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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
- ------------- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2000
OR
- ------------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-2648
HON INDUSTRIES INC.
An Iowa Corporation IRS Employer No. 42-0617510
414 East Third Street
P. O. Box 1109
Muscatine, IA 52761-0071
319/264-7400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, with Par Value of $1.00 Per Share.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
----
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, as of March 1, 2000, was: $795,627,354, assuming all 5% holders
are affiliates.
The number of shares outstanding of the registrant's common stock, as of March
1, 2000, was: 60,164,262.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated March 20, 2000, for the
May 1, 2000, Annual Meeting of Shareholders are incorporated by reference
into Part III.
Index of Exhibits is located on Page 55.
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ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
Table I - Executive Officers of the Registrant.............. 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data -- Eleven-Year Summary.............. 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 24
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 25
Item 11. Executive Compensation...................................... 25
Item 12. Securities Ownership of Certain Beneficial
Owners and Management....................................... 25
Item 13. Certain Relationships and Related Transactions.............. 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 26
Signatures .......................................................... 28
Financial Statements.................................................. 31
Financial Statement Schedules......................................... 54
Index of Exhibits..................................................... 55
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ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS
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GENERAL
HON INDUSTRIES Inc. ("HON" or the "Company") is an Iowa corporation
incorporated in 1944. The Company is a national manufacturer and marketer of
office furniture and hearth products. Approximately 84% of fiscal year 1999
net sales were in office furniture and 16% in hearth products. A broad office
furniture product offering is sold through a national system of dealers,
wholesalers, warehouse clubs, retail superstores, end-user customers, and to
federal and state governments. Dealer, wholesaler, and retail superstores are
the major channels based on sales. Hearth products include wood-, pellet-,
and gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas
logs. These products are sold through a national system of dealers,
wholesalers, and large regional contractors. In fiscal 1999, the Company had
net sales of $1.8 billion, of which approximately $1.5 billion was
attributable to office furniture products and $.3 billion was attributable to
hearth products. Please refer to Operating Segment Information in the Notes
to Consolidated Financial Statements for further information about operating
segments.
The Company is organized into a corporate headquarters and operating
units with offices, manufacturing plants, distribution centers, and sales
showrooms in the United States, Canada, and Mexico. See Item 2. Properties
for additional related discussion. Five operating units, marketing under
various brand names, participate in the office furniture industry. These
operating units include: The HON Company, Allsteel Inc., The Gunlocke
Company, Holga Inc., and BPI Inc. Each of these operating units manufactures
and markets products which are sold through various channels of distribution
and segments of the industry.
Hearth Technologies Inc. was created in October 1996 with the
acquisition of Heat-N-Glo Fireplace Products, Inc. and its subsequent
integration with the Company's Heatilator operation. On February 20, 1998,
the Company acquired Aladdin Steel Products, Inc., a manufacturer of wood-,
pellet-, and gas-burning stoves and inserts, for a purchase price of $10.2
million. This acquisition is also being operated by Hearth Technologies Inc.
HON International Inc. markets selected products manufactured by the
other various HON INDUSTRIES operating units outside the United States and
Canada.
During 1997, the Company completed three office furniture
acquisitions: Allsteel Inc. (June 17); Bevis Custom Furniture, Inc. (November
13); and Panel Concepts, Inc. (December 1) for a combined total purchase
price of approximately $119.5 million. These acquisitions each added new
products, product line extensions, manufacturing and distribution capacity,
new customers, and a quality work force. Allsteel operates as a separate
unit, Bevis operates under The HON Company, and Panel Concepts operates under
BPI Inc.
On February 29, 2000, the Company finalized the acquisition of two
leading hearth products distributors, American Fireplace Company (AFC) and
the Allied Group (Allied). AFC and Allied, with combined 1999 sales of nearly
$200 million, will be joined to form Hearth Services Inc., a new subsidiary
of Hearth Technologies Inc. AFC and Allied sell, install, and service a broad
range of gas- and wood-burning fireplaces as well as fireplace mantels,
surrounds, facings, and other accessories. Further details of the transaction
will be included in the Company's SEC Quarterly Report on Form 10-Q for the
first quarter ended April 1, 2000.
Since its inception, the Company has been committed to improvement in
manufacturing and in 1992 introduced its process improvement approach known
as Rapid Continuous Improvement ("RCI") which focuses on streamlining design,
manufacturing, and administrative processes. The Company's RCI program, in
which most members participate, has contributed to increased productivity,
lower manufacturing costs, and improved product quality and workplace safety.
In addition, the Company's RCI efforts enable it to offer short average lead
times, from receipt of order to shipment, for most of its products. The
Company's ability to apply RCI techniques to reduce order cycle time,
manufacturing costs,
-3-
and enhance value allows its products to be sold at prices lower than those
offered for competing products.
The Company distributes its products through an extensive network of
independent office furniture dealers, office products dealers, wholesalers
and retailers. The Company is a supplier of office furniture to each of the
largest nationwide chains of office products dealers, or "mega-dealers,"
which are Boise Cascade Corporation; U.S. Office Products Company; Corporate
Express Inc./BT; Office Depot Inc.-Business Services Division; and Staples
Commercial Advantage, and to the Office Depot, Staples, and Office Max
superstores. The Company offers reduced freight costs and complete order
delivery, regardless of the order size or combination of products, by
manufacturing at multiple locations and combining products throughout the
United States.
The Company's product development efforts are focused on reducing the
cost to manufacture existing products, and on designing new products that
provide additional features and top quality. Over 45% of the Company's 1999
net sales were from products introduced in the past three years.
An important element of the Company's success has been its ability to
attract, develop and retain skilled, experienced and efficient members. Each
of the Company's eligible members owns stock in the Company through a number
of stock-based plans, including a member stock purchase plan, an ESOP, and a
profit-sharing plan. In addition, most production members are eligible for
incentive bonuses.
For further financial-related information with respect to
acquisitions, dispositions, and Company operations in general, refer to Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the following captions included in the Notes to Consolidated
Financial Statements, which are filed as part of this report: Nature of
Operations, Business Combinations, Business Disposition, and Operating
Segment Information.
Statements in this report that are not strictly historical, including
statements as to plans, objectives, and future financial performance, are
"forward-looking" statements 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, competition 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 integration of acquisitions; operating
risks; the ability of the Company to realize cost savings and productivity
improvements; the ability of the Company's distributors to successfully
market and sell the Company's products; and the availability and cost 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.
INDUSTRY
According to the Business and Institutional Furniture Manufacturer's
Association ("BIFMA"), U.S. office furniture industry shipments are estimated
to be approximately $12,240,000,000 in 1999, a decrease of 1% over 1998. The
Company believes that the decrease was due to lower profits in mature
industries and a shifting of corporate investment into technology, a
significant part of which was to address Year 2000 concerns pertaining to
computer software that uses two-digit dates.
The U.S. office furniture market consists of two primary segments--the
project segment and the transactional segment. The project segment has
traditionally been characterized by one-time sales of large quantities of
office furniture to large corporations, such as for new office facilities,
relocations, or department or office redesigns, which are frequently
customized to meet specific client and designer preferences. Project
furniture is generally purchased through office furniture dealers who
typically prepare a custom-designed office layout emphasizing image and
design. The process is often lengthy and generally has several manufacturers
competing for the same projects. Overhead and support associated with the
sales and customization efforts in this segment are major reasons why the
prices for project office furniture have traditionally been relatively high.
The transactional segment of the market, in which the Company is a
leader, primarily represents smaller orders of office furniture purchased by
businesses and home office users on the basis of price, quality, selection
and quick delivery. Office products dealers, wholesalers and retailers, such
as office products superstores, are the primary distribution channels in this
market segment. Office products dealers (many of whom also participate in the
project segment of the market) publish periodic catalogs that display office
furniture and products from various manufacturers.
-4-
GROWTH STRATEGY
The Company's strategy is to build on its position as a leading
manufacturer of value-priced office furniture and hearth products in North
America. The components of this growth strategy are to introduce new
value-priced products, continually improve productivity, leverage the
distribution network, and pursue complementary strategic acquisitions.
EMPLOYEES/MEMBERS
As of January 1, 2000, the Company employed approximately 10,100
persons, 9,500 of whom were members and 600 of whom were temporary personnel.
Of the approximately 10,100 persons employed by the Company, 6,100 were in
the Company's manufacturing operations. The Company employed approximately
500 members who were members of unions. The Company believes that its labor
relations are good.
PRODUCTS
OFFICE FURNITURE
The Company designs, manufactures, and markets a broad range of office
furniture in four basic categories: (i) filing cabinets; (ii) seating,
including task chairs, executive desk chairs, and side chairs; (iii) office
systems (typically modular and moveable workspaces with integrated work
surfaces, space dividers, and lighting); and (iv) desks and related products,
including tables, bookcases, and credenzas. The Company's products are sold
through the Company's wholly owned subsidiaries - The HON Company, Allsteel
Inc., The Gunlocke Company, Holga Inc., and BPI Inc.
The Company's office furniture products are generally available in
contemporary as well as traditional styles and are priced to sell in
different channels of distribution and at different price points. The
Company's products are offered in many models, sizes, designs, and finishes
and are constructed from both wood and nonwood materials.
The following is a description of the Company's major product
categories and product lines:
FILING CABINETS
The Company offers a variety of filing options designed either to be
integrated into and support the Company's office systems products or to
function as freestanding furniture in commercial and home offices. The
Company believes it is the largest manufacturer and marketer of mid-priced
steel filing cabinets in the United States.
The Company sells most of its freestanding files through independent
office products and office furniture dealers, nationwide chains of office
products dealers, wholesalers, office products superstores, warehouse clubs,
and mail order distributors. Higher priced files are sold through
project-oriented office furniture dealers.
SEATING
The Company's seating line includes task chairs designed for different
kinds of office work, such as secretarial, computer, clerical, laboratory and
executive, guest chairs, conference and reception room seating, and stackable
chairs. The chairs are available in a variety of frame colors, a multitude of
fabrics, and a wide range of price points. Key customer criteria in seating
includes superior ergonomics, aesthetics, comfort and quality.
Gunlocke is one of the few remaining companies that continues to make
curved wood legs, arms and backs through the steambending process which
produces strong and attractive seating components.
-5-
OFFICE SYSTEMS
The Company offers a complete line of office panel systems products in
order to meet the needs of a variety of organizations. Systems may be used
for team worksettings, private offices and open floor plans, and are
typically modular and movable workspaces composed of adjustable partitions,
work surfaces, desk extensions, storage cabinets and electrical lighting
systems which can be moved, reconfigured and reused within the office. Panel
systems offer a cost-effective and flexible alternative to traditional
drywall office construction. The Company has experienced increased demand for
furniture systems able to accommodate new work arrangements such as team
workspaces and workspaces shared by several employees who are frequently out
of the office. A typical installation of office panels often includes
associated sales of seating, casegoods, files, and accessories.
The Company offers whole office solutions, movable panels, storage
units, and work surfaces that can be installed easily and reconfigured to
accommodate growth and change in organizations. The Company also offers
consultative selling and design services for certain of its office system
products. The compelling value of the Company's systems lines is that these
products are styled and featured similar to those of premium-priced contract
systems manufacturers but are offered at substantially lower prices.
DESKS AND RELATED PRODUCTS
The Company's collection of desks and related products include
stand-alone steel and wood furniture items, such as desks, bookshelves and
credenzas, and are available in a range of designs and price points. The
Company offers these products in both contemporary and traditional styles.
The Company's desks and related products are sold to a wide variety of
customers from those designing large office configurations to small retail
and home office purchasers.
The Company offers a variety of contemporary and traditional tables
designed for use in conference rooms, private offices, training areas, team
worksettings and open floor plans. Tables are produced in wood veneer and
laminate and are available in numerous sizes, shapes and base styles.
HEARTH PRODUCTS
The Company is the largest U.S. manufacturer and marketer of metal
prefabricated fireplace and related products, primarily for the home, which
it sells under the widely recognized Heatilator, Heat-N-Glo, Arrow-Dovre, and
Aladdin brand names. Products bearing these brands are marketed by the
Company's three hearth products companies, Heatilator, Heat-N-Glo, and
Aladdin. Each manufactures and markets its products separately and is part of
the Company's Hearth Technologies Inc. subsidiary.
The Company's line of hearth products includes wood- and gas-burning
fireplaces and stoves, fireplace inserts, chimney systems, and related
accessories. Heatilator and Heat-N-Glo are leaders in the two largest
segments of the home fireplace market: vented-gas and wood fireplaces.
Heat-N-Glo is the leader in "direct vent" fireplaces, which replace the
chimney-venting system used in traditional fireplaces with a less expensive
clothes-dryer-type vent through an outer wall. See Business - Intellectual
Property.
MANUFACTURING
The HON Company manufactures office furniture in Alabama, California,
Georgia, Iowa, Kentucky, North Carolina, Pennsylvania, Virginia, and
Monterrey, Mexico. Allsteel Inc. manufactures office furniture in Iowa,
Mississippi, Pennsylvania, and Tennessee. Holga Inc. manufactures office
furniture in California. The Gunlocke Company manufactures office furniture
in New York. Hearth Technologies Inc. manufactures hearth products in Iowa,
Minnesota, Washington, and Calgary, Canada.
The Company purchases raw materials and components from a variety of
vendors, and generally most items are available from multiple sources. Major
raw materials and components include coil steel, bar stock, castings, lumber,
veneer, particle board, fabric, paint, lacquer, hardware, rubber products,
plastic products, and shipping cartons.
-6-
Since its inception, the Company has focused on making its
manufacturing facilities and processes more flexible while at the same time
reducing costs and improving product quality. In 1992, the Company adopted
the principles of RCI, which focus on developing flexible and efficient
design, manufacturing and administrative processes that remove excess cost.
To achieve flexibility and attain efficiency goals, the Company has adopted a
variety of production techniques including cell manufacturing, focused
factories, just-in-time inventory management and value engineering. The
application of the RCI process has increased productivity by reducing set-up
and processing times, square footage, inventory levels, product costs and
delivery times, while improving quality and enhancing member safety. The
Company's RCI process involves production and administrative employees,
management, customers and suppliers. The Company has facilitators, coaches
and consultants dedicated to the RCI process and strives to involve all
members in the RCI process. In addition, the Company has organized a group
that designs, fabricates, tests and installs proprietary manufacturing
equipment. Manufacturing also plays a key role in the Company's concurrent
product development process that primarily seeks to design new products for
ease of manufacturability.
PRODUCT DEVELOPMENT
The Company's product development efforts are primarily focused on
reducing the cost to manufacture existing products and designing new products
that provide additional features and quality. The Company accomplishes this
through improving existing products, extending product lines, applying
ergonomic research, improving manufacturing processes, applying alternative
materials and providing engineering support and training to its operating
units. The Company conducts its product development efforts at both the
corporate and operating unit level. At the corporate level, the staff at the
Company's Stanley M. Howe Technical Center, working in conjunction with
operating staff, seeks breakthrough developments in product design,
manufacturability and materials usage. At the operating unit level,
development efforts are focused on achieving incremental improvements in
product features and manufacturing processes. The Company invested
approximately $17.1 million, $15.7 million and $15.4 million in product
development during fiscal 1999, 1998, and 1997, respectively, and has
budgeted in excess of $19 million for product development in fiscal 2000.
INTELLECTUAL PROPERTY
As of January 1, 2000, the Company owned 187 U.S. and 92 foreign
patents and had applications pending for 23 U.S. and 68 foreign patents. In
addition, the Company holds registrations for 122 U.S. and 163 foreign
trademarks and has applications pending for 77 U.S. and 51 foreign trademarks.
The Company's principal office furniture products do not require
frequent technical changes. The majority of the Company's patents are design
patents which expire at various times depending on the patent's date of
issuance. The Company believes that neither any individual patent nor the
Company's patents in the aggregate are material to the Company's business as
a whole.
When Hearth Technologies Inc. acquired Heat-N-Glo in October 1996, it
also acquired its patent for the design of a zero-clearance direct vent gas
fireplace (the "direct vent patent"). The direct vent design replaces the
traditional top-venting chimney system by permitting the exhaust pipe to
traverse a structure's exterior wall. The sealed combustion chamber of the
direct vent gas fireplace increases indoor air quality by using outside
rather than inside air for combustion, and the direct vent design achieves
70% heating efficiency, which means that the patented direct vent gas
fireplaces are an efficient alternative heat source in individual rooms. The
direct vent gas fireplaces are highly versatile for use in home design
because the direct vent design eliminates the need for a traditional chimney
system with top venting, thus opening up the space above the fireplace for
use. The Company currently offers numerous product designs that would not be
possible without the direct vent technology. Additionally, since a chimney is
not employed in the direct vent design, the cost of adding a new fireplace to
a home is greatly reduced.
The direct vent patent has been successfully enforced against numerous
infringers. Hearth Technologies Inc. presently is engaged as a plaintiff in
two patent infringement cases involving this patent. Final disposition of
these cases is not likely for several years. Although the Company believes
that the protection afforded by the direct vent patent is not vital to
sustaining Hearth Technologies' gross profit margins on its direct vent gas
fireplaces due to other technological innovations that support the direct
vent design, the technology that underlies the patent is a significant
distinguishing feature for the Company's products.
-7-
The Company applies for patent protection when it believes the expense
of doing so is justified, and believes that the duration of its registered
patents is adequate to protect these rights. The Company also pays royalties
in certain instances for the use of patents on products and processes owned
by others.
The Company actively protects its trademarks which it believes have
significant goodwill value.
SALES AND DISTRIBUTION: CUSTOMERS
Over the last ten years, the office products and office furniture
industries have experienced substantial consolidation as larger dealers have
acquired smaller local and regional dealers. Consolidation permits large
dealers to benefit from economies of scale, increased purchasing power, and
the elimination of redundant management and overhead expenses. Larger dealers
have also been able to take advantage of more sophisticated management
techniques designed to enhance customer service, lower costs and increase
operating efficiency. At the same time, office products superstores have
emerged and replaced local retail office supply stores. The Company believes
that these trends may continue to result in fewer, larger dealers and
retailers as customers for the Company's products.
In 1999, the Company's ten largest customers represented approximately
40% of its consolidated net sales. The substantial purchasing power exercised
by large customers may adversely affect the prices at which the Company can
successfully offer its products. As a result of this consolidation, changes
in the purchase patterns or the loss of a single customer may have a greater
impact on the Company's financial results than such events would have had
prior to such consolidation. In addition, there can be no assurance that the
Company will be able to maintain its customer relationships as consolidation
of its customers occur.
As a result of these trends, the Company today sells its products
through five principal distribution channels. The first channel, independent,
local office furniture and office products dealers, specialize in the sale of
a broad range of office furniture and office furniture systems, mostly to
small- and medium-sized businesses, branch offices of large corporations, and
home office owners. The second distribution channel comprises nationwide
chains of office products dealers, or "mega-dealers," including Boise Cascade
Corporation; U.S. Office Products Company; Corporate Express Inc./BT; Office
Depot Inc. - Business Services Division; and Staples Commercial Advantage.
Many of the independent dealers and mega-dealer locations assist their
customers with the evaluation of office space requirements, systems layout
and product selection, and design and office solution services provided by
professional designers.
The third distribution channel, wholesalers, serve as distributors of
the Company's products to independent dealers, mega-dealers and superstores.
The Company sells to the nation's largest wholesalers, United Stationers and
S.P. Richards, as well as to smaller regional wholesalers. Wholesalers
maintain stocks of standard product lines for resale to dealers. They also
special order products from the Company in customer-selected models and
colors. The Company's wholesalers maintain warehouse locations throughout the
United States, which enable the Company to make its products available for
rapid delivery to dealers anywhere in the country. One customer, United
Stationers, accounted for approximately 13%, 12%, and 12% of the Company's
consolidated net sales in 1999, 1998, and 1997, respectively.
The fourth distribution channel is retail stores, which include office
products superstores such as Office Depot, Office Max, and Staples and
warehouse clubs like Sam's Club and Costco.
The fifth distribution channel consists of government-focused dealers
that sell the Company's products to federal, state and local government
offices in accordance with contract terms to which the Company has agreed.
As of January 1, 2000, the Company's office furniture sales force
consisted of 20 regional sales managers supervising 135 salespersons, plus
approximately 45 firms of independent manufacturers' representatives who
collectively provided national sales coverage. Sales managers and
salespersons are compensated by a combination of salary and incentive bonus.
Office products dealers, national wholesalers and retailers market
their products through catalogs published periodically and distributed to
existing and potential customers. The Company's marketing objective is to
gain share in its customers' catalogs. The Company believes that the
inclusion of the Company's product lines in customer catalogs offers strong
potential for increased sales of the listed product items due to the exposure
provided by these publications.
-8-
The Company also makes export sales through HON International Inc. to
approximately 140 office furniture dealers and wholesale distributors serving
select foreign markets. Distributors are principally located in Latin America
and the Caribbean. The Company has an international field sales organization
consisting of a Vice President of Sales and Marketing and four regional
managers. Sales outside of the United States and Canada represented
approximately 1% of net sales in fiscal 1999.
Limited quantities of select finished goods inventories are maintained
at the Company's principal manufacturing plants and at its various
distribution centers.
Hearth Technologies Inc. sells its fireplace and stove products
through approximately 3,000 dealers and 510 distributors. The company has a
field sales organization of 13 regional sales managers supervising 29
salespersons and 20 firms of independent manufacturers' representatives.
As of January 1, 2000, the Company has an order backlog of
approximately $131.2 million which will be filled in the ordinary course of
business within the current fiscal year. This compares with $97.8 million as
of January 2, 1999, and $106.4 million as of January 3, 1998. Backlog, in
terms of percentage of net sales, was 7.3%, 5.8%, and 7.8% for fiscal years
1999, 1998, and 1997, respectively. The Company's products are manufactured
and shipped within a few weeks following receipt of order. The dollar amount
of the Company's order backlog is therefore not considered by management to
be a leading indicator of the Company's expected sales in any particular
fiscal period.
For a discussion of the seasonal nature of the Company's sales, see
Operating Segment Information in the Notes to Consolidated Financial
Statements.
COMPETITION
The office furniture industry is highly competitive, with a
significant number of competitors offering similar products. The Company
competes by emphasizing its ability to deliver compelling value products. In
executing this strategy, the Company has two significant classes of
competitors. First, the Company competes with numerous small- and
medium-sized office furniture manufacturers that focus on more limited
product lines and/or end-user segments and include Global Furniture Inc.;
Anderson-Hickey Co., Globe Business Furniture and United Chair, Inc.,
divisions of Haworth, Inc.; National Office Furniture, a division of Kimball
Office Furniture Co.; and High Point Furniture Industries, Inc. Second, the
Company competes with a small number of large office furniture manufacturers
which control a substantial portion of the market share in the
project-oriented office furniture market, such as Steelcase Inc.; Haworth,
Inc.; Herman Miller, Inc.; and Knoll, Inc. Some of these large competitors
have substantially greater assets, resources and capabilities in the
traditional project market than the Company. Products and brands offered by
these project-oriented office furniture market participants have strong
acceptance in the market place and have developed, and may continue to
develop, value-priced product designs to compete with the Company. The
Company also faces significant price competition from its competitors and may
encounter competition from new market entrants. There can be no assurance
that the Company will be able to compete successfully in its markets in the
future.
Hearth products, consisting of prefabricated metal fireplaces and
related products, are manufactured by a number of national and regional
competitors. A limited number of manufacturers, however, are predominant in
this relatively small industry. The Company competes primarily against the
larger manufacturers which include CFM/Majestic Inc. (a Canadian company),
Lennox Industries Inc. (Superior and Marco brands), Martin Industries Inc.,
and Fireplace Manufacturers Inc. (FMI).
Both office furniture and hearth products compete on the basis of
price, product performance, product quality, complete and on-time delivery to
the customer, and customer service and support. The Company believes that it
competes principally by providing compelling value products designed to be
among the best in their price range for product quality and performance,
superior customer service, and short lead-times. This is made possible, in
part, by the Company's significant on-going investment in product
development, highly efficient and low cost manufacturing operations, and an
extensive distribution network.
-9-
The Company is one of the largest office furniture manufacturers in
the United States, and believes that it is the largest manufacturer of
value-priced furniture. The Company is also the largest manufacturer and
marketer of fireplaces in the United States.
For further discussion of the Company's competitive situation, refer
to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
EFFECTS OF INFLATION
Certain business costs may, from time to time, increase at a rate
exceeding the general rate of inflation. The Company's objective is to offset
the effect of inflation on its costs primarily through productivity increases
in combination with certain adjustments to the selling price of its products
as competitive market and general economic conditions permit.
Investments are routinely made in modern plants, equipment, support
systems, and for Rapid Continuous Improvement programs. These investments
collectively focus on increasing productivity which helps to offset the
effect of rising material and labor costs. Ongoing cost control disciplines
are also routinely employed. In addition, the last-in, first-out (LIFO)
valuation method is used for most of the Company's inventories, which ensures
the changing material and labor costs are recognized in reported income; and
more importantly, these costs are recognized in pricing decisions.
ENVIRONMENTAL
The Company is subject to a variety of environmental laws and
regulations governing discharges of air and water; the handling, storage, and
disposal of hazardous or solid waste materials; and the remediation of
contamination associated with releases of hazardous substances. Although the
Company believes it is in material compliance with all of the various
regulations applicable to its business, there can be no assurance that
requirements will not change in the future or that the Company will not incur
material costs to comply with such regulations. The Company has trained staff
responsible for monitoring compliance with environmental, health, and safety
requirements. The Company's environmental professionals work with responsible
personnel at each manufacturing facility, the Company's environmental legal
counsel, and consultants on the management of environmental, health and
safety issues. The Company's ultimate goal is to reduce and, when practical,
eliminate the creation of hazardous waste in its manufacturing processes.
Compliance with federal, state, and local environmental regulations
has not had a material effect on the capital expenditures, earnings, or
competitive position of the Company to date. The Company does not anticipate
that financially material capital expenditures will be required during fiscal
year 2000 for environmental control facilities. It is management's judgment
that compliance with current regulations should not have a material effect on
the Company's financial condition or results of operations. However, the
uncertainty of new environmental legislation and technology in this area
makes it impossible to know with confidence.
For additional information about the Company's environmental matters,
refer to Item 3. Legal Proceedings and the Contingencies note in the Notes to
Consolidated Financial Statements.
BUSINESS DEVELOPMENT
The development of the Company's business during the fiscal years
ended January 1, 2000, January 2, 1999, and January 3, 1998, is discussed in
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
-10-
ITEM 2. PROPERTIES
- -------------------
The Company maintains its corporate headquarters in Muscatine, Iowa,
and conducts its operations at locations throughout the United States,
Canada, and Mexico which house manufacturing and distribution operations and
offices totaling an aggregate of approximately 8.7 million square feet. Of
this total, approximately 1.8 million square feet are leased, including
approximately 0.3 million square feet under a capital lease.
Although the plants are of varying ages, the Company believes they are
well maintained, are equipped with modern and efficient equipment, and are in
good operating condition and suitable for the purposes for which they are
being used. The Company has sufficient capacity to increase output at most
locations by increasing the use of overtime and/or number of production
shifts employed.
The Company's principal manufacturing and distribution facilities
(100,000 square feet in size or larger) are as follows:
APPROXIMATE OWNED OR DESCRIPTION
LOCATION SQUARE FEET LEASED OF USE
-------- ----------- -------- -----------
Cedartown, Georgia 547,014 Owned Manufacturing wood/nonwood
casegoods office furniture (1)
Chester, Virginia 382,082 Owned/ Manufacturing nonwood casegoods
Leased(2) office furniture (1)
Florence, Alabama 308,763 Owned Manufacturing wood casegoods
office furniture
Jackson, Tennessee 301,000 Leased Manufacturing parts for office
furniture (1)
Jackson, Tennessee 155,000 Leased Manufacturing nonwood office
seating
Kent, Washington 189,062 Leased Manufacturing systems
office furniture
Lake City, Minnesota 235,000 Leased Manufacturing metal prefabricated
fireplaces (1)
Louisburg, North Carolina 176,354 Owned Manufacturing wood casegoods
office furniture
Milan, Tennessee 358,000 Leased Manufacturing systems office
furniture
Monterrey, Mexico 105,000 Owned Manufacturing nonwood
office seating
Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal prefabricated
fireplaces (1)
Muscatine, Iowa 286,000 Owned Manufacturing nonwood casegoods
office furniture (1)
Muscatine, Iowa 578,284 Owned Warehousing office
furniture (1)
Muscatine, Iowa 236,100 Owned Manufacturing wood casegoods
office furniture
-11-
Muscatine, Iowa 142,850 Owned Manufacturing systems office
furniture
Muscatine, Iowa 342,850 Owned Manufacturing systems office
furniture
Muscatine, Iowa 237,800 Owned Manufacturing nonwood office
seating
Muscatine, Iowa 210,000 Owned Warehousing office furniture
Muscatine, Iowa 127,400 Owned Manufacturing wood casegoods
office furniture
Owensboro, Kentucky 311,575 Owned Manufacturing wood office seating
Salisbury, North Carolina 129,000 Owned Manufacturing systems office
furniture
South Gate, California 520,270 Owned Manufacturing nonwood casegoods
and seating office furniture (1)
Wayland, New York 692,226 Owned Manufacturing wood casegoods and
seating office furniture (1)
West Hazleton, Pennsylvania 268,800 Owned Manufacturing nonwood casegoods
office furniture
Williamsport, Pennsylvania 147,265 Owned Manufacturing wood office seating
and casegoods
Verona, Mississippi 257,000 Owned Manufacturing systems office
furniture
- ----------------
(1) Also includes a regional warehouse/distribution center
(2) A capital lease
Other Company facilities, under 100,000 square feet in size, are
located in Muscatine and Mt. Pleasant, Iowa; Van Nuys and Santa Ana,
California; Sulphur Springs, Texas; Winnsboro, South Carolina; Richmond,
Virginia; Colville, Washington; and Calgary, Alberta, Canada. These
facilities total approximately 1,098,000 square feet with approximately
909,000 square feet used for the manufacture and distribution of office
furniture and approximately 189,000 square feet for hearth products. Of this
total, approximately 245,000 square feet are leased. Two of these facilities
have been vacated and are in the process of being marketed for sale. The
Company also leases sales showroom space in office furniture market centers
in several major metropolitan areas.
The Company has a 40,000 square foot leased plant in Savage,
Minnesota, which is subleased.
There are no major encumbrances on Company-owned properties other than
outstanding mortgages on certain properties, the amount of which is disclosed
in the Long-Term Debt note in the Notes to Consolidated Financial Statements,
filed as a part of this report. Refer to the Property, Plant, and Equipment
note in the Notes to Consolidated Financial Statements for related cost,
accumulated depreciation, and net book value data.
As of January 1, 2000, the Company has approximately 122,000
additional square feet of office, production and warehousing space at one
plant site which is scheduled for completion during 2000.
-12-
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is involved in certain continuing activities in
Pennsylvania to clean-up environmental contamination at one site formerly
owned by a subsidiary of the Company. The Pennsylvania environmental
authorities are supervising this activity. The costs associated with this
site are primarily related to the operation of a groundwater remediation
system. These costs have not had a material effect on the financial condition
or results of operations of the Company.
The Company was a party, along with three other potentially
responsible parties, to an Imminent or Substantial Endangerment Order and
Remedial Action Order dated April 29, 1994, (the "Order") by the California
Department of Toxic Substances Control ("DTSC") in connection with the former
Firestone Tire & Rubber Company facility in South Gate, California (the
"Firestone Site"). The Company has denied liability, asserting that any
contamination on the property relates to operations conducted by others
before the Company purchased the property. In June 1999, the Company entered
into an agreement with Bridgestone/Firestone, Inc. ("BFS"), the former owner
of the Firestone Site. In that agreement, BFS agrees to continue the
investigation and clean-up work required by DTSC at its sole expense. It also
agrees to hold the Company harmless from any costs related to environmental
investigation and remediation required by the Order and from claims by any
regulatory agency that the hazardous substances which are the subject of the
Order are the source of any off-site ground-water contamination.
Investigation and clean-up work at the Firestone Site is being conducted by
BFS pursuant to a work plan approved by DTSC, and the Company believes they
will continue to do so at their own expense. In September 1999, the DTSC
issued an amendment to the Order removing the Company from the Order.
Due to such factors as the wide discretion of regulatory authorities
regarding clean-up levels and uncertain allocation of liability at multiple
party sites, estimates made prior to the approval of a formal plan of action
represent management's best judgment as to estimates of reasonably
foreseeable expenses based upon average remediation costs at comparable
sites. The Company, therefore, has accrued liabilities reflecting
management's current, best estimate of the eventual future cost of the
Company's anticipated share of remediation costs. That estimate is based upon
estimated ranges of remediation costs, the existence of other potentially
responsible parties to share in such costs who are financially viable, the
Company's experience to date in relation to the determination of its
allocable share, the knowledge of the Company that it did not contribute
contamination to the sites, and the anticipated periods of time over which
such costs may be paid. Recovery of these costs from insurance is not
expected. Management believes that the ultimate outcome of these matters will
not have a material effect on the Company's financial position or results of
operations.
For additional information on legal proceedings involving the Company,
refer to the Contingencies note included in the Notes to Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
-13-
PART I, TABLE I
EXECUTIVE OFFICERS OF THE REGISTRANT
JANUARY 1, 2000
Family
Name Age Relationship Position
---- --- ------------ --------
Jack D. Michaels 62 None Chairman of the Board
President
Chief Executive Officer
Director
Jeffrey D. Fick 38 None Vice President,
Member and Community Relations
James I. Johnson 51 None Vice President, General Counsel an
Secretary
Melvin L. McMains 58 None Vice President and
Controller
Thomas K. Miller 61 None Vice President, Marketing and
International
President, HON International Inc.
David W. Strohl 56 None Vice President,
Technical Development
David C. Stuebe 59 None Vice President and Chief
Financial Officer
PART I, TABLE I
EXECUTIVE OFFICERS OF THE REGISTRANT
JANUARY 1, 2000
Position Other Business Experience
Held Since During Past Five Years
---------- ----------------------
1996 Chairman, President and Chief Executive
1990 Officer
1991
1990
1997 Secretary and Acting General Counsel (1997);
Senior Counsel (1994-97)
1997 General Counsel and Secretary, Norand
Corporation, a portable data computing
company (1990-97)
1998 Controller (1980-present),
1980
1996 Vice President, Marketing and Distribution
(1996); Vice President, Strategic
1996 Development-Office Depot (1995-96), HON
INDUSTRIES Inc.; President, Ring King
Visibles, Inc. (1991-96)
1993 Vice President, Technical Development
1994 Vice President and Chief Financial Officer
Officer
-14-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's common stock is listed for trading on the New York Stock
Exchange (NYSE), trading symbol HNI. The Company moved to the NYSE, effective
July 2, 1998, from the Nasdaq National Market System where the stock had
traded under the symbol HONI. As of year-end 1999, the Company had 6,737
stockholders of record.
Harris Trust and Savings Bank, Chicago, Illinois, serves as the
Company's transfer agent and registrar of its common stock. Shareholders may
report a change of address or make inquiries by writing or calling: Harris
Trust and Savings Bank, P.O. Box A3504, Chicago, IL 60690-3504 or telephone
312/360-5346.
Common Stock Market Prices and Dividends (Unaudited) and Common Stock
Market Price and Price/Earnings Ratio (Unaudited) are presented in the
Investor Information section which follows the Notes to Consolidated
Financial Statements filed as part of this report.
The Company expects to continue its policy of paying regular cash
dividends on the first business day of March, June, September, and December.
Dividends have been paid each quarter since the Company paid its first
dividend in 1955. The average dividend payout percentage for the most recent
three-year period has been 23% of prior year earnings. Future dividends are
dependent on future earnings, capital requirements, and the Company's
financial condition.
-15-
HON INDUSTRIES INC. AND SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA -- ELEVEN-YEAR SUMMARY
- -------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Income before Cumulative Effect of Accounting Changes $ 1.44 $ 1.72 $ 1.45
Cumulative Effect of Accounting Changes - - -
Net Income 1.44 1.72 1.45
Cash Dividends .38 .32 .28
Book Value 8.33 7.54 6.19
Net Working Capital 1.52 1.19 1.53
- ---------------------------------------------------------------------------------------------------------------
OPERATING RESULTS (THOUSANDS OF DOLLARS)
Net Sales $ 1,789,281 $ 1,696,433 $ 1,362,713
Cost of Products Sold 1,236,612 1,172,997 933,157
Gross Profit 552,669 523,436 429,556
Interest Expense 9,712 10,658 8,179
Income before Income Taxes 137,575 170,109 139,128
Income before Income Taxes
as a % of Net Sales 7.69% 10.03% 10.21%
Federal and State Income Taxes $ 50,215 $ 63,796 $ 52,173
Effective Tax Rate 36.5% 37.50% 37.50%
Income before Cumulative Effect
of Accounting Changes $ 87,360 $ 106,313 $ 86,955
Net Income 87,360 106,313 86,955
Net Income as a % of Net Sales 4.88% 6.27% 6.38%
Cash Dividends and Share
Purchase Rights Redeemed $ 23,112 $ 19,730 $ 16,736
Addition to (Reduction of) Retained Earnings 64,248 86,583 37,838
Net Income Applicable to Common Stock 87,360 106,313 86,955
% Return on Average Shareholders' Equity 18.14% 25.20% 27.43%
Depreciation and Amortization $ 65,453 $ 52,999 $ 35,610
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTION OF NET INCOME
% Paid to Shareholders 26.46% 18.56% 19.25%
% Reinvested in Business 73.54% 81.44% 80.75%
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION (THOUSANDS OF DOLLARS)
Current Assets $ 316,556 $ 290,329 $ 295,150
Current Liabilities 225,123 217,438 200,759
Working Capital 91,433 72,891 94,391
Net Property, Plant, and Equipment 455,591 444,177 341,030
Total Assets 906,723 864,469 754,673
% Return on Beginning Assets Employed 16.94% 23.74% 28.27%
Long-Term Debt and Capital Lease Obligations $ 124,173 $ 135,563 $ 134,511
Shareholders' Equity 501,271 462,022 381,662
Retained Earnings 416,034 351,786 265,203
Current Ratio 1.41 1.34 1.47
- ---------------------------------------------------------------------------------------------------------------
CURRENT SHARE DATA
Number of Shares Outstanding at Year-End 60,171,753 61,289,618 61,659,316
Weighted-Average Shares
Outstanding During Year 60,854,579 61,649,531 59,779,508
Number of Shareholders of Record at Year-End 6,737 5,877 5,399
- ---------------------------------------------------------------------------------------------------------------
OTHER OPERATIONAL DATA
Capital Expenditures-- Net (Thousands of Dollars) $ 71,474 $ 149,717 $ 85,491
Members (Employees) at Year-End 10,095 9,824* 9,390*
- ---------------------------------------------------------------------------------------------------------------
*Includes acquisitions completed during year
-16-
1996 1995 1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------
$ 1.13 $ .67 $ .87 $ .69 $ .59 $ .51 $ .65 $ .39
- - - .01 - - - -
1.13 .67 .87 .70 .59 .51 .65 .39
.25 .24 .22 .20 .19 .18 .15 .12
4.25 3.56 3.17 2.83 2.52 2.32 2.03 1.88
.89 1.07 1.27 1.23 1.23 1.07 .82 .83
- -------------------------------------------------------------------------------------------------------------------
$ 998,135 $ 893,119 $ 845,998 $ 780,326 $ 706,550 $ 607,710 $ 663,896 $ 602,009
679,496 624,700 573,392 537,828 479,179 411,168 458,522 409,942
318,639 268,419 272,606 242,498 227,371 196,542 205,374 192,067
4,173 3,569 3,248 3,120 3,441 3,533 3,611 3,944
105,267 65,517 86,338 70,854 61,893 52,653 69,085 44,656
10.55% 7.34% 10.21% 9.08% 8.76% 8.66% 10.41% 7.42%
$ 37,173 $ 24,419 $ 31,945 $ 26,216 $ 23,210 $ 19,745 $ 25,907 $ 17,193
35.31% 37.27% 37.00% 37.00% 37.50% 37.50% 37.50% 38.50%
$ 68,094 $ 41,098 $ 54,393 $ 44,638 $ 38,683 $ 32,908 $ 43,178 $ 27,463
68,094 41,098 54,156 45,127 38,683 32,908 43,178 27,463
6.82% 4.60% 6.43% 5.78% 5.47% 5.42% 6.50% 4.56%
$ 14,970 $ 14,536 $ 13,601 $ 12,587 $ 12,114 $ 11,656 $ 9,931 $ 8,298
33,860 18,863 13,563 17,338 26,569 18,182 (11,952) (17,444)
68,094 41,098 54,156 45,127 38,683 32,908 43,178 27,463
29.06% 20.00% 28.95% 26.35% 24.75% 23.41% 33.24% 19.92%
$ 25,252 $ 21,416 $ 19,042 $ 16,631 $ 15,478 $ 14,084 $ 13,973 $12,866
- -------------------------------------------------------------------------------------------------------------------
21.98% 35.37% 25.11% 27.89% 31.32% 35.42% 23.00% 30.22%
78.02% 64.63% 74.89% 72.11% 68.68% 64.58% 77.00% 69.78%
- -------------------------------------------------------------------------------------------------------------------
$ 205,527 $ 194,183 $ 188,810 $ 188,419 $ 171,309 $ 150,901 $ 146,591 $ 162,576
152,553 128,915 111,093 110,759 91,780 82,275 93,465 106,104
52,974 65,268 77,717 77,660 79,529 68,626 53,126 56,472
234,616 210,033 177,844 157,770 145,849 125,465 124,603 114,116
513,514 409,518 372,568 352,405 322,746 280,893 276,984 284,322
25.93% 17.91% 24.72% 22.14% 22.18% 19.66% 24.00% 16.32%
$ 77,605 $ 42,581 $ 45,877 $ 45,916 $ 50,961 $ 32,734 $ 37,250 $ 36,996
252,397 216,235 194,640 179,553 163,009 149,575 131,612 128,203
227,365 193,505 174,642 161,079 143,741 117,172 98,990 110,942
1.35 1.51 1.70 1.70 1.87 1.83 1.57 1.53
- -------------------------------------------------------------------------------------------------------------------
59,426,530 60,788,674 61,349,206 63,351,692 64,737,912 64,417,370 $64,769,794 68,194,176
60,228,590 60,991,284 62,435,450 64,181,088 65,517,990 64,742,976 66,220,810 69,632,100
5,319 5,479 5,556 4,653 4,534 4,466 4,331 4,124
- -------------------------------------------------------------------------------------------------------------------
$ 44,684 $ 53,879 $ 35,005 $ 27,541 $ 26,626 $ 13,907 $ 20,709 $ 12,807
6,502* 5,933 6,131 6,257 5,926 5,599 6,073 6,385
- -------------------------------------------------------------------------------------------------------------------
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
The following discussion of the company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the consolidated financial statements of the company and related notes.
RESULTS OF OPERATIONS
The following table sets forth the percentage of consolidated net sales
represented by certain items reflected in the Company's statements of income
for the periods indicated.
Fiscal 1999 1998 1997
- ------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 69.1 69.1 68.5
-----------------------------------------
Gross profit 30.9 30.9 31.5
Selling and
administrative expenses 21.6 20.3 20.9
Provision for closing facilities
and reorganization expense 1.1 - -
----------------------------------------
Operating income 8.2 10.6 10.6
Interest expense - net .5 .5 .4
Income before income taxes 7.7 10.1 10.2
Income taxes 2.8 3.8 3.8
----------------------------------------
Net income 4.9% 6.3% 6.4%
- ------------------------------------------------------------------------------------------
The Company has two reportable core operating segments: office furniture and
hearth products. The Operating Segment Information note included in the Notes
to Consolidated Financial Statements provides more detailed financial data
with respect to these two segments.
FISCAL YEAR ENDED JANUARY 1, 2000, COMPARED TO FISCAL YEAR ENDED JANUARY 2, 1999
NET SALES
Net sales, on a consolidated basis, increased by 5% to $1.8 billion in 1999
from $1.7 billion in 1998. The Company increased sales in both core operating
segments due to the continued focus on superior customer service and rapid
introduction of new innovative products. Office furniture net sales increased
4% in 1999 to $1.50 billion from $1.45 billion in 1998. Net sales of hearth
products increased 16% to $284.9 million in 1999 from $245.1 million in 1998.
The Business and Institutional Furniture Manufacturer's Association reported
a decline in office furniture shipments of 1% in 1999 compared to 1998. The
hearth products industry's 1999 annual growth rate is estimated at 6% to 7%.
The Company's most recent five-year compounded annual growth rate in net
sales is 16%.
GROSS PROFIT
Gross profit dollars increased 6% to $552.7 million in 1999 from $523.4
million in the prior year. Gross margin held steady at 30.9% for 1999 and
1998. The Company is continuing to focus on improving gross margins. A tight
labor market made it more difficult than anticipated to staff facilities
causing an increase in backlog and additional overtime, increased training,
and expenses associated with moving production to alternate plant locations.
The Company was able to fill positions in the fourth quarter and implemented
plans to ensure workers are in place to meet order demands. Gross profit also
included start-up costs associated with the Monterrey, Mexico, production
facility.
-18-
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by 12% to $386.5 million in
1999 from $344.3 million in the prior year. Selling and administrative
expenses, as a percentage of net sales, increased to 21.6% in 1999 from 20.3%
in 1998. The Company has implemented a number of internal initiatives to
serve customers better by providing complete, on-time, and undamaged orders
quickly. These initiatives have resulted in increased freight costs. The
Company has contracted with distribution experts and is currently
implementing a new logistical management system to lower freight costs while
still providing excellent service to customers.
The Company also launched a strategic initiative during the fourth quarter to
strengthen its office furniture market focus. Allsteel Inc., which was
purchased in 1997, and The HON Company had been operating as one business
unit. During the fourth quarter, the two operations were split into two
separate business units. The HON Company serves the open-line, middle-market
segment, and Allsteel Inc. serves the project-oriented contract market. The
Company incurred additional costs related to this initiative in the
near-term, but these investments will be leveraged as the companies increase
sales and grow their market shares. Both business units continue to be
reported under the Company's office furniture segment reported in the
Operating Segment Information note included in the Notes to Consolidated
Financial Statements.
Selling and administrative expenses for 1999 were significantly influenced by
increased 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 comparative expense levels for
these major expense items.
OPERATING INCOME
Operating income decreased by 7.3% to $166.1 million (excluding a one-time,
pre-tax charge for closing facilities and reorganization expense of $19.7
million) in 1999 from $179.2 million in 1998. The decrease is due principally
to increased selling and administrative expenses.
NET INCOME
Net income, excluding the $12.5 million nonrecurring, after-tax charge for
the closing of facilities and reorganization expenses, decreased by 6.1% to
$99.9 million in 1999 from $106.3 million in the prior year. This decrease is
primarily attributable to increased selling and administrative expenses. A
favorable impact on net income was caused by a decrease in the Company's
effective tax rate from 37.5% in 1998 to 36.5% in 1999 resulting from
favorable state income tax initiatives.
Net income per common share decreased by 4.7% to $1.64 (excluding a
nonrecurring, after-tax charge of $0.20 per share) in 1999 from $1.72 for
1998. The Company's net income per share for 1999 benefited from the
Company's common stock repurchase program. Weighted-average shares
outstanding was reduced from 61.6 million shares for 1998 to 60.9 million
shares for 1999 as a result of the repurchase program.
FISCAL YEAR ENDED JANUARY 2, 1999, COMPARED TO FISCAL YEAR ENDED
JANUARY 3, 1998
NET SALES
Net sales, on a consolidated basis, increased by 24% to $1.7 billion in 1998
from $1.36 billion in the prior year even though fiscal year 1998 was a
normal 52-week year compared to 1997 being a 53-week year. The Company
increased sales in both core operating segments due to the continued focus on
superior customer service, rapid introduction of new innovative and
compelling value products, and acquisitions. Office furniture net sales
increased 25% in 1998 to $1.5 billion from $1.16 billion in 1997. Net sales
of hearth products increased 20% to $245.1 million in 1998 from $204.5
million in 1997. Both core operating segments experienced another year of
strong growth during 1998. The office products industry reported an annual
growth rate of 7.8% and hearth products an estimated 10%. The Company's
five-year compounded annual growth rate was 17% in net sales as of the end of
fiscal year 1998.
-19-
GROSS PROFIT
Gross profit increased 22% to $523.4 million in 1998 from $429.6 million in
the prior year. Gross margin decreased to 30.9% for 1998 compared to 31.5%
for 1997. This decrease was due to selling price reductions on select
products to increase sales volume, which were only partially offset by
productivity gains, and the adverse impact of the Allsteel acquisition not
achieving the Company's margin standards as rapidly as projected.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by 21% to $344.3 million from
$284.4 million in the prior year. Selling and administrative expenses, as a
percentage of net sales, decreased to 20.3% in 1998 from 20.9% in 1997.
Management places major emphasis on controlling and reducing selling and
administrative expenses.
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
comparative expense levels for these major expense items.
OPERATING INCOME
Operating income increased by 23% to $179.2 million in 1998 from $145.2
million in 1997. The increase was due to increased sales and lower selling
and administrative expenses as a percent of sales.
NET INCOME
Net income increased by 22% to $106.3 million in 1998 from $87.0 million in
1997. This increase was a result of the higher operating income being
partially offset by an increase in interest expense associated with
acquisition and capital expenditures.
Net income per common share increased by 19% to $1.72 in 1998 from $1.45 in
1997. Average shares outstanding increased to 61.6 million in 1998 from 59.8
million in 1997 as a result of the weighting of the October 1997 primary
stock offering.
FISCAL YEAR ENDED JANUARY 3, 1998, COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
1996
NET SALES
Net sales, on a consolidated basis, increased by 37% to $1.36 billion in 1997
from $998.1 million in the prior year. The Company increased net sales in
both core segments by offering compelling value products through a
combination of broad selection, features, quality, price, and service. Office
furniture products net sales increased 31% in 1997 to $1.16 billion from
$887.3 million in 1996 due in part to the Company's acquisitions of Allsteel
Inc., Bevis Custom Furniture, Inc., and Panel Concepts, Inc. Hearth products
net sales increased 84% in 1997 to $204.5 million from $110.8 million in 1996
due in part to the Company's October 1996 acquisition of Heat-N-Glo Fireplace
Products, Inc. Both core industry segments experienced strong growth during
1997. The office products industry reported an annual growth rate of 15% and
hearth products an estimated 10%. The Company's compounded annual growth rate
for the five-year period of 1993 to 1997 was 14% in net sales while the
overall office furniture industry's sales growth rate was 8%. No comparable
industry growth data is available for the hearth products industry.
-20-
GROSS PROFIT
Gross profit increased by 35% to $429.6 million in 1997 from $318.6 million
in the prior year. Gross margin decreased to 31.5% for 1997 compared to 31.9%
for 1996. This lower margin was due to the combination of productivity gains
and cost control initiatives being more than offset by strategic selling
price reductions on select products to increase market share and the impact
of lower operating margins for certain 1997 acquisitions.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by 32% to $284.4 million from
$215.6 million in the prior year. Selling and administrative expenses, as a
percentage of net sales, decreased to 20.9% in 1997 from 21.6% in 1996. This
decrease was a result of continued commitment to develop more efficient
business processes which have improved member productivity, stringent control
of expenses, and increased efficiencies associated with higher net sales.
However, these results were partially offset by increased freight costs due
to growth of unit volume, increased distribution costs for new warehouse
capacity and product handling technologies that facilitate providing a higher
level of service to customers, and the ongoing commitment to developing and
marketing new products.
This expense category, in addition to freight expense to the customer, also
includes major costs related to product development and amortization expense
of intangible assets. The Selling and Administrative Expenses note included
in the Notes to Consolidated Financial Statements provides further
information regarding the comparative expense levels for these major expense
items.
OPERATING INCOME
Operating income increased by 41% to $145.2 million in 1997 from $103.0
million, excluding a nonrecurring, pre-tax gain on the sale of a subsidiary
of $3.2 million in 1996. The increase is due to controlling operating costs
and leveraging incremental sales.
NET INCOME
Net income increased by 32% to $87.0 million in 1997 from $66.1 million in
1996, excluding the $2.0 million nonrecurring, after-tax gain on the sale of
a subsidiary. This increase was a result of the higher operating income being
partially offset by an increase in interest expense associated with
acquisitions and the resumption of a more normal effective income tax rate.
The effective tax rate was 37.5% for 1997 compared to 35.3% for 1996. The
rate for 1996 was favorably impacted by nonrecurring income tax credits of
$2.1 million, or $0.04 per share, recorded in the third quarter of 1996.
Net income per common share increased by 32% to $1.45 in 1997 from $1.10,
excluding a nonrecurring, after-tax gain of $0.03 per share in 1996. Average
common shares outstanding decreased to 59.8 million in 1997 from 60.2 million
in 1996.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, cash from operations was $156.2 million, which provided the
funds necessary to meet working capital needs, invest in capital
improvements, repay long-term debt, repurchase common stock, and pay
increased dividends.
CASH MANAGEMENT
Cash, cash equivalents, and short-term investments totaled $22.2 million
compared to $17.7 million at the end of 1998 and $46.3 million at the end of
1997. 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.
-21-
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
about 37 days over the past three years. Inventory levels and turns continue
to improve as a function of reducing production cycle times. Inventory turns
have been in the 17 to 18 range over the past three years.
The Company had a cash infusion during the fourth quarter of 1997 from its
primary offering of 2,300,000 shares of common stock at an offering price of
$26 per share. This transaction netted the Company approximately $56.8
million which was used to finance acquisitions and repay a portion of debt
associated with acquisitions.
CAPITAL EXPENDITURE INVESTMENTS
Capital expenditures, net of disposals, were $71.5 million in 1999, $149.7
million in 1998, and $85.5 million in 1997. Expenditures during 1999, 1998,
and 1997 have been consistently focused on machinery and equipment and
facility expansion needed to support new products, process improvements,
cost-savings initiatives, and creating additional production and warehousing
capacity.
ACQUISITIONS
In February 1998, the Company completed the acquisition of Aladdin Steel
Products, Inc., a manufacturer of decorative gas- and wood-burning stoves,
for a purchase price of approximately $10.2 million. This acquisition allowed
the Company to strengthen its position in the hearth products market. During
1997, the Company completed three office furniture acquisitions: Allsteel
Inc. in June; Bevis Custom Furniture, Inc. in November; and Panel Concepts,
Inc. in December for a combined purchase price of approximately $119.5
million. All of the acquisitions were accounted for under the purchase method
of accounting and financed by a combination of cash and long-term debt.
LONG-TERM DEBT
Long-term debt, including capital lease obligations, was 20% of total
capitalization at January 1, 2000, 23% at January 2, 1999, and 26% at January
3, 1998. The Company does not expect future capital resources to be a
constraint on planned growth. Significant additional borrowing capacity is
available through a revolving bank credit agreement in the event cash
generated from operations should be inadequate to meet future needs.
CASH DIVIDENDS
Cash dividends were $0.38 per common share for 1999, $0.32 for 1998, and
$0.28 for 1997. Further, the Board of Directors announced a 15.8% increase in
the quarterly dividend from $0.095 to $0.11 per common share effective with
the March 1, 2000, dividend payment. The previous quarterly dividend increase
was from $0.08 to $0.095, effective with the March 1, 1999, dividend payment.
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 23% of prior year
earnings.
STOCK SPLIT
On February 11, 1998, the Board of Directors announced a two-for-one stock
split in the form of a 100 percent stock dividend that was paid on March 27,
1998, to shareholders of record on March 6, 1998. Shareholders received one
share of common stock for each share held on record date.
-22-
COMMON SHARE REPURCHASES
During 1999, the Company repurchased 1,408,624 shares of its common stock at
a cost of approximately $30.9 million, or an average price of $21.91. As of
January 1, 2000, approximately $31.6 million of the $70.0 million authorized
by the Board of Directors for repurchases remained unspent. During 1998, the
Company repurchased 529,284 shares at a cost of approximately $12.2 million,
or an average price of $23.04. During 1997, the Company repurchased 183,154
shares at a cost of approximately $4.1 million, or an average price of $22.30.
LITIGATION AND UNCERTAINTIES
The Company is involved in various legal actions arising in the course of
business. These uncertainties are referenced in the Contingencies note
included in the Notes to Consolidated Financial Statements.
YEAR 2000 ISSUE
The Company did not experience any significant business continuity issue in
its operations or business systems during the crucial year-end 1999 rollover
to January 1, 2000. Based on operations since January 1, 2000, the Company
does not expect any significant impact to its on-going business as a result
of the "Year 2000" issue. However, it is possible that the full impact of the
date change has not been fully recognized. For example, it is possible that
Year 2000 or similar issues, such as problems resulting from infrequent
quarter-end or year-end processes, may still occur, although the Company
believes that any such problems are likely to be minor and correctable. In
addition, the Company could be negatively impacted if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The
Company currently is not aware of any such problems that have arisen for its
customers or suppliers.
The Company expended approximately $961,000 on Year 2000 readiness efforts
with the bulk of it being spent during fiscal year 1999. The expenditures
include approximately $159,000 in costs, which were capitalized for replacing
outdated, noncompliant hardware and software. The balance of the costs was
recorded as period expenses for testing, identifying, and remediating Year
2000 problems.
-23-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The Company has no material financial exposure to the various
financial instrument market risks covered under this rule. Currently, the
Company has no derivative financial instruments or off-balance sheet
financing arrangements. For information related to the Company's long-term
debt, refer to the Long-Term Debt disclosure in the Notes to Consolidated
Financial Statements filed as part of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements listed under Item 14 (a)(1) and (2) are filed
as part of this report.
The Summary of Unaudited Quarterly Results of Operations follows the
Notes to Consolidated Financial Statements filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
-24-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information under the caption "Election of Directors" of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
on May 1, 2000, is incorporated herein by reference. For information with
respect to executive officers of the Company, see Part I, Table I "Executive
Officers of the Registrant."
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on May 1, 2000, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information under the captions "Election of Directors" and
"Executive Compensation" of the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 1, 2000, is incorporated herein by
reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------
The information under the captions "Election of Directors" and
"Beneficial Owners of Common Stock" of the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 1, 2000, is incorporated
herein by reference.
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on May 1, 2000, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information under the caption "Certain Relationships and Related
Transactions" of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 1, 2000, is incorporated herein by reference.
-25-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- ---------------------------------------------------------------------------
(a) (1) FINANCIAL STATEMENTS
The following consolidated financial statements of HON
INDUSTRIES Inc. and Subsidiaries included in the Company's 1999
Annual Report to Shareholders are filed as a part of this report
pursuant to Item 8:
Report of Independent Public Accountants
Consolidated Statements of Income for the Years Ended January 1,
2000; January 2, 1999; and January 3, 1998
Consolidated Balance Sheets -- January 1, 2000; January 2, 1999; and
January 3, 1998
Consolidated Statements of Shareholders' Equity for the Years Ended
January 1, 2000; January 2, 1999; and January 3, 1998
Consolidated Statements of Cash Flows for the Years Ended January 1,
2000; January 2, 1999; and January 3, 1998
Notes to Consolidated Financial Statements
Investor Information
(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of the
Company and subsidiaries is attached pursuant to Item 14(d):
Schedule II Valuation and Qualifying Accounts for the
Years Ended January 1, 2000; January 2, 1999;
and January 3, 1998
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(b) REPORTS ON FORM 8-K
There are no reports on Form 8-K filed during the last
quarter of the period covered by this report.
-26-
(c) EXHIBITS
An exhibit index of all exhibits incorporated by reference
into, or filed with, this Form 10-K appears on Page 55. The following
exhibits are filed herewith:
EXHIBIT
(10xiii) Credit Agreement
(21) Subsidiaries of the Registrant
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
(d) Financial Statement Schedules
See Item 14(a)(2).
-27-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
HON INDUSTRIES Inc.
Date: March 17, 2000 By: /s/ Jack D. Michaels
-----------------------------
Jack D. Michaels
Chairman, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each Director
whose signature appears below authorizes and appoints Jack D. Michaels as his
or her attorney-in-fact to sign and file on his or her behalf any and all
amendments and post-effective amendments to this report.
Signature Title Date
--------- ----- -----
Chairman, President and CEO,
/s/ Jack D. Michaels Principal Executive Officer, 3/17/00
- ------------------------------------------------------ and Director
Jack D. Michaels
/s/ Melvin L. McMains Vice President and Controller and 3/17/00
- ------------------------------------------------------ Principal Accounting Officer
Melvin L. McMains
/s/ David C. Stuebe Vice President and 3/17/00
- ------------------------------------------------------ Chief Financial Officer
David C. Stuebe
/s/ Robert W. Cox Director 3/17/00
- ------------------------------------------------------
Robert W. Cox
/s/ Cheryl A. Francis Director 3/17/00
- ------------------------------------------------------
Cheryl A. Francis
/s/ W August Hillenbrand Director 3/17/00
- ------------------------------------------------------
W August Hillenbrand
/s/ Stanley M. Howe Director 3/17/00
- ------------------------------------------------------
Stanley M. Howe
/s/ Robert L. Katz Director 3/17/00
- ------------------------------------------------------
Robert L. Katz
/s/ Moe S. Nozari Director 3/17/00
- ------------------------------------------------------
Moe S. Nozari
-28-
/s/ Richard H. Stanley Director 3/17/00
- ------------------------------------------------------
Richard H. Stanley
/s/ Brian E. Stern Director 3/17/00
- ------------------------------------------------------
Brian E. Stern
/s/ Lorne R. Waxlax Director 3/17/00
- ------------------------------------------------------
Lorne R. Waxlax
-29-
(THIS PAGE INTENTIONALLY LEFT BLANK)
-30-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders HON INDUSTRIES Inc.
We have audited the accompanying consolidated balance sheets of HON
INDUSTRIES Inc. and subsidiaries as of January 1, 2000, January 2, 1999, and
January 3, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three fiscal years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of HON
Industries Inc. and subsidiaries as of January 1, 2000, January 2, 1999, and
January 3, 1998, and its results of its operations and its cash flows for
each of the three fiscal years then ended, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 3, 2000
-31-
HON INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except for per share data)
FOR THE YEARS 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Net sales $1,789,281 $1,696,433 $1,362,713
Cost of products sold 1,236,612 1,172,997 933,157
- --------------------------------------------------------------------------------------------------------------
GROSS PROFIT 552,669 523,436 429,556
Selling and administrative expenses 386,547 344,259 284,397
Provision for closing facilities and reorganization expenses 19,679 -- --
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME 146,443 179,177 145,159
- --------------------------------------------------------------------------------------------------------------
Interest income 844 1,590 2,148
Interest expense 9,712 10,658 8,179
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 137,575 170,109 139,128
Income taxes 50,215 63,796 52,173
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 87,360 $ 106,313 $ 86,955
- --------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.44 $ 1.72 $ 1.45
- --------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-32-
HON INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
AS OF YEAR-END 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents $ 22,168 $ 17,500 $ 46,080
Short-term investments - 169 260
Receivables 196,730 183,576 158,408
Inventories 74,937 67,225 60,182
Deferred income taxes 13,471 12,477 14,391
Prepaid expenses and other current assets 9,250 9,382 15,829
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 316,556 290,329 295,150
Property, Plant, and Equipment 455,591 444,177 341,030
Goodwill 113,116 108,586 98,720
Other Assets 21,460 21,377 19,773
- --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $906,723 $864,469 $754,673
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $209,194 $193,663 $183,606
Accrued facilities closing and reorganization expenses 3,878 196 132
Income taxes - 1,921 8,133
Note payable and current maturities of long-term debt 6,106 15,769 2,545
Current maturities of other long-term obligations 5,945 5,889 6,343
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES $225,123 $217,438 $200,759
LONG-TERM DEBT 119,860 128,069 123,487
CAPITAL LEASE OBLIGATIONS 4,313 7,494 11,024
OTHER LONG-TERM LIABILITIES 18,015 18,067 18,601
DEFERRED INCOME TAXES 38,141 31,379 19,140
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock 60,172 61,290 61,659
Paid-in capital 24,981 48,348 55,906
Retained earnings 416,034 351,786 265,203
Receivable from HON Members Company
Ownership Plan - - (1,099)
Accumulated other comprehensive income 84 598 (7)
- --------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 501,271 462,022 381,662
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $906,723 $864,469 $754,673
- --------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-33-
HON INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands) ACCUMULATED
ADDITIONAL RECEIVABLE OTHER TOTAL
COMMON PAID-IN FROM CO. RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL ESOP EARNINGS INCOME EQUITY
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 1996 $29,713 $ 360 $(5,041) $227,365 $ - $252,397
Comprehensive income:
Net income 86,955 86,955
Other comprehensive income (7) (7)
Comprehensive income 86,948
Cash dividends (16,736) (16,736)
Stock split effected in the form of a
100% stock dividend 30,830 (30,830) -
Common shares -- treasury:
Shares purchased (92) (2,441) (1,551) (4,084)
Shares issued through
public stock offering 1,150 55,616 56,766
Shares issued under Members Stock
Purchase Plan and stock awards 58 2,371 2,429
Principal repaid by HON Members
Company Ownership Plan 3,942 3,942
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 3, 1998 61,659 55,906 (1,099) 265,203 (7) 381,662
Comprehensive Income:
Net income 106,313 106,313
Other comprehensive income 605 605
Comprehensive income 106,918
Cash dividends (19,730) (19,730)
Common shares -- treasury:
Shares purchased (529) (11,672) (12,201)
Shares issued under Members Stock
Purchase Plan and stock awards 160 4,114 4,274
Principal repaid by HON Members
Company Ownership 1,099 1,099
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 2, 1999 61,290 48,348 - 351,786 598 462,022
Comprehensive income:
Net income 87,360 87,360
Other comprehensive income (514) (514)
Comprehensive income
Cash dividends (23,112) (23,112)
Common shares -- treasury:
Shares purchased (1,409) (29,457) (30,866)
Shares issued under Members Stock
Purchase Plan and stock awards 291 6,090 6,381
Principal repaid by HON Members
Company Ownership Plan - -
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 $60,172 $ 24,981 $ - $416,034 $ 84 $501,271
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
-34-
HON INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
FOR THE YEARS 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income $ 87,360 $106,313 $ 86,955
Noncash items included in net income:
Depreciation and amortization 65,453 52,999 35,610
Other postretirement and postemployment benefits 2,329 1,529 1,397
Deferred income taxes 6,033 13,816 7,128
Other -- net (121) 8 (35)
Changes in working capital, excluding acquisition and disposition:
Receivables (13,154) (24,238) (15,169)
Inventories (7,712) (4,286) 3,134
Prepaid expenses and other current assets 391 6,517 (1,574)
Accounts payable and accrued expenses 15,960 3,895 16,789
Accrued facilities closing and reorganization expenses 3,878 64 (256)
Income taxes (2,178) (7,419) 6,881
Increase in other liabilities (2,054) (2,406) 525
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows from (to) operating activities 156,185 146,792 141,385
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Capital expenditures -- net (71,474) (149,717) (85,491)
Capitalized software (3,530) - -
Acquisition spending, net of cash acquired (8,932) (11,470) (121,424)
Principal repaid by HON Members Company Ownership Plan - 1,099 3,942
Short-term investments-- net 169 91 442
Other -- net (290) 80 1,792
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows from (to) investing activities (84,057) (159,917) (200,739)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Purchase of HON INDUSTRIES common stock (30,866) (12,206) (4,085)
Proceeds from public offering of
HON INDUSTRIES common stock - - 56,766
Proceeds from long-term debt 147,055 73,237 100,238
Payments of note and long-term debt (167,052) (60,079) (64,374)
Proceeds from sale of HON INDUSTRIES
common stock to members 6,515 3,323 2,429
Dividends paid (23,112) (19,730) (16,736)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash flows from (to) financing activities (67,460) (15,455) 74,238
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,668 (28,580) 14,884
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,500 46,080 31,196
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,168 $ 17,500 $ 46,080
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 9,803 $ 10,867 $ 8,404
Income taxes $ 46,822 $ 56,787 $ 38,246
- ---------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
-35-
HON INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATURE OF OPERATIONS
HON INDUSTRIES Inc., with its subsidiaries (the Company), is a national
manufacturer and marketer of office furniture and hearth products. Both
industries are reportable segments; however, the Company's office furniture
business is its principal line of business. Refer to the Operating Segment
Information note for further information. Office furniture products are sold
through a national system of dealers, wholesalers, mass merchandisers,
warehouse clubs, retail superstores, end-user customers, and to federal and
state governments. Dealer, wholesaler, and retail superstores are the major
channels based on sales. Hearth products include wood-, pellet-, and
gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas
logs. These products are sold through a national system of dealers,
wholesalers, and large regional contractors. The Company's products are
marketed predominantly in the United States and Canada. The Company exports
select products to a limited number of markets outside North America,
principally Latin America and the Caribbean, through its export subsidiary;
however, based on sales, it is not significant.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR-END
The consolidated financial statements include the accounts and transactions
of the Company and its subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.
The Company follows a 52/53-week fiscal year which ends on the Saturday
nearest December 31. Fiscal year 1999 ended on January 1, 2000; 1998 ended on
January 2, 1999; and 1997 ended on January 3, 1998. The financial statements
for fiscal year 1997 are based on a 53-week period; fiscal years 1999 and
1998 are on a 52-week basis.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents generally consist of cash and commercial paper.
These securities have original maturity dates not exceeding three months from
date of purchase.
SHORT-TERM INVESTMENTS
Short-term investments are classified as available-for-sale and are highly
liquid debt and equity securities.
RECEIVABLES
Accounts receivables are presented net of an allowance for doubtful accounts
of $3,568,000, $2,816,000, and $3,277,000 for 1999, 1998, and 1997,
respectively.
INVENTORIES
Inventories are valued at the lower of cost or market, determined principally
by the last-in, first-out (LIFO) method.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are carried at cost. Depreciation has been
computed by the straight-line method over estimated useful lives: land
improvements, 10 - 20 years; buildings, 10 - 40 years; and machinery and
equipment, 3 - 12 years.
-36-
GOODWILL AND PATENTS
Goodwill represents the excess of cost over the fair value of net
identifiable assets of acquired companies. Goodwill is being amortized on a
straight-line basis predominantly over 30 years. Patents are being amortized
on a straight-line basis over their estimated useful lives, which range from
7 to 16 years. Patents are reported by the Company as "Other Assets."
The carrying value of goodwill and patents is reviewed by the Company
whenever significant events or changes occur which might impair recovery of
recorded costs. Based on its most recent analysis, the Company believes no
material impairment of these intangible assets exists at January 1, 2000.
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------
Goodwill $121,846 $113,812 $100,667
Patents 16,450 16,450 16,450
Less accumulated
amortization 13,585 8,570 3,781
----------------------------------------
$124,711 $121,692 $113,336
- ------------------------------------------------------------------------------
REVENUE RECOGNITION
Revenue is recognized upon shipment of goods to customers.
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
$17,117,000 in 1999, $15,707,000 in 1998, and $15,371,000 in 1997.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plan using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," which
results in no charge to 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."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. The more significant areas requiring the use of management estimates
relate to allowance for receivables, accruals for self-insured medical,
workers compensation, and general liability insurance, and useful lives for
depreciation and amortization. Actual results could differ from those
estimates.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," as of
January 3, 1999, the beginning of its 1999 fiscal year. In 1998, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company intends to adopt this Statement in January 2001 as
required by the Statement. Adoption of this Statement is not expected to have
a material impact on the Company's financial statements.
-37-
COMPUTER SOFTWARE
SOP 98-1 requires the capitalization of certain costs incurred in connection
with developing or obtaining internal use software. Prior to the adoption of SOP
98-1, the Company expensed all internal use software related costs as incurred.
The Company capitalized approximately $3.5 million of computer software during
1999.
EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share," net income per common share is based on the
weighted-average number of shares of common stock outstanding during each year
including allocated and unallocated ESOP shares.
COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," as of January 4, 1998, the beginning of its
1998 fiscal year. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. The Company's comprehensive income consists of an unrealized holding
gain on equity securities available-for-sale under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," and nominal foreign currency
adjustments. Prior years' financial statements have been reclassified to conform
to these requirements.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to the current
year presentation.
PROVISION FOR FACILITIES CLOSING AND REORGANIZATION EXPENSES
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 pre-tax charge of $19.7 million or $0.20 per
diluted share was recorded during the first quarter of 1999. The charge includes
$12.5 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 employee-related costs, and $2.4 million for certain other expenses
associated with the closing of the facilities.
During 1999, $15.8 million of pre-tax exit costs were paid and charged
against the liability. It included $11.6 million for write-off of plant and
equipment, $1.9 million for severance for 326 positions, $0.7 million for
other employee-related expenses, and $1.6 million for certain other expenses
associated with the closing of the facilities. The primary costs not yet
incurred relate to costs associated with the closed buildings and workers'
compensation claims. Management believes the remaining reserve for facilities
closing and reorganization expenses to be adequate to cover these obligations.
BUSINESS COMBINATIONS
The Company acquired Aladdin Steel Products, Inc. on February 20, 1998, for
approximately $10.2 million. Aladdin is a manufacturer of wood-, pellet-, and
gas-burning stoves and inserts. Aladdin is being operated by Hearth Technologies
Inc., the Company's hearth products subsidiary. The transaction was accounted
for under the purchase method.
-38-
The Company completed three office furniture business acquisitions during
fiscal year 1997. Allsteel Inc. was a stock purchase acquired on June 17,
1997, from ACI America Holdings Inc., a subsidiary of BTR plc, for
approximately $66 million. It manufactures and markets a line of quality,
mid-priced office furniture with manufacturing and distribution facilities in
Jackson and Milan, Tennessee; Verona, Mississippi; and West Hazleton,
Pennsylvania. Bevis Custom Furniture, Inc. was an asset purchase acquired on
November 13, 1997, from Hunt Manufacturing Co. for approximately $45.1
million. It manufactures and markets a line of affordably priced office
furniture with a manufacturing operation located in Florence, Alabama.
Allsteel and Bevis have operated as part of the Company's division, The HON
Company, until January 2, 2000, when Allsteel was organized as a separate
business unit. Panel Concepts, Inc. was a stock purchase acquired December 1,
1997, from Standard Pacific Corp. for approximately $8.4 million. It
manufactures and markets innovative panel-based office systems with a
manufacturing plant located in Santa Ana, California. Panel Concepts operates
as part of the Company's subsidiary, BPI Inc. Each of the transactions was
accounted for under the purchase method of accounting and all were financed
by a combination of cash and long-term debt.
Assuming the acquisition of Allsteel Inc., Bevis Custom Furniture, Inc., Panel
Concepts, Inc., and Aladdin Steel Products, Inc. had occurred on December 29,
1996, the beginning of the Company's 1997 fiscal year, instead of the actual
dates reported above, the Company's pro forma consolidated net sales would have
been approximately $1.7 billion and $1.5 billion for 1998 and 1997,
respectively. Pro forma consolidated net income and net income per share for
1998 and 1997 would not have been materially different than the reported
amounts.
INVENTORIES
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Finished products $ 29,663 $ 24,955 $ 26,352
Materials and work in process 55,737 53,320 48,186
LIFO allowance (10,463) (11,050) (14,356)
-----------------------------------
$ 74,937 $ 67,225 $ 60,182
- -------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT, AND EQUIPMENT
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Land and land improvements $ 17,114 $ 12,156 $ 10,059
Buildings 181,080 144,559 111,387
Machinery and equipment 469,268 411,238 333,216
Construction and equipment
installation in progress 37,819 85,782 60,832
-----------------------------------
705,281 653,735 515,494
Less allowances for depreciation 249,690 209,558 174,464
----------------------------------
$455,591 $444,177 $341,030
- -------------------------------------------------------------------------------------------------------------------
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Trade accounts payable $ 77,907 $ 75,895 $ 76,623
Compensation 6,782 6,789 6,339
Profit sharing and
retirement expense 22,705 20,355 15,013
Vacation pay 12,093 11,751 10,879
Marketing expenses 58,832 45,833 38,096
Casualty self-insurance expense 7,428 6,271 5,201
Other accrued expenses 23,447 26,769 31,455
------------------------------------
$209,194 $193,663 $183,606
- -------------------------------------------------------------------------------------------------------------------
-39-
LONG-TERM DEBT
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Industrial development revenue
bonds, various issues, payable
through 2018 with interest
at 4.07-8.50% per annum 24,608 $25,293 $23,549
Note payable to bank,
revolving credit agreement
with interest at a variable
rate (6.0625-6.5625% at
year-end 1999)* 85,000 95,000 80,000
Convertible debenture
payable to individuals,
due in 1999 with interest
at 5.5% per annum 5,074 -- 12,000
Other notes and amounts 5,178 7,776 7,938
------------------------------------
$119,860 $128,069 $123,487
- -------------------------------------------------------------------------------------------------------------------
* THE REVOLVING BANK CREDIT AGREEMENT IS PAYABLE IN THE YEAR 2002 WITH A MAXIMUM
BORROWING LIMIT OF $200,000,000.
Aggregate maturities of long-term debt are as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------
2000 $ 808
2001 8,281
2002 85,710
2003 833
2004 517
Thereafter 24,519
The convertible debenture payable to individuals was renegotiated in 1999 and
extended for an additional two years. This payable involves a former owner of a
business acquired by the Company in 1996, and this individual continues as an
officer of a subsidiary of the Company. The convertible debenture is convertible
into shares of common stock of Hearth Technologies Inc., a subsidiary of the
Company.
Certain of the above borrowing arrangements include covenants which limit the
assumption of additional debt and lease obligations. 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 1999 approximates the recorded aggregate amount.
Property, plant, and equipment, with net carrying values of approximately
$58,458,000 at the end of 1999, are mortgaged.
SELLING AND ADMINISTRATIVE EXPENSES
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Freight expense to customer $119,435 $96,258 $73,261
Amortization of intangible assets 5,362 4,789 2,943
Product development costs 17,117 15,707 15,371
General selling and
administrative expense 244,633 227,505 192,822
------------------------------------
$386,547 $344,259 $284,397
- -------------------------------------------------------------------------------------------------------------------
-40-
INCOME TAXES
Significant components of the provision for income taxes are as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Current:
Federal $40,744 $44,525 $38,989
State 3,046 5,363 4,695
-----------------------------------
43,790 49,888 43,684
Deferred 6,425 13,908 8,489
-----------------------------------
$50,215 $63,796 $52,173
- -------------------------------------------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of federal
tax effect 1.7 2.6 2.6
Federal and state tax credits -- (.1) (.2)
Other -- net (.2) -- .1
-------------------------------
Effective tax rate 36.5% 37.5% 37.5%
- -------------------------------------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities 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) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Net long-term deferred tax liabilities:
Tax over book depreciation $(38,133) $(33,118) $(25,743)
OPEB obligations 3,430 3,305 3,920
Goodwill (2,959) (1,805) 8
Other -- net (479) (239) 2,675
----------------------------------------------
Total net long-term
deferred tax liabilities $(38,141) $(31,379) $(19,140)
- -------------------------------------------------------------------------------------------------------------------
Net current deferred tax assets:
Workers' compensation,
general, and product
liability accruals 2,984 2,315 2,054
Vacation accrual 3,492 2,531 892
Inventory
obsolescence reserve 1,287 1,026 2,631
Other -- net 5,708 6,605 8,814
--------------------------------------------
Total net current
deferred tax assets 13,471 12,477 14,391
--------------------------------------------
Net deferred tax
(liabilities) assets $(24,670) $(18,902) $(4,749)
- -------------------------------------------------------------------------------------------------------------------
-41-
SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Common Stock, $1 Par Value
Authorized 200,000,000 200,000,000 100,000,000
Issued and outstanding 60,171,753 61,289,618 61,659,316
Preferred Stock, $1 Par Value
Authorized 1,000,000 1,000,000 1,000,000
Issued and outstanding - - -
- -------------------------------------------------------------------------------------------------------------------
On February 11, 1998, the Company's Board of Directors declared a two-for-one
stock split in the form of a 100% stock dividend paid on March 27, 1998, to
shareholders of record on the close of business on March 6, 1998. In May 1998,
shareholders authorized an increase of capital stock of the Company from
101,000,000 shares to 201,000,000 shares, consisting of 200,000,000 shares of
common stock, $1.00 par value, and 1,000,000 shares of preferred stock, $1.00
par value.
The Company purchased 1,408,624; 529,284; and 183,154 shares of its common stock
during 1999, 1998, and 1997, 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 Paid-In Capital with the excess charged to
Retained Earnings.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," as of January 4, 1998, the beginning of its
1998 fiscal year. The Company has changed the format of its consolidated
statements of shareholders' equity to present comprehensive income.
Components of other comprehensive income (loss) consist of the following:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments -- net of tax $(43) $42 $(7)
Change in unrealized gains
on marketable securities --
net of tax 127 563 -
Other comprehensive
income (loss) $84 $605 $(7)
- -------------------------------------------------------------------------------------------------------------------
The Company filed a Registration Statement with the Securities and Exchange
Commission in September 1997 for a primary offering of 2,000,000 shares of its
common stock which was combined with a secondary offering of 4,790,000 shares of
Company stock by Bandag, Incorporated, a major shareholder. The combined public
offering was priced at $26.00 per share on October 23, 1997, and closed on
October 29, 1997. The Company granted the underwriters an option to purchase
1,018,500 additional shares at the same price to cover over-allotments, if any,
of which 300,000 shares were subsequently purchased. The Company's net proceeds
from the sale of its 2,300,000 shares were used to finance acquisitions and to
repay debt associated with acquisitions.
In May 1997, the Company registered 400,000 shares of its common stock under its
1997 Equity Plan for Non-Employee Directors which was approved by shareholders
at the May 1997 annual shareholders' meeting. This plan permits the Company to
issue to its non-employee directors options to purchase shares of Company common
stock, restricted stock of the Company, and awards of Company stock. The plan
also permits non-employee directors to elect to receive all or a portion of
their annual retainers and other compensation in the form of shares of Company
common stock. During 1999, 1998 and 1997, 6,000; 4,250; and 5,400 shares of
Company common stock were issued under the plan, respectively.
-42-
Cash dividends declared and paid per share for each year are:
(In Dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Common shares $.38 $.32 $.28
- -------------------------------------------------------------------------------------------------------------------
Pursuant to the 1994 Members Stock Purchase Plan, 1,000,000 shares of the
Company's common stock were registered for issuance to participating members.
Members who have one year of employment eligibility and work a minimum of 20
hours per week have rights to purchase stock on a quarterly basis. The price of
the stock purchased under the plan is 85% of the closing price on the applicable
purchase date. No member may purchase stock under the plan in an amount which
exceeds the lesser of 20% of his or her gross earnings or 4,000 shares, with a
maximum fair market value of $25,000 in any calendar year. An additional 304,106
shares were available for issuance under the plan at January 1, 2000. The effect
of the application of adopting Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," was not material to
the Company. Shares of common stock were issued in 1999, 1998, and 1997 pursuant
to a members stock purchase plan as follows:
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Shares issued 115,354 101,108 84,552
Average price per share $19.16 $23.58 $20.77
- -------------------------------------------------------------------------------------------------------------------
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
occurrence 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 employment with the
Company, and all his or her benefits are vested under Company plans. If, at any
time within two years of the change in control, his or her position, salary,
bonus, place of work, or Company-provided benefits are modified, or employment
is terminated by the Company for any reason other than cause or by the key
employee for good reason, as such terms are defined in the agreement, then the
key employee is entitled to receive a severance payment equal to two times
annual salary and the average of the prior two years' bonuses.
STOCK OPTIONS
Under the Company's 1995 Stock-Based Compensation Plan, as amended and restated
effective February 10, 1999, the Company 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 the Human Resources and
Compensation Committee of the Board of Directors. Stock options awarded under
the Plan must be at exercise prices equal to or exceeding the fair market value
of the Company's common stock on the date of grant. Stock options are generally
subject to four-year cliff vesting and must be exercised within ten years from
the date of grant.
The Company accounts for executive stock options issued under this Plan using
Accounting Principles Board Opinion No. 25, which results in no charge to
earnings when options are issued at fair market value. The Company has elected
the disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
-43-
If compensation costs had been determined based on the fair value at the grant
dates for awards under this Plan, consistent with SFAS No.123, the impact on net
earnings and earnings per share would be less than one-cent per share. The
weighted-average fair value of options granted during 1999, 1998, and 1997
estimated on the date of grant using the Black-Scholes option-pricing model was
$10.01, $15.51, and $11.85, respectively. The fair value of 1999, 1998, and 1997
options granted is estimated on the date of grant using the following
assumptions: dividend yield of 0.90% to 1.70%, expected volatility of 30.90% to
34.16%, risk-free interest rate of 4.90% to 6.71%, and an expected life of 10
years depending on grant date.
The status of the Company's stock option plans is summarized below:
Number of Weighted-Average
Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding at
December 28, 1996 - -
Granted 156,000 $24.74
Exercised - -
Forfeited - -
- -------------------------------------------------------------------------------------------------------------------
Outstanding at
January 3, 1998 156,000 24.74
Granted 20,000 32.50
Exercised - -
Forfeited - -
- -------------------------------------------------------------------------------------------------------------------
Outstanding at
January 2, 1999 176,000 25.62
Granted 328,750 23.47
Exercised - -
Forfeited (97,000) 23.86
- -------------------------------------------------------------------------------------------------------------------
Outstanding at
January 1, 2000 407,750 24.30
Options exercisable at:
January 2, 1999 - -
January 3, 1998 - -
- -------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding
at January 1, 2000:
Options
Options Outstanding Exercisable
------------------- -----------
Weighted- Number
Average Weighted- Exercisable
Range of Number Remaining Average at January 1,
Exercise Prices Outstanding Contractual Life Exercise Price 2000
- -------------------------------------------------------------------------------------------------------------------
$24.50-$28.25 119,000 7.5 years $24.82 0
$32.50 20,000 8.1 years $32.50 0
$23.31-$23.47 268,750 9.1 years $23.47 0
- -------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS
The Company has defined contribution profit-sharing plans covering substantially
all employees who are not participants in certain defined benefit plans. The
Company's annual contribution to the defined contribution plans is based on
employee eligible earnings and results of operations and amounted to
$21,297,000, $20,101,000, and $14,558,000 in 1999, 1998, and 1997, respectively.
-44-
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 annually the minimum actuarially computed
amount. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 132, "Employer's Disclosures about Pensions and Other Postretirement
Benefits," as of January 4, 1998, the beginning of its 1998 fiscal year. Net
pension costs relating to these plans were $-0-, $-0-, and $93,000 for 1999,
1998, and 1997, respectively. The actuarial present value of obligations, less
related plan assets at fair value, is not significant.
The Company also participates in a multiemployer plan, which provides defined
benefits to certain of the Company's union employees. Pension expense for this
plan amounted to $329,000, $306,000, and $327,000 in 1999, 1998, and 1997,
respectively.
In 1992, the Company established a trust to administer a leveraged employee
stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company
contributions based on employee eligible earnings and dividends on the shares
are used to make loan interest and principal payments. As the loan is repaid,
shares are distributed to the ESOP trust for allocation to participants. During
1998, the final shares in the Plan were allocated to participants, and the Plan
was subsequently merged into the Company's defined contribution profit-sharing
plan. Selected financial data pertaining to the ESOP is as follows:
(In thousands, except share data) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Company contribution to ESOP - $656 $3,735
Dividend income of ESOP - 533 487
Company interest expense on ESOP loan - - -
Shares of common stock
allocated to ESOP participant accounts - 96,304 351,574
Shares held in suspense
(unallocated) by ESOP as of year-end - - 96,304
Fair value of shares held in
suspense by ESOP as of year-end - - $2,757
Closing market price of common stock
as of year-end - $23.94 $28.63
- -------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT HEALTH CARE
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," as of
January 4, 1998. The Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," as of January 3, 1993, and
recorded the cumulative effect of the accounting change on the deferred
recognition basis.
The following table sets forth the funded status of the plan, reconciled to the
accrued postretirement benefits cost recognized in the Company's balance sheet
at:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Reconciliation of benefit obligation:
Obligation at beginning of year $17,341 $15,409 $15,259
Service cost 529 419 480
Interest cost 1,137 1,045 1,115
Benefit payments (1,013) (974) (796)
Actuarial (gains) losses 2,243 1,442 (649)
Obligation at end of year $20,237 $17,341 $15,409
- -------------------------------------------------------------------------------------------------------------------
-45-
Funded status:
Funded status at end of year $20,237 $17,341 $15,409
Unrecognized transition
obligation (9,362) (10,075) (10,788)
Unrecognized prior-service cost (2,338) (2,484) (2,630)
Unrecognized gain (loss) 862 4,031 6,586
Net amount recognized $9,399 $8,813 $8,577
- --------------------------------------------------------------------------------------------------------
Net periodic postretirement
benefit cost includes:
Service cost $529 $419 $480
Interest cost 1,137 1,045 1,115
Amortization of transition
obligation over 20 years 713 713 713
Amortization of prior
service cost 146 146 146
Amortization of
(gains) and losses (629) (767) (922)
Net periodic postretirement
benefit cost $1,896 $1,556 $1,532
- --------------------------------------------------------------------------------------------------------
The discount rates at fiscal year-end 1999, 1998, and 1997 were 7.5%, 6.75%, and
7.0%, respectively. The pre-65 2000 gross trend rates begin at 9% for the
medical and prescription drug coverages and grade down to 5% in seven years and
remain at this level for all future years. The post-64 gross trend rates begin
at 7.5% for the medical coverage and decrease until the maximum Company subsidy
(cap) is reached in 2002. For the prescription drug coverage, the 2000 gross
trend rates begin at 9% and decrease until the cap is reached in 2002. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A 1% change in assumed health care cost trend rates
would have the following effects:
(In thousands) 1% Increase 1% Decrease
- -------------------------------------------------------------------------------------------------------------------
Effect on total of service and interest
cost components of net periodic
postretirement health care benefit cost 185 $(149)
Effect on the health care component
of the accumulated postretirement
benefit obligation $1,620 $(1,345)
- -------------------------------------------------------------------------------------------------------------------
LEASES
The Company leases certain warehouse and plant facilities and equipment.
Commitments for minimum rentals under noncancelable leases at the end of 1999
are as follows:
Capitalized Operating
(In thousands) Leases Leases
- -----------------------------------------------------------------------------------------------------------------------------
2000 $3,757 $ 9,149
2001 2,398 7,659
2002 1,078 6,458
2003 211 5,277
2004 211 3,627
Thereafter 1,435 2,326
------------------------
Total minimum lease payments 9,090 $34,496
=======
Less amount representing interest 1,596
------
Present value of net minimum
lease payments, including
current maturities of $3,181,000 $7,494
- -------------------------------------------------------------------------------------------------------------------
-46-
Property, plant, and equipment at year-end include the following amounts for
capitalized leases:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Buildings $ 3,299 $ 3,299 $ 3,299
Machinery and equipment 15,805 15,805 15,805
-----------------------------------------
19,104 19,104 19,104
Less allowances for depreciation 11,816 8,978 6,139
-----------------------------------------
$ 7,288 $10,126 $12,965
- -------------------------------------------------------------------------------------------------------------------
Rent expense for the years 1999, 1998, and 1997 amounted to approximately
$10,403,000, $10,150,000, and $7,555,000, 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
individuals continue as officers of a subsidiary of the Company following the
merger. Contingent rent expense under both capitalized and operating leases
(generally based on mileage of transportation equipment) amounted to $755,000,
$596,000, and $581,000 for the years 1999, 1998, and 1997, respectively.
CONTINGENCIES
The Company is involved in various legal actions which have arisen in the course
of business. Management believes the outcome of these matters will not have a
material effect on the financial condition or results of operations of the
Company.
OPERATING SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
with its 1998 fiscal year beginning January 4, 1998. This segment disclosure is
essentially unchanged from the format used by the Company historically in
complying with SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and SFAS No. 30, "Disclosures of Information about Major
Customers." That is, management views the Company as being in two operating
segments: office furniture and hearth products, with the former being the
principal segment.
The office furniture segment manufactures and markets a broad line of metal and
wood commercial and home office furniture which includes file cabinets, desks,
credenzas, chairs, storage cabinets, tables, bookcases, freestanding office
partitions and panel systems, and other related products. The hearth products
segment manufactures and markets a broad line of manufactured gas-, pellet-, and
wood-burning fireplaces and stoves, fireplace inserts, gas logs, and chimney
systems principally for the home.
The Company's two operating segments are somewhat seasonal with the third
(July-September) and fourth (October-December) fiscal quarters historically
having higher sales than the prior quarters. In fiscal 1999, 53% of the
Company's consolidated net sales of office furniture were generated in the third
and fourth quarters and 53% of consolidated net sales of hearth products were
generated in the third and fourth quarters.
For purposes of segment reporting, intercompany sales transfers between segments
are not material, and operating profit is income before income taxes exclusive
of certain unallocated corporate expenses. These unallocated corporate expenses
include the net costs of the Company's corporate operations, interest income,
and interest expense. Management views interest income and expense as corporate
financing costs and not as an operating segment cost. In addition, management
applies an effective income tax rate to its consolidated income before income
taxes so income taxes are not reported or viewed internally on a segment basis.
Identifiable assets by segment are those assets applicable to the respective
industry segments. Corporate assets consist principally of cash and cash
equivalents, short-term investments, and corporate office real estate and
related equipment.
-47-
No geographic information for revenues from external customers or for long-lived
assets is disclosed inasmuch as the Company's primary market and capital
investments are concentrated in the United States.
Reportable segment data reconciled to the consolidated financial statements for
the years ended 1999, 1998, and 1997 is as follows:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Net sales:
Office furniture $1,504,422 $1,451,328 $1,158,228
Hearth products 284,859 245,105 204,485
---------------------------------------------
$1,789,281 $1,696,433 $1,362,713
- -------------------------------------------------------------------------------------------------------------------
Operating profit:
Office furniture* $131,607 $165,314 $139,710
Hearth products 34,588 31,478 24,817
--------------------------------------------
Total operating profit 166,195 196,792 164,527
Unallocated
corporate expenses (28,620) (26,683) (25,399)
--------------------------------------------
Income before income taxes $137,575 $170,109 $139,128
- -------------------------------------------------------------------------------------------------------------------
Identifiable assets:
Office furniture $678,503 $660,626 $551,120
Hearth products 174,386 154,817 128,361
General corporate 53,834 49,026 75,192
--------------------------------------------
$906,723 $864,469 $754,673
- -------------------------------------------------------------------------------------------------------------------
Depreciation and
amortization expense:
Office furniture $52,483 $42,562 $27,633
Hearth products 11,065 9,120 6,590
General corporate 1,905 1,317 1,387
-------------------------------------------
$65,453 $52,999 $35,610
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures -- net:
Office furniture $48,565 $128,482 $73,659
Hearth products 16,489 18,162 13,055
General corporate 6,420 3,073 (1,223)
-----------------------------------------
$71,474 $149,717 $85,491
- -------------------------------------------------------------------------------------------------------------------
*1999 INCLUDES A NONRECURRING PRE-TAX CHARGE OF $19.7 MILLION FOR THE CLOSING OF
FACILITIES AND REORGANIZATION EXPENSES.
One office furniture customer accounted for approximately 13%, 12%, and 12% of
consolidated net sales in 1999, 1998, and 1997, respectively.
-48-
(THIS PAGE INTENTIONALLY LEFT BLANK)
-49-
SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited quarterly financial information
for each of the past twelve quarters. In the opinion of the Company's
management, this information has been prepared on the same basis as the
consolidated financial statements appearing elsewhere in this report and
includes all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarter are not necessarily indicative of results
for any future period.
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------
YEAR-END 1999:
Net sales $424,459 $419,708 $475,738 $469,376
Cost of products sold 295,222 292,077 327,243 322,070
-----------------------------------------------------
Gross profit 129,237 127,631 148,495 147,306
Selling and administrative expenses 89,264 89,785 101,234 106,264
Provision for closing facilities and
reorganization expenses 19,679 - - -
------------------------------------------------------
Operating income 20,294 37,846 47,261 41,042
Interest income (expense) -- net (2,045) (2,399) (2,160) (2,264)
------------------------------------------------------
Income before income taxes 18,249 35,447 45,101 38,778
Income taxes 6,661 12,938 16,462 14,154
------------------------------------------------------
Net income $ 11,588 $ 22,509 $ 28,639 $ 24,624
======================================================
Net income per common share $.19 $.37 $.47 $.41
Weighted-average common shares outstanding 61,154 61,169 60,921 60,159
AS A PERCENTAGE OF NET SALES
----------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 30.4 30.4 31.2 31.4
Selling and administrative expenses 21.0 21.4 21.3 22.7
Provision for closing facilities and
reorganization expenses 4.6 - - -
Operating income 4.8 9.0 9.9 8.7
Income taxes 1.6 3.1 3.5 3.0
Net income 2.7 5.4 6.0 5.2
YEAR-END 1998: (a)
Net sales $418,263 $401,417 $448,679 $428,074
Cost of products sold 291,571 278,107 309,080 294,239
-----------------------------------------------------
Gross profit 126,692 123,310 139,599 133,835
Selling and administrative expenses 88,563 83,213 88,162 84,321
------------------------------------------------------
Operating income 38,129 40,097 51,437 49,514
Interest income (expense) -- net (2,172) (2,691) (2,025) (2,180)
------------------------------------------------------
Income before income taxes 35,957 37,406 49,412 47,334
Income taxes 13,484 14,027 18,530 17,755
------------------------------------------------------
Net income $ 22,473 $ 23,379 $ 30,882 $ 29,579
======================================================
Net income per common share $.36 $.38 $.50 $.48
Weighted-average common shares outstanding 61,648 61,663 61,691 61,596
AS A PERCENTAGE OF NET SALES
----------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 30.3 30.7 31.1 31.3
Selling and administrative expenses 21.2 20.7 19.6 19.7
Operating income 9.1 10.0 11.5 11.6
Income taxes 3.2 3.5 4.1 4.1
Net income 5.4 5.8 6.9 6.9
-50-
YEAR-END 1997: (b)
Net sales $282,859 $296,567 $391,348 $391,939
Cost of products sold 194,194 200,969 268,147 269,847
------------------------------------------------------
Gross profit 88,665 95,598 123,201 122,092
Selling and administrative expenses 60,453 64,303 80,641 79,000
------------------------------------------------------
Operating income 28,212 31,295 42,560 43,092
Interest income (expense) -- net (1,142) (1,141) (2,209) (1,539)
------------------------------------------------------
Income before income taxes 27,070 30,154 40,351 41,553
Income taxes 10,152 11,307 15,132 15,582
------------------------------------------------------
Net income $ 16,918 $ 18,847 $ 25,219 $ 25,971
======================================================
Net income per common share $.28 $.32 $.43 $.42
Weighted-average common shares outstanding 59,400 59,384 59,356 61,011
AS A PERCENTAGE OF NET SALES
----------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 31.3 32.2 31.5 31.2
Selling and administrative expenses 21.4 21.7 20.6 20.2
Operating income 10.0 10.6 10.9 11.0
Income taxes 3.6 3.8 3.9 4.0
Net income 6.0 6.4 6.4 6.6
(a) FIRST QUARTER 1998 INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF
ALADDIN STEEL PRODUCTS, INC. ACQUISITION ACQUIRED FEBRUARY 20, 1998.
(b) THIRD QUARTER 1997 REPRESENTS 14 WEEKS OF BUSINESS ACTIVITY COMPARED TO
13 WEEKS FOR THE SAME QUARTER IN 1996 AND 1995. IN ADDITION, THE
QUARTER INCLUDES THE FIRST QUARTERLY RESULTS OF THE ALLSTEEL INC.
ACQUISITION ACQUIRED JUNE 17, 1997. FISCAL YEAR 1997 SIMILARLY
REPRESENTS 53 WEEKS COMPARED TO 52 WEEKS IN 1998 AND 1996. FOURTH
QUARTER INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF TWO
ACQUISITIONS: BEVIS CUSTOM FURNITURE, INC., ACQUIRED NOVEMBER 13, 1997,
AND PANEL CONCEPTS, INC., ACQUIRED DECEMBER 1, 1997.
SUBSEQUENT ACQUISITION (UNAUDITED)
On February 29, 2000, the Company finalized the acquisition of two leading
hearth products distributors, American Fireplace Company (AFC) and the Allied
Group (Allied). AFC and Allied, with combined 1999 sales of nearly $200 million,
will be joined to form Hearth Services Inc., a new subsidiary of Hearth
Technologies Inc. AFC and Allied sell, install and service a broad range of gas-
and wood-burning fireplaces as well as fireplace mantels, surrounds, facings and
other accessories. Further details of the transaction will be included in the
Company's SEC Quarterly Report on Form 10-Q for the first quarter ended April 1,
2000.
-51-
INVESTOR INFORMATION
COMMON STOCK MARKET PRICES AND DIVIDENDS (UNAUDITED)
QUARTERLY 1999 - 1998
1999 by Dividends
Quarter High Low per Share
- -------------------------------------------------------------------------------------------------------------------
1st $24 1/2 $19 3/4 $.095
2nd 29 7/8 21 5/8 .095
3rd 28 1/8 19 1/16 .095
4th 23 3/4 18 3/4 .095
----
Total Dividends Paid $ .38
=====
1998 by Dividends
Quarter High Low per Share
- -------------------------------------------------------------------------------------------------------------------
1st $37 3/16 $27 3/4 $.08
2nd 36 1/2 26 1/4 .08
3rd 32 7/8 21 1/2 .08
4th 28 1/4 20 .08
---
Total Dividends Paid $.32
====
COMMON STOCK MARKET PRICE AND PRICE/EARNINGS RATIO (UNAUDITED)
FISCAL YEARS 1999 - 1989
Market Price/Earnings
Price* Earnings Ratio
------------------------ per ---------------------
Year High Low Share* High Low
- -------------------------------------------------------------------------------------------------------------------
1999 29 7/8 18 3/4 1.44 21 13
1998 37 3/16 20 1.72 22 12
1997 32 1/8 15 7/8 1.45 22 11
1996 21 3/8 9 1/4 1.13 19 8
1995 15 5/8 11 1/2 .67 23 17
1994 17 12 .87 20 14
1993 14 5/8 10 3/4 .70 21 15
1992 11 3/4 8 1/4 .59 20 14
1991 10 1/4 6 5/8 .51 20 13
1990 11 1/2 6 3/4 .65 18 10
1989 9 5/16 4 3/8 .39 25 11
-- --
Eleven-Year Average 21 13
- -------------------------------------------------------------------------------------------------------------------
*ADJUSTED FOR THE EFFECT OF STOCK SPLITS
-52-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
HON INDUSTRIES Inc.
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The valuation and qualifying
accounts as of and for the three fiscal years ended January 1, 2000; January 2,
1999; and January 3, 1998, are presented for the purpose of additional analysis
and are not a required part of the consolidated financial statements of HON
INDUSTRIES Inc. Such information has been subjected to the auditing procedures
applied in our audits of the consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois
February 3, 2000
-53-
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
HON INDUSTRIES INC. AND SUBSIDIARIES
JANUARY 1, 2000
- ----------------------------------------------- --------------- -------------------------------- --------------- ---------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------- --------------- -------------------------------- --------------- ---------------
ADDITIONS
- ----------------------------------------------- --------------- --------------- ---------------- --------------- ---------------
DESCRIPTION BALANCE AT (1) (2) DEDUCTIONS BALANCE AT
BEGINNING OF CHARGED TO CHARGED TO (DESCRIBE) END OF PERIOD
PERIOD COSTS AND OTHER
EXPENSES ACCOUNTS
(DESCRIBE)
- ----------------------------------------------- --------------- --------------- ---------------- --------------- ---------------
(In thousands)
Reserves deducted in the consolidated balance
sheet from the assets to which they apply:
Year ended January 1, 2000:
Allowance for doubtful accounts $2,816 $2,114 $1,362 (A) $3,568
====== ====== ====== ======
Year ended January 2, 1999:
Allowance for doubtful accounts $3,277 $1,288 $1,749 (A) $2,816
====== ====== ====== ======
Year ended January 3, 1998:
Allowance for doubtful accounts $1,830 $2,162 $ 715 (A) $3,277
====== ====== ===== ======
Note A: Excess of accounts written off over recoveries
ITEM 14(a)(3) - INDEX OF EXHIBITS
Exhibit Number Description of Document
-------------- -----------------------
(3i) Articles of Incorporation of the Registrant,
incorporated by reference to Exhibit 3(i) to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 3, 1999
(3ii) By-Laws of the Registrant, incorporated by reference to
Exhibit 3(ii) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended October 3, 1998
(4i) Rights Agreement dated as of August 13, 1998, by and
between the Registrant and Harris Trust and Savings
Bank, as Rights Agent, incorporated by reference to
Exhibit 4.1 to Registration Statement on Form 8-A filed
August 14, 1998, as amended by Form 8-A/A filed
September 14, 1998, incorporated by reference to
Exhibit 4.1 on Form 8-K filed August 10, 1998
(10i) 1995 Stock-Based Compensation Plan, as amended and
restated effective February 10, 1999, incorporated by
reference to Exhibit 10(i) to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
April 3, 1999
(10ii) 1997 Equity Plan for Non-Employee Directors,
incorporated by reference to Exhibit B to the
Registrant's proxy statement dated March 28, 1997,
related to the Registrant's Annual Meeting of
Shareholders held on May 13, 1997
(10iii) Form of Registrant's Change in Control Agreement,
incorporated by reference to Exhibit 10 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994
(10iv) Executive Long-Term Incentive Compensation Plan of the
Registrant, incorporated by reference to Exhibit 99B to
the Registrant's Annual Report on Form 10-K for the
year ended December 30, 1995
(10v) ERISA Supplemental Retirement Plan of the Registrant,
incorporated by reference to Exhibit 99C to the
Registrant's Annual Report on Form 10-K for the year
ended December 30, 1995
(10vi) 1994 Members Stock Purchase Plan of the Registrant,
incorporated by reference to Exhibit 4.3 to the
Registrant's Registration Statement No.
33-54163 on Form S-8 filed June 16, 1994
(10vii) Agreement as Consultant and Director, dated November
15, 1995, between the Registrant and Robert L. Katz,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form
10-K/A for the fiscal year ended December 28, 1996
(10viii) Form of Director and Officer Indemnification Agreement
of the Registrant, incorporated by reference to the
same numbered exhibit filed with the Registrant's
Annual Report on Form 10-K/A for the fiscal year ended
December 28, 1996
(10ix) Form of Common Stock Grant Agreement of the Registrant,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form
10-K/A for the fiscal year ended December 28, 1996
(10x) Form of HON INDUSTRIES Inc. Stock-Based Compensation
Plan Stock Option Award Agreement of the Registrant,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form
10-K/A for the fiscal year ended December 28, 1996
(10xi) Stock Purchase Agreement of the Registrant, dated
September 18, 1985, as amended by amendment dated
February 11, 1991, between the Registrant and Stanley
M. Howe, incorporated by reference to Exhibit 10(xi) to
the Registrant's Annual Report on Form 10-K for the
year ended January 3, 1998
(10xii) Real Estate Contract of the Registrant, dated November
15, 1997, between the Registrant and Terrence L. and
Loretta B. Mealy, incorporated by reference to Exhibit
10(xii) to the Registrant's Annual Report on Form 10-K
for the year ended January 3, 1998
(10xiii) $200,000,000 Credit Agreement, dated June 11, 1997;
First Amendment to Credit Agreement and Waiver, dated
October 20, 1997; and Second Amendment to Credit
Agreement, dated January 18, 2000, by and between
the Registrant and Bankers Trust Company, as
Syndication Agent and Administrative Agent, and
various lending institutions, incorporated by
reference to Exhibit 10(xiii) to the Registrant's
Annual Report on Form 10-K for the year ended
January 1, 2000
(10xiv) HON INDUSTRIES Inc. Profit-Sharing Retirement Plan of
the Registrant incorporated by reference to Exhibit 4.4
to the Registrant's Registration Statement No.
333-31366 on Form S-8 filed February 29, 2000
(16) Letter of Former Accountant, incorporated by reference
to the Registrant's Report on Form 8-K dated May 14,
1996
(21) Subsidiaries of the Registrant
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
(99A) Executive Bonus Plan of the Registrant, incorporated by
reference to the same numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 28, 1996
(99B) Executive Deferred Compensation Plan of the Registrant,
incorporated by reference to the same numbered exhibit
filed with the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 28, 1996