q: A: Is HON INDUSTRIES in good businesses for the future? Jack Michaels: I look at the fundamentals. Are they still there? I believe so. Corporate profitability will come back. When there are workforce reductions in the service sector, people tend to stay in the service sector. They end up in other offices. Other factors – new office construction, furniture replacement, consumer confidence – I believe these things will return. There isn’t anything fundamental that’s changed. On the hearth side, the number of existing homes that don’t have second fireplaces or gas fireplaces is still signi- ficant and housing starts are strong. The long-term indicators are still there. How do you plan to grow? Jack Michaels: By concentrating on the “front wheel” of our business. If you imagine our business as a bicycle, with the “back wheel” being operations and the front wheel being marketing, we are acknowledged to have one of the strongest back wheels in the industry. We now are concentrating on who the end-users of our products are and what they want, and on how we go to market – what we call the front wheel. We’ve intensified our focus on end-user and distribution partner needs; on applying new technologies; on rapid development and introduction of new products – all while driving for ongoing operational improve- ment. Splitting The HON Company and Allsteel into two units is proving to be a tremendous enabling strategy to strengthen the front wheel with its stronger market focus. On other fronts, we are always alert for strategic acquisition opportunities, and we continue to actively explore ways to expand our success to select international markets. What are your goals for the next year? Jack Michaels: I’ve outlined four goals for HON INDUSTRIES in 2002. The first I have already touched upon. It is to develop the front wheel: Focus more on the end-user. Improve our relationships with our distributors. Achieve significant improvement in customer satisfaction. Leverage our strengths to gain market share. My second goal is to continue to build the leadership skills of our senior management team. This is a clear imperative to ensure the long-term performance of the company. The third is to increase our organizational orientation toward innovation. We hired our first-ever Chief Technology Officer to, among other things, help determine and develop products for the end-user that deliver value. The fourth goal is to continue our focus on being the leading lean enterprise in our industries. It’s a never-ending process of improvement. We can always get better. Q u e s t i o n & A n s w e r H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 5 HON INDUSTRIES is a leader in two principal businesses, office furniture and hearth products. In our Hearth Products business, we combine leading brands with product innovation and market focus to be the first choice of consumers and contractors alike. Our office furniture business is divided into two distinct areas of market focus – The HON Company, our largest operating unit, concentrates on the retail and commercial channels; at Allsteel and Gunlocke, the focus is on contract customers. This approach allows us to focus products, processes, and strategies on the unique needs and decision- drivers of each market. All in all, end-users across our many markets are not so differ- ent. In each, they demand high-quality products at a reasonable price, delivered reliably every time. Compromise is unacceptable. This is why the companies of HON INDUSTRIES excel. HON IND 6 H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T USTRIES H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 7 Office Furniture 8 H O N I N D U S T R I E S 2 0 0 1 A N N U A L R E P O R T Value is an overused word. Everyone says they deliver value – to the point that it’s sometimes difficult to know what it means anymore. But our customers know what it means: Real value is determined more by quality than by price. They want lower price, but they expect high quality. High quality means the products are well made. Attractive. Functional and durable. We have built our reputation by delivering high quality – in our products, our service, and our people, time after time. HON® Initiate™ HON’s Initiate panel system delivers the best in looks and functionality. Designed for ease of configuration and setup, Initiate makes defining a beautiful space truly a stress-free experience. H O N I N D U S T R I E S 2 0 0 1 A N N U A L R E P O R T 9 The HON Company New Product Introductions 4 1 0 1 5 2 Improve workplace performance. Boiled down to three words, this is The HON Company’s mission. Achieving it requires product design that is as functional as it is durable, that is simple, elegant, and beautiful. To achieve it, we are focused more than at any time in our history on understanding the needs of our products’ end-users. Despite a soft economy in 2001, The HON Company successfully introduced a record number of new products, including the Initiate ™ panel system, 9 9 9 1 0 0 0 2 1 0 0 2 designed to be the easiest to specify and install in the industry. The launch of the Initiate line was an unquali- fied success, with sales of the new system during the year exceeding our expectations even in a down market. Other successful HON Company product launches included Instinct™task seating, Provisions™ mobile tables, Efficiencies™ filing systems, and Gamut™ managerial seating, among many others. During 2001 HON INDUSTRIES introduced a record number of new product series while reaching all-time highs in complete-and-on-time delivery and record lows in customer complaints. 10 H O N I N D U S T R I E S 2 0 0 1 A N N U A L R E P O R T Going forward, our focus is on under- standing end-user customers and finding better ways to serve them– and on improving faster than the competition. The HON Company expanded and completed its line of laminated wood case goods. It also plans to launch the Park Avenue™ veneer line in 2002 – an exciting new veneer line from the Wood Products Group. At the same time, it focused on improving productivity, closing one of its seating plants, and absorbing production at other manufacturing facilities without the addition of incremental manpower. It was a challenging year, and we met the challenge. Members responded well, relentlessly pursuing new ways to improve operational performance and satisfy customers. The number of suggestions submitted to our Member Proposal System, a formal program for enabling our members to participate in improving company performance, was up in 2001. Increased partic- ipation is significant – when we get several thousand people working on continuous improvement, there’s no holding us back. HON INDUSTRIES Inc. Recordable Accident Rates Per 100 Workers 2 6 . 5 3 7 . 4 9 5 . 3 9 9 9 1 0 0 0 2 1 0 0 2 (Record) H O N I N D U S T R I E S 2 0 0 1 A N N U A L R E P O R T 11 Whether the customer is an individual, a small company, or large corporation; a designer, retailer, or wholesaler, top performance for the best price has never been more important. This is our focus at HON INDUSTRIES. 12 H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T The contract market is driven by projects. And projects involve a variety of decision-makers and influencers, each with different needs and concerns. Architects and designers want to make a statement that uniquely and accurately reflects their client’s image; project managers demand flawless attention to detail when details can number in the thousands. The result is a longer, more complex, more consultative selling process. What makes us successful? Solutions. Modern, Purposeful Design™ – beauty and style that help business work, combined with a performance/price equation that is second to none in the industry. Allsteel® Marbles® The flexible office is taking shape with Marbles. With distinctive styling and easy-to-configure solutions, Marbles gives people the freedom to work where they want, how they want – and where they’re most productive. H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 13 When we say it, we do it. Reliability is an important part of a complex equation in which customers demand high style, delivered on time and right the first time. Allsteel®, our leading brand in the performance contract market, is focused on giving customers smarter choices. This reflects a shift in emphasis to the end-user that is similar to what is occurring all over the organization – a focus on understanding and taking care of our customers. For Allsteel, 2001 was a year of mastering the basics – in a tough economic climate, working to enhance customer service and support, reduce lead times, and improve delivery performance – while redefining Allsteel Complete-on-Time Shipments Percentage 2 8 8 9 9 9 our product direction to better meet the unique needs of the contract market. To sharpen our market focus, we split the organization into four primary units: the Terrace® line of panel systems, Consensys® panel systems, Integrated Storage, and Seating. We sharpened our overall operating model during the year as well, achieving an industry-best 99 percent complete-and-on- time performance. We began to market this performance with a guarantee: On Consensys® products, Allsteel will make its promised delivery within two hours or it will pay for installation. Meanwhile, we nearly doubled our product development budget 1999 2000 2001 with an emphasis on end-user solutions – creating more features and increased functionality with more-exciting design and aesthetics. 14 H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T HON INDUSTRIES Inc. Gross Margin Percentage 3 . 1 3 9 9 9 1 5 . 2 3 0 0 0 2 1 . 4 3 1 0 0 2 Gunlocke Complete-on-Time Shipments Percentage 9 5 2 7 7 9 The investment in performance is paying off. We’re being specified by designers at a rapidly increasing rate, and winning business from some of America’s largest and most recognized corpo- rations. Local, state, and federal institutions are standardizing on Allsteel products. Most recently the State of California chose Allsteel® panel systems as its statewide standard. On another front, Gunlocke benefited from focusing on getting its cost structure under better control while winning a number of major industry design awards for its new products. As Gunlocke approached its 100th anniversary in 2002, it reached a new level of operational excellence – with improved lead time and complete-and-on-time performance. It now can build to order in 9 9 9 1 0 0 0 2 1 0 0 2 as timely a fashion as the competition builds to stock. We are getting our story out, building stronger brand awareness within our important markets – architects and designers, dealers, and end-users. H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 15 Hearth Products 16 H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T How do we drive growth when we already have the leading brands in the hearth products market? Two important ways, to echo a familiar theme in this annual report, are through innovation and an increasing focus on our customers. We’re building on our leadership with a continuous stream of award-winning products. We’re working to learn more about our end-users and enhancing our ability to reach them. And we’re expanding our view of how we can serve customers and end-users in the future. Heatilator® I100 For more than 75 years, Heatilator has been the “first name in fireplaces.” In 2002 we’re bringing the warmth home with the industry’s largest wood-burning fireplace, the I100, shown here with our red oak mission-style surround. H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 17 Hearth Products Operating Income ($1000) 8 7 4 , 1 3 8 8 5 , 4 3 2 3 2 , 0 3 2 8 2 , 9 3 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 For HON INDUSTRIES’ Hearth Technologies business, 2001 was a year of building our brands and preparing for long-term growth – with gratifying results. Product leadership always has been critical to our success. We work very hard to be an innovative company and to drive that innovation into everything we make and market. Our efforts along these lines were rewarded with substantial industry recognition in 2001. Our products won four of 15 awards at the Hearth, Patio and Barbeque Association industry trade show, including Best New Gas Fireplace and Product of the Year. Our brands performed well in 2001, led by Heatilator®, Heat-N-Glo®, and Quadra-Fire™. The retail side of our business posted a very strong year, and we continued to gain customers in the new con- struction market. In fact, Heatilator – which will celebrate its 75th year in 2002 – and Heat-N-Glo were the number-one and number-two brands, respectively, in a study of building industry brand usage and awareness conducted by Professional Builder magazine. And during the year, we saw high U.S. energy costs contribute to excellent results in our wood and pellet stove business. Heatilator ® and Heat-N-Glo® are the number- one and number-two brands in the building industry as measured in a study conducted by Professional Builder magazine. 18 H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T Our horizon is expanding from hearth to home – including technology for improved indoor air quality and innovative new products for outdoor living. Hearth Products Net Sales Growth ($1000) 0 6 9 , 5 4 2 0 4 9 , 5 8 2 * 9 4 3 , 6 9 3 6 2 1 , 6 2 4 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 * Includes acquisition of Hearth Services Hearth Technologies’ 2001 results began to reflect the success of our Customer Alliance Program, a long-term strategy in which we identify the top U.S. markets and form alliances with indepen- dent distributors to better serve those markets. We share best practices from our distribution business with alliance partners, working closely with them to identify and aggressively pursue growth opportunities in local markets. To improve our prospects for growth in the long term, we’re pursuing ways to expand our horizon. Increasingly, we’re creating and marketing hearth systems – going beyond the fireplace with related products such as facings, fans, remote controls, and more. We’re also moving into entirely new product categories, developing technology to enhance indoor air quality, and a new line of outdoor lifestyle products. 2001 Brand Awareness Professional Builder Magazine Percentage 2 . 1 8 2 . 4 7 6 . 8 6 6 . 8 4 2 . 9 2 1 . 7 2 6 . 4 2 8 . 1 2 c i t s e a M j r o i r e p u S t n o m r e V s g n i t s a C n i t r a M o c r a M o c m e T r o t a l i t a e H l o G N - - t a e H H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 19 HON INDUSTRIES At A Glance ® ® ® ® ® ® ™ The HON Company is America’s leader in middle-market office furniture. The company manufactures and markets a complete line of workplace solutions that include systems, seating, desks, storage files, and tables. Allsteel Inc. is one of the best-recognized brands in the office furniture industry. It is a leader in the design, manufacture, and marketing of office panel systems, desks, steel storage products, and office seating for the contract market. The Gunlocke Company handcrafts high-quality, natural wood office furniture that includes executive case goods, a wide range of seating, lounge furniture, and conference tables. ® Panel Concepts, Inc. is a leader in developing breakthrough solutions for office environments. Panel Concepts owns patents for a mounting system that allows flat-panel monitors to be placed directly into the panel system. Panel Concepts also holds patents on its camlock attachment system that allows for the rapid assembly and reconfiguration of offices. BPI Inc. specializes in office environments that are easy to specify, install, and reconfigure. It offers the industry’s broadest quick-ship program. BPI’s entire product line is available for shipment in five days or less. Holga Inc. supplies a broad line of filing and storage products ranging from space-efficient high-density shelving, storage, and mobile systems to traditional lateral and vertical filing options. The company offers five-day lead times on its entire product offering, as well as many other premium service and delivery benefits. HON International Inc. markets HON INDUSTRIES’ furniture products outside of the United States and Canada. Heatilator is the most-recognized name in the fireplace industry. It is a state-of-the-art manufacturer of a full line of gas- and wood-burning fireplaces, inserts, and fireplace accessories, and celebrates its 75th year of bringing the warmth home this year. ® Heat-N-Glo invented today’s fireplace technology (direct-vent gas fireplaces) and is the industry’s largest manufacturer of gas fireplace products. It focuses on innovative technology and unique designs inspiring consumers to create the hearth of their dreams. Aladdin Hearth Products manufactures and markets the most complete line of high-efficiency gas-, wood-, pellet-, and oil-burning hearth products available. It pursues the innovative “perfect fire” through its premium Quadra-Fire™ brand. Hearth Services is the largest distributor of fireplaces in the hearth industry. The company sells, installs, and services a broad range of gas- and wood-burning fireplaces and fireplace mantels, surrounds, facings, and other building material products. With a strong focus on customer service, Hearth Services helps consumers and builders achieve the feeling they want in the home. E R U T I N R U F E C I F F O S T C U D O R P H T R A E H 20 H O N I N D U S T R I E S I n c . a n d S U B S I D I A R I E S New HON® Products: In 2001 Initiate™ panel systems; expanded 10500 and 10700 series laminate case goods; Efficiencies™ track filing and storage; Provisions™ mobility tables; Flagship™ lateral and pedestal files; Director™ LAN furniture; Pagoda™ and Gamut™ seating expansion; Mobius® and Instinct™ task seating; Invitation™ guest seating; Park Avenue™ collection. The HON Company 200 Oak Street Muscatine, Iowa 52761 563.264.7100 hon.com New Allsteel® Products: In 2001 Pendulum ™ seating; Persona ™ collection of storage products; Extensions ™ line of accessories; Synchrony™ line of wood case goods; additions to Marbles® mobility line. Enhancements to Concensys® panel systems including stacking and technology panels; enhancements to Terrace® panel systems including radius trim, veneer trim, work surfaces, and tiles. Allsteel Inc. 2210 Second Avenue Muscatine, Iowa 52761 563.262.4800 allsteeloffice.com New Gunlocke® Products: In 2001 Volo™ executive seating series; Cali™ executive seating series; Meet and Greet lounge seating series; Shuttle™ collection; Surfaces table collection; new exotic veneers; additions to our Mosaic® collection. The Gunlocke Company One Gunlocke Drive Wayland, New York 14572 800.828.6300 gunlocke.com New Panel Concepts® Products: In 2001 expanded [empower]™ product line; introduced new desking options in Series 2000; expanded offering of filing products; enhanced fabric and finish offerings. Panel Concepts, Inc. 21606-86th Place South Kent, Washington 98031 800.624.6118 panelconceptsinc.com New BPI® Products: In 2001 new glass panel options; space-efficient work surfaces; enhanced data management options; value-oriented storage products to complement extensive privacy screen offerings. BPI Inc. 21606-86th Place South Kent, Washington 98031 800.289.1274 BPICorp.com New Holga® Products: In 2001 Apex™ integrated shelving and mobile aisle systems; “7I” and “9I” series shelf files; universal side-to-side SmartSpace™ carriages for lateral files; enhancements to accessory options for FourFlex® shelving. Holga Inc. 7901 Woodley Avenue Van Nuys, California 91406 800.544.4623 holga.com New HON International Inc. Offerings: In 2001 Allsteel’s enhanced Terrace® panel system; HON Company’s and Allsteel’s new case goods and seating products. HON International Inc. 414 East Third Street Muscatine, Iowa 52761 563.262.7900 honi.com New Heatilator® Products: The masonry Icon™ model with the look of a real masonry fireplace; has been enlarged to be the largest wood-burning masonry-style fireplace on the market. The Novus™ product line has been upgraded for improved flame appearance and new gas log sets. The new Aztech™ with the Kiva design; will blend well with Southwestern designs. Heatilator 1915 West Saunders Street Mt. Pleasant, Iowa 52641 800.843.2848 heatilator.com New Heat-N-Glo® Products: The new Intensity™ gas fireplace voted as the industry’s best gas fireplace in 2001. The Twilight™ indoor-outdoor, see-through fireplace, voted as the industry’s most innovative product in 2001. Additionally, recognition for the best venting product – a step forward in heat management. Heat-N-Glo 20802 Kensington Boulevard Lakeville, Minnesota 55044 952.985.6000 heatnglo.com New AladdinTM Products: In 2001 Vesta Award Winner – The Quadra-Fire™ 3100 ACT, cleanest- burning American-built woodstove; Vesta Award Runner-Up – The beautiful cast-iron Castile™ pellet stove with the ability to burn shelled corn or wood pellets; Vesta Award Runner-Up – The small cast-iron Garnet gas stove, able to be installed right against a combustible wall. Aladdin Hearth Products 1445 North Highway Colville, Washington 99114 509.684.3745 aladdinhearth.com New Hearth Services Offerings: The company offers a first in the fireplace industry by offering seamless manufacturing, distribution, and installation of hearth products to the end-user. The selec- tion of products and services allows for one-stop shopping to the builder or homeowner for the innovative lineup of new products offered by Heat-N-Glo, Heatilator, and Aladdin Hearth Products. Hearth Services 2700 Fairview Avenue North Roseville, Minnesota 55113 651.633.2561 honi.com H O N I N D U S T R I E S I n c . a n d S U B S I D I A R I E S 21 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S 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 Provision for closing facilities and reorganization expense Operating income Interest expense (net) Income before income taxes Income taxes Net income 2001 100.0% 65.9 34.1 25.9 1.3 6.9 .4 6.5 2.3 4.2% 2000 100.0% 67.5 32.5 1999 100.0% 68.7 31.3 23.8 22.1 – 8.7 .6 8.1 2.9 5.2% 1.1 8.1 .5 7.6 2.8 4.9% 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 December 29, 2001, Compared to Fiscal Year Ended December 30, 2000 Net Sales Net sales, on a consolidated basis, decreased by 12% to $1.8 billion in 2001 from $2.0 billion in 2000. Office furniture net sales decreased 17% in 2001 to $1.37 billion from $1.65 billion in 2000. The decline in sales occurred in the retail, commercial, and contract sectors. The office furniture industry reported a decrease in shipments of 17% in 2001 compared to 2000. Net sales of hearth products increased 8% to $426.1 million in 2001 from $396.3 million in 2000. The Company’s most recent five- year compounded annual growth rate in net sales is 12%. Gross Profit Gross profit dollars decreased 8% to $611.3 million in 2000 from $665.9 million in the prior year. The gross margin percentage increased to 34.1% for 2001 from 32.5% in 2000. The improve- ment in gross margin is due to new product introductions, and rapid continuous improvement, cost containment, and business simplification initiatives. Selling and Administrative Expenses Selling and administrative expenses decreased by 5% to $464.2 million in 2001 from $487.8 million in the prior year. Selling and administrative expenses, as a percent of net sales, increased to 25.9% in 2001 from 23.8% in 2000. This increase was due to lower overall sales volume, development of new products, and continued investment in sales and marketing expenses associated with the Company’s business simplifica- tion, end-user focus, and branding strategies. Selling and administrative expenses include freight expense for shipments to customers, 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 comparative expense levels for these major expense items. During the second quarter of 2001, the Company recorded a pretax charge of $24.0 million, $15.4 million after tax, or $0.26 per common share for a restructuring plan that involved con- solidating physical facilities, discontinuing low volume product lines, and reduction of workforce. Included in this charge was the closedown of three of its office furniture facilities located in Williamsport, Pennsylvania, Tupelo, Mississippi, and Santa Ana, California. The charge included $16.2 million of asset impair- ments for manufacturing equipment that will be disposed of and $7.8 million of restructuring expenses. Included in the $7.8 mil- lion is $3.1 million for severance arising from the elimination of approximately 600 plant member positions, $0.8 million for other member-related costs, and $3.9 million for certain other expenses associated with the closing of facilities. Operating Income Operating income decreased almost 31% to $123.1 million in 2001 from $178.0 million in 2000. Excluding a pretax charge for restructuring and impairment of $24.0 million in second quarter 2001, operating income decreased 17% to $147.1 million. Operating profit in the office furniture segment decreased in 2001 as a percent of net sales to 8.2%, or 9.9% prior to the restructuring charge, compared to 10.4% in 2000. The decrease is due to lower 22 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S overall sales volume. Operating profit in the hearth products seg- ment increased in 2001 as a percent of net sales to 9.2%, or 9.6% prior to the restructuring charge, compared to 7.6% in the prior year. This improvement is due to increased sales volume, simplification of the business structure, and cost containment. Net Income Net income decreased by 30% to $74.4 million in 2001 from $106.2 million in the prior year. Excluding the $15.4 million after-tax charge for the restructuring plan referred to above, net income decreased by 15% to $89.8 million. The decrease is due to lower overall sales volume and increased selling and administrative expenses offset by reduced interest expense. Net income per common share decreased by 29% to $1.26 in 2001 from $1.77 for 2000. Excluding the after-tax charge of $0.26 per share for the restructuring plan, net income per common share decreased 14% to $1.52. The Company’s net income per share performance for 2001 benefited from the Company’s common stock repurchase program. Fiscal Year Ended December 30, 2000, Compared to Fiscal Year Ended January 1, 2000 Net Sales Net sales, on a consolidated basis, increased by 14% to $2.0 bil- lion in 2000 from $1.8 billion in 1999. Office furniture net sales increased 9% in 2000 to $1.65 billion from $1.51 billion in 1999. Net sales of hearth products increased 39% to $396.3 million in 2000 from $285.9 million in 1999 due mainly to the Company’s acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied). The office furniture industry reported an increase in shipments of 9% in 2000 compared to 1999. The Company’s most recent five-year compounded annual growth rate in net sales is 18%. is a different business model that has proportionally higher sell- ing and administrative costs than manufacturing. The Company is applying rapid continuous improvement philosophies to reduce these costs. The Company also continued to experience increased investment in sales and marketing expenses associated with refocusing the Company and developing branding programs in the office furniture segment. The Company was able to reduce freight expense as a percent of net sales despite increased fuel and carrier costs. 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 compar- ative expense levels for these major expense items. Operating Income Operating income increased by 22% to $178.0 million in 2000 from $146.4 million in 1999. Excluding a pretax charge for clos- ing facilities and reorganization expense of $19.7 million in 1999, operating income increased by 7 percent. The increase is due mainly to increased sales and gross margins. Net Income Net income increased by 22% to $106.2 million in 2000 from $87.4 million in the prior year. Excluding the $12.5 million after-tax charge for the closing of facilities and reorganization expenses, net income increased 6 percent. This increase is attributable primarily to increased sales and gross margins. Net income was favorably impacted by a decrease in the Company’s effective tax rate from 36.5% in 1999 to 36.0% in 2000 resulting from favorable state income tax initiatives. Gross Profit Gross profit dollars increased 18% to $665.9 million in 2000 from $564.3 million in the prior year. Gross margin increased to 32.5% for 2000 from 31.3% in 1999. The improvement reflects the com- bination of improved price realization and productivity from rapid continuous improvement programs. Net income per common share increased by 23% to $1.77 in 2000 from $1.44 in 1999. Excluding the after-tax charge of $0.20 per share in 1999 for the closing of facilities and reorganization expenses, net income per common share increased by 8%. The Company’s net income per share performance for 2000 also ben- efited from the Company’s common stock repurchase program. Selling and Administrative Expenses Selling and administrative expenses increased by 23% to $487.8 million in 2000 from $398.2 million in the prior year. Selling and administrative expenses, as a percent of net sales, increased to 23.8% in 2000 from 22.1% in 1999. The largest contributor to this increase was the acquisition of Hearth Services Inc., which is a retail distributor. Retail distribution Liquidity and Capital Resources During 2001, cash flow from operations was $227.8 million, which provided the funds necessary to meet working capital needs, help finance acquisitions, invest in capital improvements, repay long-term debt, repurchase common stock, and pay increased dividends. The Company does not have any off balance sheet financing arrangements. H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Cash Management Cash, cash equivalents, and short-term investments totaled $78.8 million in 2001 compared to $3.2 million at the end of 2000 and $22.2 million at the end of 1999. 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 is not aware of any known trends or demands, commitments, events, or uncertainties that are reasonably likely to result in its liquidity increasing or decreasing in any material way. 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 managing 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 approximately 37 days over the past three years. Inventory levels and turns continue to improve as a result of reducing production cycle times. Inventory turns have been in the 17 to 18 times range over the past three years. Capital Expenditure Investments Capital expenditures, net of disposals, were $36.9 million in 2001, $59.8 million in 2000, and $71.5 million in 1999. Expenditures during 2001, 2000, and 1999 have been consistently focused on machinery and equipment that is needed to support new products, process improvements, cost-savings initiatives, and creating more efficient production and warehousing capacity. Acquisitions During 2001, the Company completed the acquisition of three small hearth product distributors for a total purchase price of approximately $7.6 million. The acquisitions were accounted for using the purchase method, and the results of the three distribu- tors have been included in the Company’s financial statements since the date of acquisition. On February 29, 2000, the Company completed the acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry, for a purchase price of approximately $135 million. Long-Term Debt Long-term debt, including capital lease obligations, was 12% of total capitalization at December 29, 2001, 18% at December 30, 2000, and 20% at January 1, 2000. The Company does not expect future capital resources to be a constraint on planned growth. Additional borrowing capacity of $200 million is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future needs. The current revolving bank credit agreement expires in June 2002; however, management is in the process of negotiating a new agreement. Certain of the Company’s credit agreements include covenants that limit the assumption of additional debt and lease obligations. The Company has been and currently is in com- pliance with the covenants related to the debt agreements. Contractual Obligations The following table discloses the Company’s obligations and commitments to make future payments under contracts: Payments Due by Period Contractual Obligations Less than 1 year Total 1-3 years 4-5 years After 5 years Long-term debt 85,354 5,784 60,162 1,185 18,223 Capital lease obligations 2,935 1,078 422 422 1,013 Operating leases 45,874 12,373 18,470 10,028 5,003 Other long-term obligations Total contractual cash 9,334 2,215 2,046 987 4,086 143,497 21,450 81,100 12,622 28,325 Related Party Transactions The Company has convertible debentures in the amount of $58.1 million that are payable to former owners of businesses that were acquired by the Company. These individuals remain as employees of the Company following the acquisitions. The Company has operating leases for office and production facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. These individuals continue as officers of a subsidiary of the Company following the acquisition. Cash Dividends Cash dividends were $0.48 per common share for 2001, $0.44 for 2000, and $0.38 for 1999. Further, the Board of Directors announced a 4.2% increase in the quarterly dividend from $0.12 to $0.125 per common share effective with the March 1, 2002, dividend payment to shareholders of record at the close of busi- ness February 22, 2002. The previous quarterly dividend increase was from $0.11 to $0.12, effective with the March 1, 2001, divi- dend payment to shareholders of record at the close of business February 21, 2001. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. The average dividend payout percentage for the most recent three-year period has been 26% of prior year earnings. 24 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S Common Share Repurchases During 2001, the Company repurchased 1,472,937 shares of its common stock at a cost of approximately $35.1 million, or an average price of $23.80. As of December 29, 2001, approximately $78.6 million of the $100.0 million authorized on February 14, 2001, by the Board of Directors for repurchases remained unspent. During 2000, the Company repurchased 837,552 shares at a cost of approximately $18.0 million, or an average price of $21.46. During 1999, the Company repurchased 1,408,624 shares at a cost of approximately $30.9 million, or an average price of $21.91. 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. Critical Accounting Policies The Company’s critical accounting policies include: Revenue recognition – The Company recognizes revenue upon the shipment of goods. Revenue includes freight charged to customers; related costs are included in selling and administra- tive expense. Allowance for doubtful accounts – The allowance for receivables is developed based on several factors including overall cus- tomer credit quality, historical write-off experience, and specific account analyses that project the ultimate collectibility of the account. As such, these factors may change over time, causing the reserve level to adjust accordingly. Inventory valuation – The Company values its inventory at the lower of cost or market by the last in, first out (LIFO) method. Additionally, the Company evaluates its inventory reserves in terms of excess and obsolete exposures. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels, and ultimate product sales value. As such, these factors may change over time, causing the reserve level to adjust accordingly. Self-insurance reserves – The Company is partially self-insured for general liability, workers’ compensation, and certain employee health benefits. The general and workers’ compensation liabilities are managed through a wholly owned insurance captive; the related liabilities are included in the accompanying financial statements. The Company’s policy is to accrue amounts equal to the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, and changes in actual experi- ence could cause these estimates to change in the near term. Recent Accounting Pronouncements During 2001, the Financial Accounting Standards Board finalized Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company implemented SFAS No. 141 on July 1, 2001. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. The Company intends to adopt SFAS No. 142 on December 30, 2001, the beginning of its 2002 fiscal year. With the adoption of SFAS No. 142, good- will is no longer subject to amortization over its estimated useful life. Rather, goodwill will be assessed for impairment by applying a fair-value-based test. The Company does not anticipate recog- nizing any impairment of goodwill upon adoption. The Company will stop recording, on an annual basis, approximately $9.5 mil- lion of goodwill amortization upon adoption. The Financial Accounting Standards Board also finalized SFAS No. 143, “Accounting for Asset Retirement Obligations,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” during 2001. The Company intends to adopt Statement No. 143 on December 29, 2002, the beginning of its 2003 fiscal year and Statement No. 144 on December 30, 2001, the beginning of its 2002 fiscal year. The adoption of these Statements is not expected to have a material impact on the Company’s financial statements. Looking Ahead Due to the current economic environment, the Company anticipates that 2002 will be an extremely challenging year, especially during the first six months. DRI-WEFA, the Business and Institutional Furniture Manufacturer’s Association’s (BIFMA) forecasting consultant, is projecting the office furniture industry to be down 13 percent in 2002 over 2001. The Company contin- ues to focus on new product development and streamlining processes and operations through simplification and rapid continuous improvement. An announcement was made of the closing of an office furniture facility in January 2002 in Jackson, Tennessee, to help reduce the Company’s permanent cost struc- ture. The Company is also continuing its focus on long-term shareholder value by making investments for the future. These investments include innovative new products, technology, end- user focus, brand building, and increased distribution. H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 25 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Amounts in thousands, except for per share data For the Years 2001 2000 1999 Net sales Cost of products sold Gross Profit Selling and administrative expenses Provision for closing facilities and reorganization expenses Operating Income Interest income Interest expense Income Before Income Taxes Income taxes $1,792,438 1,181,140 $2,046,286 1,380,404 $1,800,931 1,236,612 611,298 464,206 24,000 123,092 1,717 8,548 116,261 41,854 665,882 487,848 – 178,034 1,945 14,015 165,964 59,747 564,319 398,197 19,679 146,443 844 9,712 137,575 50,215 Net Income Net Income Per Common Share – Basic and Diluted $«««««74,407 $«««««««««1.26 $÷«106,217 $÷÷÷÷«1.77 $÷÷«87,360 $÷÷÷÷«1.44 The accompanying notes are an integral part of the consolidated financial statements. 26 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S C O N S O L I D A T E D B A L A N C E S H E E T S Amounts in thousands Assets Current Assets Cash and cash equivalents 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’ 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 Commitments and Contingencies Shareholders’ Equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity As of Year-End 2001 2000 1999 $««78,838 161,390 50,140 14,940 14,349 319,657 404,971 214,337 22,926 $÷÷÷«3,181 211,243 84,360 19,516 11,841 330,141 454,312 216,371 21,646 $÷22,168 196,730 74,937 13,471 9,250 316,556 455,591 113,116 21,460 $961,891 $1,022,470 $906,723 $216,184 6,112 6,715 1,432 230,443 79,570 1,260 18,306 39,632 58,673 891 532,555 561 592,680 $÷«240,540 12,067 10,408 1,853 ÷«264,868 126,093 2,192 18,749 37,226 59,797 17,339 495,796 410 573,342 $217,110 – 6,106 1,907 225,123 119,860 4,313 18,015 38,141 60,172 24,981 416,034 84 501,271 $961,891 $1,022,470 $906,723 The accompanying notes are an integral part of the consolidated financial statements. H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 27 C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y Amounts in thousands Balance, January 2, 1999 Comprehensive income: Net income Other comprehensive income Comprehensive income Cash dividends Common shares – treasury: Common Stock Additional Paid-in Capital Accumulated Other Retained Comprehensive Income Earnings Total Shareholders’ Equity $61,290 $«48,348 $351,786 $«598 $462,022 87,360 (23,112) (514) 87,360 (514) 86,846 (23,112) (30,866) 6,381 Shares purchased Shares issued under Members Stock Purchase Plan and stock awards (1,409) (29,457) 291 6,090 Balance, January 1, 2000 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 Balance, December 30, 2000 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 Balance, December 29, 2001 60,172 24,981 416,034 84 501,271 106,217 (26,455) 326 106,217 326 106,543 (26,455) (17,973) 9,956 495,796 410 573,342 (838) (17,135) 463 59,797 9,493 17,339 74,407 (28,373) 151 (1,473) (24,311) (9,275) 349 7,863 74,407 151 74,558 (28,373) (35,059) 8,212 $58,673 $««««««891 $532,555 $«561 $592,680 The accompanying notes are an integral part of the consolidated financial statements. 28 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Amounts in thousands For the Years 2001 2000 1999 $«««74,407 $«106,217 $÷«87,360 Net Cash Flows From (To) Operating Activities: Net income Noncash items included in net income: Depreciation and amortization Other postretirement and postemployment benefits Deferred income taxes Asset impairment Other – net Changes in working capital, excluding acquisition and disposition: Receivables Inventories Prepaid expenses and other current assets Accounts payable and accrued expenses Income taxes Increase in other liabilities Net cash flows from (to) operating activities Net Cash Flows From (To) Investing Activities: Capital expenditures – net Capitalized software Acquisition spending, net of cash acquired Short-term investments – net Other – net Net cash flows from (to) investing activities Net Cash Flows From (To) Financing Activities: Purchase 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 The accompanying notes are an integral part of the consolidated financial statements. 79,046 1,572 (7,213) – 90 3,961 6,410 (1,616) 5,483 11,808 (838) 65,453 2,329 6,033 – (121) (13,154) (7,712) 391 19,838 (2,178) (2,054) 204,920 156,185 81,385 1,757 6,962 16,200 109 47,897 35,048 (1,661) (26,149) (5,957) (2,198) 227,800 (36,851) (1,757) (8,748) – 343 (59,840) (2,192) (134,696) – (3) (47,013) (196,731) (35,059) 36,218 (87,365) 9,449 (28,373) (105,130) 75,657 3,181 (17,973) 155,181 (147,458) 9,529 (26,455) (27,176) (18,987) 22,168 (71,474) (3,530) (8,932) 169 (290) (84,057) (30,866) 147,055 (167,052) 6,515 (23,112) (67,460) 4,668 17,500 $«««78,838 $÷÷«3,181 $«÷22,168 $«««««8,646 $«««40,916 $÷«13,395 $÷«54,634 $«÷÷9,803 $«÷46,822 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 29 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 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 to deal- ers, wholesalers, mass merchandisers, warehouse clubs, retail superstores, end-user customers, and federal and state gov- ernments. 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, large regional contractors, and Company-owned retail outlets. 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, these activities are 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. Inter- company accounts and transactions have been eliminated in consolidation. The Company’s fiscal year ends on the Saturday nearest December 31. Fiscal year 2001 ended on December 29, 2001; 2000 ended on December 30, 2000; and 1999 ended on January 1, 2000. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash and com- mercial paper. These securities have original maturity dates not exceeding three months from date of purchase. Receivables Accounts receivables are presented net of an allowance for doubtful accounts of $16,576,000, $11,237,000, and $3,568,000 for 2001, 2000, and 1999, 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 using the straight-line method over esti- mated useful lives: land improvements, 10–20 years; buildings, 10–40 years; and machinery and equipment, 3–12 years. 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 over 20–40 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 in the accompanying balance sheet. 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, no material impairment of these intangible assets exists at December 29, 2001. (In thousands) 2001 2000 1999 Goodwill Patents Less accumulated amortization $240,916 16,450 $233,348 $121,846 16,450 16,450 34,455 23,342 13,585 $222,911 $226,456 $124,711 Revenue Recognition Revenue is recognized upon shipment of goods to customers. Revenue includes freight charged to customers; related costs are in selling and administrative expense. 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 $21,415,000 in 2001, $18,911,000 in 2000, and $17,117,000 in 1999. Stock-Based Compensation The Company accounts for its stock option plan using Account- ing Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which results in no charge to earnings 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.” Income Taxes The Company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes.” This Statement uses an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax conse- quences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. 30 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Earnings Per Share Basic earnings per share are based on the weighted-average number of common shares outstanding during the year. Shares potentially issuable under options have been considered outstanding for purposes of the diluted earnings per share calculation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to allowance for doubtful accounts, inventory reserves, accruals for self-insured medical claims, workers’ compensation, general liability and auto insur- ance claims, and useful lives for depreciation and amortization. Actual results could differ from those estimates. Self-Insurance The Company is partially self-insured for general liability, work- ers’ compensation, and certain employee health benefits. The general and workers’ compensation liabilities are managed through a wholly owned insurance captive; the related liabilities are included in the accompanying consolidated financial state- ments. The Company’s policy is to accrue amounts equal to the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, and changes in actual experi- ence could cause these estimates to change in the near term. Recent Accounting Pronouncements During 2001, the Financial Accounting Standards Board finalized SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company imple- mented SFAS No. 141 on July 1, 2001. SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. The Company intends to adopt SFAS No. 142 on December 30, 2001, the beginning of its 2002 fiscal year. With the adoption of SFAS No. 142, goodwill is no longer subject to amortization over its esti- mated useful life. Rather, goodwill will be assessed for impairment by applying a fair-value-based test. The Company does not antic- ipate recognizing any impairment of goodwill upon adoption. The Company will stop recording, on an annual basis, approximately $9.5 million of goodwill amortization upon adoption. The Financial Accounting Standards Board also finalized SFAS No. 143, “Accounting for Asset Retirement Obligations,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” during 2001. The Company intends to adopt Statement No. 143 on December 29, 2002, the beginning of its 2003 fiscal year and Statement No. 144 on December 30, 2001, the beginning of its 2002 fiscal year. The adoption of these Statements is not expected to have a material impact on the Company’s financial statements. In 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-10, “Accounting for Shipping and Handling Fees and Costs,” that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The Company implemented the above EITF consensus effective with the fourth quarter 2000 and has restated prior periods to reflect the change. The adoption of this consensus did not have a material impact on the Company’s financial statements. In 1998, the Financial Accounting Stan- dards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was amended in June 2000 by SFAS No. 138. The Company adopted this Statement in January 2001 as required by the Statement. The adoption of this Statement did not have any impact on the Company’s financial statements. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Provision for Facilities Closing and Reorganization Expenses During the second quarter of 2001, the Company recorded a pretax charge of $24.0 million or $0.26 per diluted share for a restructuring plan that involved consolidating physical facilities, discontinuing low-volume product lines, and reductions of work- force. Included in the charge was the closedown of three of its office furniture facilities located in Williamsport, Pennsylvania, Tupelo, Mississippi, and Santa Ana, California. The charge included $16.2 million of asset impairments for manufacturing equipment that will be disposed of and $7.8 million of restruc- turing expenses. Included in the $7.8 million is $3.1 million for severance arising from the elimination of approximately 600 plant member positions, $0.8 million for other member-related costs, and $3.9 million for certain other expenses associated with the closing of facilities. H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 31 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S During 2001, $5.1 million of pretax exit costs were paid and charged against the liability. It included $2.4 million for severance for 469 plant member positions, $0.4 million for other member related costs and $2.3 million for certain other expenses associ- ated with the closing of facilities. The primary costs not yet incurred relate to costs associated with the closed buildings. Management believes the remaining reserve for restructuring expenses to be adequate to cover these obligations. On February 11, 1999, the Company adopted a plan to close three of its office furniture facilities located in Winnsboro, South Carolina; Sulphur Springs, Texas; and Mt. Pleasant, Iowa. A pretax charge of $19.7 million or $0.20 per diluted share was recorded during the first quarter of 1999. The charge includes $12.6 million for write-offs of plant and equipment, $2.6 million for severance arising from the elimination of approximately 360 positions, $2.1 million for other member-related costs, and $2.4 million for certain other expenses associated with the clos- ing of the facilities. All significant activities with respect to this reorganization have been completed except for the pending disposition of the Winnsboro, South Carolina, property. Business Combinations During 2001, the Company completed the acquisition of three small hearth product distributors for a total purchase price of approximately $7.6 million. The acquisitions were accounted for using the purchase method, and the results of the three distributors have been included in the Company’s financial statements since the date of acquisition. On February 29, 2000, the Company completed the acquisition of its Hearth Services division, which consists of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry. The Company acquired AFC and Allied for approximately $135 million in cash and debt including acquisition costs. The acquisition has been accounted for using the purchase method, and the results of AFC and Allied have been included in the Company’s financial statements since the date of acquisition. Management finalized its integration plan related to the acquisition during the first quarter of 2001. The excess of the consideration paid over the fair value of the business of $21 million was recorded as goodwill and was being amortized on a straight-line basis over 20 years. Assuming the acquisition of American Fireplace Company and Allied Group had occurred on January 3, 1999, the beginning of the Company’s 1999 fiscal year, instead of the actual dates reported above, the Company’s pro forma consolidated net sales would have been approximately $2.1 billion and $1.9 billion for 2000 and 1999, respectively. Pro forma consolidated net income and net income per share for 2000 and 1999 would not have been materially different than the reported amounts. Inventories (In thousands) 2001 2000 1999 Finished products $÷33,280 $÷48,990 $÷29,663 Materials and work in process LIFO reserve 26,469 (9,609) 46,497 (11,127) 55,737 (10,463) $÷50,140 $÷84,360 $÷74,937 Property, Plant, and Equipment (In thousands) 2001 2000 1999 Land and land improvements $««21,678 $««18,808 $««17,114 Buildings Machinery and equipment Construction and equipment installation in progress Less allowances for depreciation 212,352 494,458 14,247 742,735 337,764 202,189 514,293 181,080 469,268 27,547 37,819 762,837 308,525 705,281 249,690 $404,971 $454,312 $455,591 Accounts Payable and Accrued Expenses (In thousands) 2001 2000 1999 Trade accounts payable Compensation Profit sharing and retirement expense Vacation pay Marketing expenses Casualty self-insurance expense Other accrued expenses $««53,660 13,663 $««67,540 $««77,907 15,781 10,820 26,020 13,881 54,861 17,189 36,910 25,041 14,560 65,931 12,216 39,471 22,705 12,093 58,832 7,428 27,325 $216,184 $240,540 $217,110 Long-Term Debt (In thousands) 2001 2000 1999 Industrial development revenue bonds, various issues, payable through 2018 with interest at 1.42–8.125% per annum Note payable to bank, revolving credit agreement with interest at a variable rate* Convertible debentures payable to individuals, due in 2003 with interest at 5.5% per annum Other notes and amounts Total debt Less current portion Long-term debt $««23,995 $««24,633 $««25,319 – 46,000 85,000 58,074 3,285 85,354 5,784 58,074 5,673 5,074 5,275 134,380 120,668 8,287 808 $««79,570 $126,093 $119,860 * The revolving bank credit agreement was paid off in 2001 but is available until June 2002 with a maximum borrowing limit of $200,000,000. Management is in the process of negotiating a new agreement. 32 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Aggregate maturities of long-term debt are as follows: (In thousands) 2002 2003 2004 2005 2006 Thereafter $÷5,784 53,986 6,176 602 583 18,223 The convertible debentures are payable to the former owners of businesses that were acquired by the Company. These individuals continue as employees of the Company following the acquisitions. The convertible debentures are convertible into cash. Certain of the above borrowing arrangements include covenants which limit the assumption of additional debt and lease obliga- tions. The Company has been and currently is in compliance with the covenants related to these debt agreements. The fair value of the Company’s outstanding long-term debt obligations at year-end 2001 approximates the recorded aggregate amount. Property, plant, and equipment, with net carrying values of approximately $53,471,000 at the end of 2001, are mortgaged with maturities through 2021. Selling and Administrative Expenses (In thousands) 2001 2000 1999 Freight expense for shipments to customers Amortization of intangible assets Product development costs Other selling and administrative expenses $103,489 $137,197 $131,085 12,646 21,415 10,679 18,911 5,362 17,117 326,656 321,061 244,633 $464,206 $487,848 $398,197 Income Taxes Significant components of the provision for income taxes are as follows: (In thousands) 2001 2000 1999 Current: Federal State Deferred $32,393 2,442 34,835 7,019 $62,172 $40,744 3,931 3,046 66,103 (6,356) 43,790 6,425 $41,854 $59,747 $50,215 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 Other – net Effective tax rate 2001 35.0% 1.6 (.6) 36.0% 2000 35.0% 1.5 (.5) 36.0% 1999 35.0% 1.7 (.2) 36.5% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabili- ties for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liabilities and assets are as follows: (In thousands) Net long-term deferred tax liabilities: 2001 2000 1999 Tax over book depreciation $(38,759) $(37,509) $(38,133) OPEB obligations Compensation Goodwill Other – net Total net long-term deferred tax liabilities Net current deferred tax assets: Workers’ compensation, general, and product liability accruals Vacation accrual Integration accruals Inventory obsolescence reserve Plant closing accruals Other – net Total net current deferred tax assets Net deferred tax (liabilities) assets 3,197 2,519 (5,550) (1,039) 3,157 2,079 (4,183) (770) 3,430 1,681 (2,959) (2,160) (39,632) (37,226) (38,141) 1,119 4,002 (3,766) 1,969 3,302 8,314 4,183 4,632 (3,205) 2,404 – 11,502 2,984 3,492 (3,263) 1,287 – 8,971 14,940 19,516 13,471 $(24,692) $(17,710) $(24,671) Shareholders’ Equity and Earnings Per Share 2001 2000 1999 Common Stock, $1 Par Value Authorized 200,000,000 200,000,000 200,000,000 Issued and outstanding 58,672,933 59,796,891 60,171,753 Preferred Stock, $1 Par Value Authorized 1,000,000 1,000,000 1,000,000 Issued and outstanding – – – H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 33 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S The Company purchased 1,472,937; 837,552; and 1,408,624 shares of its common stock during 2001, 2000, and 1999, respectively. 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 Additional Paid-In Capital with the excess charged to Retained Earnings. Components of other comprehensive income (loss) consist of the following: (In thousands) 2001 2000 1999 Foreign currency translation adjustments – net of tax Change in unrealized gains on marketable securities – net of tax Other comprehensive income (loss) $109 42 $151 $118 $««(79) 208 (435) $326 $(514) In May 1997, the Company registered 400,000 shares of its common stock under its 1997 Equity Plan for Non-Employee Directors. 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 2001, 2000, and 1999, 7,446; 6,948; and 12,758 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 2001 $.48 2000 $.44 1999 $.38 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 clos- ing 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 128,662 shares were available for issuance under the plan at December 29, 2001. Shares of common stock were issued in 2001, 2000, and 1999 pursuant to a members stock purchase plan as follows: Shares issued Average price per share 2001 85,385 $20.51 2000 90,059 $21.10 1999 115,354 $19.16 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 preferred 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 employees. 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 employ- ment 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 employ- ment 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 November 10, 2000, the Com- pany may award options to purchase shares of the Company’s common stock and grant other stock awards to executives, managers, and key personnel. The Plan is administered by 34 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S 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 10 years from the date of grant. 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 Company’s pro-forma net earnings and both basic and diluted earnings per share would have been reduced by $1,369,000 or $0.02 per share for 2001, $1,122,000 or $0.02 per share for 2000, and $531,000 or $0.01 per share for 1999. The weighted-average fair value of options granted during 2001, 2000, and 1999 estimated on the date of grant using the Black-Scholes option-pricing model was $9.70, $9.25, and $10.01, respectively. The fair value of 2001, 2000, and 1999 options granted is estimated on the date of grant using the following assumptions: dividend yield of 1.46% to 2.06%, expected volatil- ity of 34.09% to 35.89%, risk-free interest rate of 4.90% to 6.56%, and an expected life of 10 to 12 years depending on grant date. The status of the Company’s stock option plans is summarized below: Number of Shares Weighted-Average Exercise Price Outstanding at January 2, 1999 Granted Exercised Forfeited Outstanding at January 1, 2000 Granted Exercised Forfeited Outstanding at December 30, 2000 Granted Exercised Forfeited Outstanding at December 29, 2001 Options exercisable at: December 29, 2001 December 30, 2000 January 1, 2000 176,000 328,750 – (97,000) 407,750 532,500 (22,000) – 918,250 266,500 (17,500) (37,000) 1,130,250 105,000 – – $25.62 23.47 – 23.86 $24.30 20.13 23.80 – $21.90 23.39 18.31 21.57 22.32 24.86 – – The following table summarizes information about fixed stock options outstanding at December 29, 2001: Options Outstanding Weighted- Average Weighted- Average Exercise Price Remaining Contractual Life Range of Exercise Prices Number Outstanding $24.50–$28.25 $32.50 $23.31–$23.47 $18.31–$26.69 $23.32–$25.27 105,000 20,000 238,750 500,000 266,500 5.5 years 6.1 years 7.1 years 8.6 years 9.1 years $24.86 $32.50 $23.47 $20.25 $23.39 Options Exercisable Number Exercisable at 12/29/01 105,000 0 0 0 0 Retirement Benefits The Company has defined contribution profit-sharing plans covering substantially all employees who are not participants in certain defined benefit plans. The Company’s annual con- tribution to the defined contribution plans is based on employee eligible earnings and results of operations and amounted to $24,826,000, $24,400,000, and $21,297,000 in 2001, 2000, and 1999, respectively. The Company sponsors defined benefit plans which include a limited number of salaried and hourly employees at certain subsidiaries. The Company’s funding policy is generally to contribute annu- ally the minimum actuarially computed amount. The Company adopted SFAS No. 132, “Employer’s Disclosures about Pensions and Other Postretirement Benefits,” as of January 4, 1998, the beginning of its 1998 fiscal year. Net pension costs relating to these plans were $0 for 2001, 2000, and 1999. 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 $310,000, $308,500, and $329,000 in 2001, 2000, and 1999, respectively. H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 35 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Postretirement Health Care In accordance with the guidelines of SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” 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) 2001 2000 1999 Reconciliation of benefit obligation Obligation at beginning of year $12,229 $20,237 $17,341 Service cost Interest cost Benefit payments Actuarial (gains) losses Current year prior service cost 278 941 (952) 3,042 1,813 182 882 (981) (5,888) (2,203) 529 1,137 (1,013) 2,243 – Obligation at end of year $17,351 $12,229 $20,237 Funded status Funded status at end of year $17,351 $12,229 $20,237 Unrecognized transition obligation Unrecognized prior-service cost Unrecognized gain (loss) (6,523) (1,582) (364) (7,103) (1,813) 5,457 (9,362) (2,338) 862 Net amount recognized $««8,882 $««8,770 $««9,399 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 882 581 – 1,137 713 146 941 581 230 (474) $««1,556 $««1,106 $««1,896 The discount rates at fiscal year-end 2001, 2000, and 1999 were 6.5%, 8.0%, and 7.5%, respectively. The pre-65 2001 gross trend rates begin at 9.0% for the medical and prescription drug coverages and grade down to 5.0% in eight years and remain at this level for all future years. The post-64 gross trend rates begin at 7.25% for the medical coverage and decrease until the maximum Company subsidy (cap) is reached in 2006. For the prescription drug coverage, the 2002 gross trend rates begin at 9.0% and decrease until the cap is reached in 2006. Assumed health care cost trend rates have a significant effect on the 36 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects: (In thousands) 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 1% Increase 1% Decrease $«««««84 $«««««(49) $8,099 $(6,182) Leases The Company leases certain warehouse, plant facilities and equipment. Commitments for minimum rentals under noncance- lable leases at the end of 2001 are as follows: (In thousands) 2002 2003 2004 2005 2006 Thereafter Capitalized Leases Operating Leases $12,373 10,128 8,342 5,848 4,180 5,003 $45,874 $1,078 211 211 211 211 1,013 2,935 743 (In thousands) Buildings Machinery and equipment Less allowances for depreciation 2001 2000 1999 $÷3,299 15,805 19,104 $÷3,299 15,805 $÷3,299 15,805 19,104 19,104 17,052 14,655 11,816 $÷2,052 $÷4,449 $÷7,288 Rent expense for the years 2001, 2000, and 1999 amounted to approximately $13,387,000, $15,428,000, and $10,403,000, respectively. The Company has operating leases for office and production facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. These indi- viduals continue as officers of a subsidiary of the Company following the acquisition. Contingent rent expense under both capitalized and operating leases (generally based on mileage of transportation equipment) amounted to $869,000, $941,000, and $755,000 for the years 2001, 2000, and 1999, respectively. $«««««278 $«««««182 $«««««529 Total minimum lease payments Less amount representing interest Present value of net minimum lease payments, including current maturities of $932,000 $2,192 (539) (629) Property, plant, and equipment at year-end include the following amounts for capitalized leases: N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Reportable segment data reconciled to the consolidated finan- cial statements for the years ended 2001, 2000, and 1999 is as follows: (In thousands) Net sales: Office furniture Hearth products Operating profit: Office furniture* Hearth products* Total operating profit Unallocated corporate expenses 2001 2000 1999 $1,366,312 $1,649,937 $1,514,991 426,126 396,349 285,940 $1,792,438 $2,046,286 $1,800,931 $«««112,405 $«««171,647 $«««131,607 39,282 30,232 34,588 151,687 201,879 166,195 (35,426) (35,915) (28,620) Income before income taxes $«««116,261 $«««165,964 $«««137,575 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 $«««526,712 $«««638,075 $«««678,503 320,199 114,980 327,528 56,867 174,386 53,834 $«««961,891 $1,022,470 $«««906,723 $«««««58,658 $«««««58,926 $«««««52,483 20,389 2,338 18,109 2,011 11,065 1,905 $«««««81,385 $«««««79,046 $«««««65,453 $«««««29,785 $«««««39,361 $«««««48,565 7,149 (83) 17,643 2,836 16,489 6,420 $«««««36,851 $«««««59,840 $«««««71,474 * Included in operating profit for the office furniture segment are a pretax charge of $22.5 million for closing of facilities and impairment charges in 2001 and a pretax charge of $19.7 million for the closing of facilities and reorganization expense in 1999. Included in operating profit for the hearth products segment is a pretax charge of $1.5 million for closing of facilities and impairment charges in 2001. Contingencies The Company has contingent liabilities which have arisen in the course of its business, including pending litigation, environmen- tal remediation, taxes, and other claims. The Company believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations, or cash flows. Significant Customer One office furniture customer accounted for approximately 14%, 14% and 13% of consolidated net sales in 2001, 2000, and 1999, respectively. Operating Segment Information In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” management views the Company as being in two operating segments: office furniture and hearth products, with the former being the principal seg- ment. The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furni- ture which includes storage products, desks, credenzas, chairs, tables, bookcases, freestanding office partitions and panel sys- tems, 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 hearth products segment is somewhat seasonal with the third (July–September) and fourth (October–December) fiscal quarters historically having higher sales than the prior quarters. In fiscal 2001, 53% of consolidated net sales of hearth products were generated in the third and fourth quarters. For purposes of segment reporting, intercompany sales trans- fers 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 inter- est 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 inter- nally 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 equiva- lents, short-term investments, and corporate office real estate and related equipment. No geographic information for revenues from external cus- tomers or for long-lived assets is disclosed since the Company’s primary market and capital investments are concentrated in the United States. H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 37 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Summary of Unaudited Quarterly Results of Operations The following table presents certain unaudited quarterly financial information for each of the past 12 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 financial 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 2001: Net sales Cost of products sold Gross profit Selling and administrative expenses Restructuring and impairment charges 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 Provisions for closing facilities and reorganization expenses Operating income Income taxes Net income Year-End 2000: (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 38 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S First Quarter $461,997 311,711 150,286 119,050 – 31,236 (2,700) 28.536 10,273 $««18,263 $««««««««.31 59,448 100.0% 32.5 25.8 – 6.8 2.2 4.0 $481,523 329,416 152,107 111,214 40,893 (2,550) 38,343 13,803 $÷24,540 $÷÷÷÷.41 60,186 100.0% 31.6 23.1 8.5 2.9 5.1 Second Quarter $444,196 292,789 151,407 118,983 24,000 8,424 (1,832) 6,592 ««««2,373 $««««4,219 $««««««««.07 59,205 100.0% 34.1 26.8 5.4 1.9 0.5 0.9 $509,649 343,842 165,807 125,513 40,294 (3,688) 36,606 13,188 $÷23,418 $÷÷÷÷.39 60,145 100.0% 32.5 24.6 7.9 2.6 4.6 Third Quarter $459,352 298,427 160,925 114,759 – 46,166 (1,375) 44,791 16,125 $««28,666 $««««««««.48 59,048 100.0% 35.0 25.0 – 10.1 3.5 6.2 $535,322 354,367 180,955 124,197 56,758 (3,303) 53,455 19,234 $÷34,221 $÷÷÷÷.57 60,162 100.0% 33.8 23.2 10.6 3.6 6.4 Fourth Quarter $426,893 278,213 148,680 111,414 – 37,266 (924) 36,342 13,083 $««23,259 $««««««««.40 58,651 100.0% 34.8 26.1 – 8.7 3.1 5.4 $519,792 352,779 167,013 126,924 40,089 (2,529) 37,560 13,522 $÷24,038 $««««««««.40 60,069 100.0% 32.1 24.4 7.7 2.6 4.6 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S (In thousands, except per share data) Year-End 1999: Net sales Cost of products sold Gross profit Selling and administrative expenses Provision for closing facilities and reorganization 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 Provision for closing facilities and reorganization expenses Operating income Income taxes Net income First Quarter $427,660 295,222 132,438 92,465 19,679 20,294 (2,045) 18,249 6,661 $««11,588 $÷÷÷÷.19 61,154 100.0% 31.0 21.6 4.6 4.7 1.6 2.7 Second Quarter $422,377 292,077 130,300 92,454 – 37,846 (2,399) 35,447 12,938 $««22,509 $÷÷÷÷.37 61,169 100.0% 30.8 21.9 – 9.0 3.1 5.3 Third Quarter $478,609 327,243 151,366 104,105 – 47,261 (2,160) 45,101 16,462 $««28,639 $÷÷÷÷.47 60,921 100.0% 31.6 21.8 – 9.9 3.5 6.0 Fourth Quarter $472,285 322,070 150,215 109,173 – 41,042 (2,264) 38,778 14,154 $««24,624 $÷÷÷÷.41 60,159 100.0% 31.8 23.1 – 8.7 3.0 5.2 (a) First quarter 2000 includes partial quarterly results of operation of American Fireplace Company and the Allied Group acquisitions acquired February 29, 2000. Subsequent Event In January 2002, the Company announced the closing of one office furniture manufacturing operation in Jackson, Tennessee. The operation will close following an orderly transition of production to other facilities which is expected to be completed during the second quarter of 2002. The Company expects to realize savings during 2002 equal to the costs incurred in closing the facility. Common Stock Market Prices and Dividends (Unaudited) Quarterly 2001–2000 2001 by Quarter 1st 2nd 3rd 4th Total Dividends Paid 2000 by Quarter 1st 2nd 3rd 4th Total Dividends Paid High Low $26.50 $22.00 26.45 26.15 28.85 ««««««« 22.44 19.96 20.00 High Low $25.75 $15.56 27.88 27.88 27.13 23.00 23.19 21.00 Dividends per Share $.12 .12 .12 .12 $.48 Dividends per Share $.11 .11 .11 .11 $.44 Common Stock Market Price and Price/Earnings Ratio (Unaudited) Fiscal Years 2001–1991 Market Price* Low 19.96 15.56 18.75 20.00 15.88 9.25 11.50 12.00 10.75 8.25 6.63 High 28.85 27.88 29.88 37.19 32.13 21.38 15.63 17.00 14.63 11.75 10.25 Year 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 Eleven-Year Average * Adjusted for the effect of stock splits. Earnings per Share* Price/Earnings Ratio High Low 1.26 1.77 1.44 1.72 1.45 1.13 .67 .87 .70 .59 .51 23 16 21 22 22 19 23 20 21 20 20 21 16 9 13 12 11 8 17 14 15 14 13 13 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 39 S E L E C T E D F I N A N C I A L D A T A – E L E V E N - Y E A R S U M M A R Y 2001 2000 1999 Per Common Share Data Income before Cumulative Effect of Accounting Changes Cumulative Effect of Accounting Changes 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 Before Income Taxes Income Before Income Taxes as a % of Net Sales Federal and State Income Taxes Effective Tax Rate Income before Cumulative Effect of Accounting Changes Net Income Net Income as a % of Net Sales 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 $«««««««««1.26 – 1.26 .48 10.10 1.52 $1,792,438 1,181,140 611,298 8,548 116,261 6.49% $«««««41,854 36.0% $«««««74,407 74,407 4.15% $«««««28,373 36,759 74,407 12.76% $«««««81,385 $«««««««««1.77 – 1.77 .44 9.59 1.09 $2,046,286 1,380,404 665,882 14,015 165,964 8.11% $«««««59,747 36.0% $«««106,217 106,217 5.19% $«««««26,455 79,762 106,217 19.77% $«««««79,046 $«««««««««1.44 – 1.44 .38 8.33 1.52 $1,800,931 1,236,612 564,319 9,712 137,575 7.64% $«««««50,215 36.5% $«««««87,360 87,360 4.85% $«««««23,112 64,248 87,360 18.14% $«««««65,453 1998 1.72 – 1.72 .32 7.54 1.19 $1,706,628 1,172,997 533,632 10,658 170,109 9.97% $«««««63,796 37.50% $«««106,313 106,313 6.23% $«««««19,730 86,583 106,313 25.20% $«««««52,999 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 % 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 38.13% 61.87% 24.91% 75.09% 26.46% 73.54% 18.56% 81.44% $«««319,657 230,443 89,214 404,971 961,891 12.04% $«««««80,830 592,680 532,555 1.39 $«««330,141 264,868 65,273 454,312 1,022,470 19.63% $«««128,285 573,342 495,796 1.25 $«««316,556 225,123 91,433 455,591 906,723 16.94% $«««124,173 501,271 416,034 1.41 $«««290,329 217,438 72,891 444,177 864,469 23.74% $«««135,563 462,022 351,786 1.34 58,672,933 59,796,891 60,171,753 61,289,618 59,087,963 6,694 60,140,302 6,563 60,854,579 6,737 61,649,531 5,877 Capital Expenditures – Net (Thousands of Dollars) Members (Employees) at Year-End $«««««36,851 $«««««59,840 9,029 (a) 11,543 (a) $«««««71,474 10,095 $«««149,717 9,824 (a) (a) Includes acquisitions completed during year. 40 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S S E L E C T E D F I N A N C I A L D A T A – E L E V E N - Y E A R S U M M A R Y 1997 1996 1995 1994 1993 1992 1991 $«««««««««1.45 – 1.45 .28 6.19 1.53 $1,362,713 933,157 429,556 8,179 139,128 10.21% $«««««52,173 37.50% $«««««86,955 86,955 6.38% $«««««16,736 37,838 86,955 27.43% $«««««35,610 19.25% 80.75% $«««295,150 200,759 94,391 341,030 754,673 28.27% $«««134,511 381,662 265,203 1.47 $««««««1.13 – 1.13 .25 4.25 .89 $998,135 679,496 318,639 4,173 105,267 10.55% $««37,173 35.31% $««68,094 68,094 6.82% $««14,970 33,860 68,094 29.06% $««25,252 21.98% 78.02% $205,527 152,553 52,974 234,616 513,514 25.93% $««77,605 252,397 227,365 1.35 $««««««««.67 – .67 .24 3.56 1.07 $893,119 624,700 268,419 3,569 65,517 7.34% $««24,419 37.27% $««41,098 41,098 4.60% $««14,536 18,863 41,098 20.00% $««21,416 35.37% 64.63% $194,183 128,915 65,268 210,033 409,518 17.91% $««42,581 216,235 193,505 1.51 $««««««««.87 – .87 .22 3.17 1.27 $845,998 573,392 272,606 3,248 86,338 10.21% $««31,945 37.00% $««54,393 54,156 6.43% $««13,601 13,563 54,156 28.95% $««19,042 25.11% 74.89% $188,810 111,093 77,717 177,844 372,568 24.72% $««45,877 194,640 174,642 1.70 $««««««««.69 .01 .70 .20 2.83 1.23 $780,326 537,828 242,498 3,120 70,854 9.08% $««26,216 37.00% $««44,638 45,127 5.78% $««12,587 17,338 45,127 26.35% $««16,631 27.89% 72.11% $188,419 110,759 77,660 157,770 352,405 22.14% $««45,916 179,553 161,079 1.70 $««««««««.59 – .59 .19 2.52 1.23 $706,550 479,179 227,371 3,441 61,893 8.76% $««23,210 37.50% $««38,683 38,683 5.47% $««12,114 26,569 38,683 24.75% $««15,478 31.32% 68.68% $171,309 91,780 79,529 145,849 322,746 22.18% $««50,961 163,009 143,741 1.87 $««««««««.51 – .51 .18 2.32 1.07 $607,710 411,168 196,542 3,533 52,653 8.66% $««19,745 37.50% $««32,908 32,908 5.42% $««11,656 18,182 32,908 23.41% $««14,084 35.42% 64.58% $150,901 82,275 68,626 125,465 280,893 19.66% $««32,734 149,575 117,172 1.83 61,659,316 59,426,530 60,788,674 61,349,206 63,351,692 64,737,912 64,417,370 59,779,508 5,399 60,228,590 5,319 60,991,284 5,479 62,435,450 5,556 64,181,088 4,653 65,517,990 4,534 64,742,976 4,466 $«««««85,491 $««44,684 9,390 (a) 6,502 (a) $««53,879 5,933 $««35,005 6,131 $««27,541 6,257 $««26,626 5,926 $««13,907 5,599 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S 41 R E P O R T O F I N D E P E N D E N T P U B L I C A C C O U N T A N T S To the Board of Directors and Shareholders of HON INDUSTRIES Inc. We have audited the accompanying consolidated balance sheets of HON INDUSTRIES Inc. and subsidiaries as of December 29, 2001, December 30, 2000, and January 1, 2000, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of 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 financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstate- ment. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HON INDUSTRIES Inc. and subsidiaries as of December 29, 2001, December 30, 2000, and January 1, 2000, and the results of its operations and its cash flows for each of the three fiscal years then ended in conformity with accounting principles generally accepted in the United States. Chicago, Illinois February 1, 2002 M A N A G E M E N T ’ S R E S P O N S I B I L I T Y F O R F I N A N C I A L S T A T E M E N T S 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 accor- dance 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 policies 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 accompany- ing 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 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 Jerald K. Dittmer Vice President and Chief Financial Officer 42 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S Protecting our environment, building our communities. In 1943 our founders envisioned a new kind of company. A company dedicated to the principle of respect for shareholders, employees, customers, and community; a company built on personal responsibility for shared success. In 1947 HON INDUSTRIES began making card files from pieces of scrap metal and employees became “members.” For more than 50 years, the company has made it a priority to conserve raw materials and reduce waste. We celebrate individual contri- butions; members take pride in their work and share in the success of the company. And the company takes pride in its contribution to building strong communities. Today we integrate environmental management into product development and manufacturing, we define waste as anything that does not bring value to the customer, and improving the quality of life in communities where our members live, work, and raise their families is paramount. HON INDUSTRIES and its members believe that to ensure a healthy, prosperous future for our company and our communities, we must go beyond what we should do, to what we can do – every day. H O N I N D U S T R I E S I n c . 2 0 0 1 A N N U A L R E P O R T 43 B O A R D O F D I R E C T O R S Jack D. Michaels Chairman, President and Chief Executive Officer, HON INDUSTRIES Inc. Abbie J. Smith Chaired Professor, The University of Chicago, Graduate School of Business Richard H. Stanley Vice Chairman, HON INDUSTRIES Inc. Chairman, SC Companies, Inc. Chairman, Stanley Consultants, Inc. Brian E. Stern President, Xerox Supplies Business Group, Xerox Corporation Lorne R. Waxlax Retired Executive Vice President, The Gillette Company Gary M. Christensen President and Chief Executive Officer, Pella Corporation Robert W. Cox Chairman Emeritus, Baker & McKenzie Cheryl A. Francis Advisor/Consultant M. Farooq Kathwari Chairman, President and Chief Executive Officer, Ethan Allen Interiors Inc. Robert L. Katz President, Robert L. Katz and Associates Dennis J. Martin Chairman, President and Chief Executive Officer, General Binding Corporation Committees of the Board Audit Cheryl A. Francis, Chairperson Dennis J. Martin Abbie J. Smith Human Resources and Compensation Lorne R. Waxlax, Chairperson Gary M. Christensen Robert L. Katz Public Policy and Corporate Governance Richard H. Stanley, Chairperson Robert W. Cox M. Farooq Kathwari Brian E. Stern H O N I N D U S T R I E S I n c . a n d S U B S I D I A R I E S O F F I C E R S Jack D. Michaels Chairman, President and Chief Executive Officer Stanley A. Askren Executive Vice President President, Allsteel Inc. Peter R. Atherton Vice President and Chief Technology Officer Alysia L. Bensmiller Vice President, Compensation and Benefits Tamara S. Feldman Vice President, Financial Reporting Jeffrey D. Fick Vice President, Member and Community Relations Malcolm C. Fields Vice President and Chief Information Officer Thomas E. Hammer Vice President, Continuous Improvement James I. Johnson Vice President, General Counsel and Secretary Phillip M. Martineau Executive Vice President President, Wood Group and HON International Inc. Jean M. Reynolds President, BPI Inc. Daniel C. Shimek Executive Vice President President, Hearth Technologies Inc. David C. Burdakin Executive Vice President President, The HON Company Robert D. Hayes Vice President, Business Analysis and General Auditor William F. Snydacker Treasurer Jerald K. Dittmer Vice President and Chief Financial Officer Thomas D. Head Vice President and General Manager, Holga Inc. 44 H O N I N D U S T R I E S I n c. a n d S U B S I D I A R I E S I N V E S T O R I N F O R M A T I O N Independent Public Accountants Arthur Andersen LLP 33 West Monroe Street Chicago, IL 60603-5385 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: Jerald K. Dittmer Vice President and Chief Financial Officer HON INDUSTRIES Inc. P.O. Box 1109 Muscatine, IA 52761-0071 Telephone: 563.264.7400 Fax: 563.264.7655 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. Transfer Agent Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, LLC 2 North LaSalle Street Chicago, IL 60602 Telephone: 312.588.4991 Schedule of Quarterly Results The Company operates on a fiscal year ending on the Saturday nearest December 31. Quarterly results are typically announced within 20 days after the end of each quarter, and audited results are typically announced within 40 days after year-end. Fiscal 2002 Quarter-End Dates 1st Quarter >Saturday, March 30 2nd Quarter >Saturday, June 29 3rd Quarter >Saturday, September 28 4th Quarter >Saturday, December 28 Annual Meeting The Company’s annual shareholders’ meeting will be held at 10:30 a.m. on May 6, 2002, 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 Jerald K. Dittmer, Vice President and Chief Financial Officer, 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: 563.264.7400 Fax: 563.264.7217 Website: www.honi.com 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-burning fireplaces; the effects of economic conditions; issues associated with the acquisition and inte- gration of acquisitions; operating risks; the ability of the Company to realize cost savings and productivity improvements; the ability of the Company’s distributors to successfully 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. . c n I , s s e r P y t n u o C e k a L : g n i t n i r P i n w d o o G w e r d n A : y h p a r g o t o h P e v i t u c e x E . m o c n d n a c b w w w . / u e N & s e a o C t r e l l o B i : n g s e D HON INDUSTRIES Inc. 414 East Third Street P.O. Box 1109 Muscatine, IA 52761-0071 www.honi.com 

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