HNI Corporation Annual Report 2001

FY2001 Annual Report · HNI Corporation

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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

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

7
2

5
2

8
1

9
1

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

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.

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:

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

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

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

Office
Furniture

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

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.

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

3
7

9
5

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

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.

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

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.

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

Hearth
Products

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

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.

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

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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 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.

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

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

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

8.1

2.9

5.2%

1.1

8.1

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

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

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

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.

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

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.

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

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

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.

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

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

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.

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

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.

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

Issued and outstanding

58,672,933

59,796,891

60,171,753

Preferred Stock, $1 Par Value

Authorized

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

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

$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

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

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

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

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

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

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

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

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

27.13

23.00

23.19

21.00

Dividends
per Share

$.12

.12

$.48

Dividends
per Share

$.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

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

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.

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

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

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

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.

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.

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HON INDUSTRIES Inc.

414 East Third Street

P.O. Box 1109

Muscatine, IA 52761-0071