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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

FORM 10-K

For Fiscal Year Ended June 3, 2000
Commission File Number 0-5813
Herman Miller,Inc.
(Exact name of registrant as specified in its charter)

Michigan
(State or other jurisdiction of incorporation or organization)

38-0837640
(I.R.S. Employer Identification Number)

855 East Main Avenue, PO Box 302, Zeeland, MI 49464-0302
(Address of principal executive offices and Zip Code)

Registrant’s Telephone Number, Including Area Code: 616 654 3000

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.20 Par Value
                                                              (Title of Class)

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 (for this purpose only, the affiliates of the registrant have been assumed to be the executive officers and directors of the registrant and their associates) as of August 7, 2000, was $2,455,125,953 (based on $32.438 per share, which was the closing sale price as reported by NASDAQ).

The number of shares outstanding of the registrant’s common stock, as of August 7, 2000: Common stock, $.20 par value—77,302,365 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on October 3, 2000, are incorporated into Part III of this report.

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PART 1

ITEM 1 BUSINESS

(a) General Development of Business

The company researches, designs, manufactures and distributes interior furnishings and provides related services that support companies all over the world. The company’s products are sold primarily to or through independent contract office furniture dealers. Through research, the company seeks to define and clarify customer needs and problems existing in its markets and to design, through innovation where appropriate and feasible, products, systems, and services as solutions to such problems. Ultimately, the company seeks to assist its customers in creating great places to work.

      Herman Miller, Inc., was incorporated in Michigan in 1905. One of the company’s major plants and its corporate offices are located at 855 East Main Avenue, PO Box 302, Zeeland, Michigan, 49464-0302, and its telephone number is (616) 654-3000. Unless otherwise noted or indicated by the context, the term “company” includes Herman Miller, Inc., its predecessors and subsidiaries.

(b) Financial Information About Industry Segments

The company’s operations are in a single industry segment—the design, manufacture, and sale of office furniture systems and furniture, and related products and services. Accordingly, no separate industry segment information is presented.

(c) Narrative Description of Business

The company’s principal business consists of the research, design, development, manufacture, and sale of office systems, products and related services. Most of these systems and products are coordinated in design so that they may be used both together and interchangeably.

      The company is a leader in design and development of furniture and furniture systems. This leadership is exemplified by the innovative concepts introduced by the company in its modular systems known as Action Office, Q System, Ethospace, and Resolve. Action Office, the company’s series of three freestanding office partition and furnishing systems, is believed to be the first such system to be introduced and nationally marketed and as such popularized the “open plan” approach to office space utilization. Ethospace is a system of movable full- and partial-height walls, with panels and individual wall segments that interchangeably attach to wall framework. It includes wall-attached work surfaces and storage/display units, electrical distribution, lighting, organizing tools, and freestanding components. Resolve, the company’s newest product line, is a more flexible systems solution that is based on 120 degree angles around a steel pole and uses fabric screens and canopies for office definition. The company also offers a broad array of seating (including Aeron, Equa, Ergon, Ambi, and Reaction office chairs), storage (including Meridian filing products), wooden casegoods (including Geiger Brickel products), and freestanding furniture products (including Passage).

      The company’s products are marketed worldwide by its own sales staff and its owned dealer network, and via the Internet. These sales persons work with dealers, the design and architectural community, as well as directly with end users. Identifying and developing the various distribution channels within the marketplace is a major focus of the company. Independent dealerships concentrate on the sale of Herman Miller products and a few complementary product lines of other manufacturers. Approximately 71 percent of the company’s sales in the fiscal year ended June 3, 2000, were made to or through independent dealers. The remaining sales (29 percent) were made directly to end-users, including federal, state, and local governments, and several major corporations, either by the company’s own sales staff or its owned dealer network.

      The company is also a recognized leader within its industry for the use, development and integration of customer-centered technologies that enhance the reliability, speed, and efficiency of its operations. This includes proprietary sales tools, interior design and product specification software, order entry and manufacturing scheduling and production systems, and direct connectivity to the company’s suppliers.

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      The company’s furniture systems, seating, storage, casegoods and freestanding furniture products, and related services are used in (1) office/institution environments including offices and related conference, lobby and lounge areas, and general public areas including transportation terminals; (2)health/science environments including hospitals and other healthcare facilities; (3) clinical, industrial, and educational laboratories; and (4) residential and other environments.

      New Product and Industry Segment Information During the past 12 months, the company has not made any public announcement of, or otherwise made public information about, a new product or a new industry segment which would require the investment of a material amount of the company’s assets or which would otherwise result in a material cost.

      Raw Materials The company’s manufacturing materials are available from a significant number of sources within the United States, Canada, Europe, and Asia. To date, the company has not experienced any difficulties in obtaining its raw materials. The raw materials used are not unique to the industry nor are they rare.

      Patents, Trademarks, Licenses, Etc. The company has approximately 139 active United States utility patents on various components used in its products and approximately 104 active United States design patents. Many of the inventions covered by the United States patents also have been patented in a number of foreign countries. Various trademarks, including the name and style “Herman Miller,” and the “Herman Miller Symbol” trademark, are registered in the United States and many foreign countries. The company does not believe that any material part of its business is dependent on the continued availability of any one or all of its patents or trademarks, or that its business would be materially adversely affected by the loss of any thereof, except the “Herman Miller,” “Action Office,” “Aeron,” “Ambi,” “Ergon,” “Equa,” “Ethospace,” “Meridian,” “1:1,” “Passage,” “Prospects,” “Q,” “Resolve,” “SQA,” “Geiger Worldwide” (and “Herman Miller Symbol”) trademarks.

      Working Capital Practices The company does not believe that it or the industry in general has any special practices or special conditions affecting working capital items that are significant for an understanding of the company’s business.

      Customer Base No single dealer accounted for more than 3.7percent of the company’s net sales in the fiscal year ended June 3, 2000. For fiscal 2000, the largest single end-user customer accounted for approximately 7.3 percent of the company’s net sales with the 10 largest of such customers accounting for approximately 16.4 percent of the company’s sales. The company does not believe that its business is dependent on any single or small number of customers, the loss of which would have a materially adverse effect upon the company.

      Backlog of Orders As of June 3, 2000, the company’s backlog of unfilled orders was $283.7 million. At May 29, 1999, the company’s backlog totaled $216.0 million. It is expected that substantially all the orders forming the backlog at June 3, 2000, will be filled during the current fiscal year. Many orders received by the company are filled from existing raw material inventories and are reflected in the backlog for only a short period while other orders specify delayed shipments and are carried in the backlog for up to one year. Accordingly, the amount of the backlog at any particular time is not necessarily indicative of the level of net sales for a particular succeeding period.

      Government Contracts Other than standard price reduction and other provisions contained in contracts with the United States government, the company does not believe that any significant portion of its business is subject to material renegotiation of profits or termination of contracts or subcontracts at the election of various government entities.

      Competition All aspects of the company’s business are highly competitive. The principal methods of competition utilized by the company include design, product and service quality, speed of delivery, and product pricing. The company believes that it is the second largest office furniture manufacturer in the world. However, in several of the markets served by the company, it competes with over 400 smaller companies and with several manufacturers that have significantly greater resources and sales. Price competition remained relatively stable from 1997 through 2000.

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      Research, Design and Development One of the competitive strengths of the company is its research, design and development programs. Accordingly, the company believes that its research and design activities are of significant importance. Through research, the company seeks to define and clarify customer needs and problems and to design, through innovation where feasible and appropriate, products and services as solutions to these customer needs and problems. The company utilizes both internal and independent research and design resources. Exclusive of royalty payments, approximately $35.1 million, $33.4 million, and $29.0 million was spent by the company on design and research activities in 2000, 1999, and 1998, respectively. Royalties are paid to designers of the company’s products as the products are sold and are not included in research and development costs as they are variable based on product sales.

      Environmental Matters The company does not believe, based on current facts known to management, that existing environmental laws and regulations have had or will have any material effects upon the capital expenditures, earnings, or competitive position of the company. Further, the company continues to rigorously reduce, recycle, and reuse the solid wastes generated by its manufacturing processes. Its accomplishments and these efforts have been widely recognized.

      Human Resources The company considers another of its major competitive strengths to be its human resources. The company stresses individual employee participation and incentives, and believes that this emphasis has helped to attract and retain a capable work force. The company has a human resources group to provide employee recruitment, education and development, and compensation planning and counseling. There have been no work stoppages or labor disputes in the company’s history, and its relations with its employees are considered good. Approximately 551 of the company’s employees are represented by collective bargaining agents, most of whom are employees of its Integrated Metal Technology, Inc., and Herman Miller, Limited (U.K.) subsidiaries. As such, these subsidiaries are parties to collective bargaining agreements with these employees.

      As of June 3, 2000, the company employed 9,868 full-time and 383 part-time employees, representing a 20.6 percent increase in full-time employees and a 3.5 percent increase in part-time employees compared with May 29, 1999. In addition to its employee work force, the company uses purchased labor to meet demand fluctuations in its manufacturing operations.

(d) Information About International Operations

The company’s sales in international markets primarily are made to office/institutional customers. Foreign sales mostly consist of office furniture products such as Ethospace and Action Office systems, seating, and storage products. The company is in the following major markets: Canada, Europe, Latin America, and the Asia/Pacific region. In certain other foreign markets, the company’s products are offered through licensing of foreign manufacturers on a royalty basis.

      At the present time, the company’s products sold in international markets are manufactured by wholly owned subsidiaries in the United States, United Kingdom, and Mexico. Sales are made through wholly owned subsidiaries in Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, and the United Kingdom. The company’s products are offered in the Middle East, South America, and Asia through dealers.

      In several other countries, the company licenses manufacturing and selling rights. Historically, these licensing arrangements have not required a significant investment of funds or personnel by the company, and, in the aggregate, have not produced material net income for the company.

      Additional information with respect to operations by geographic area appears in the note “Operating Segments” of the Notes to Consolidated Financial Statements set forth on page 35. Fluctuating exchange rates and factors beyond the control of the company, such as tariff and foreign economic policies, may affect future results of international operations.

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ITEM 2 PROPERTIES

The company owns or leases facilities which are located throughout the United States and several foreign countries, including Australia, Canada, France, Germany, Italy, Japan, Mexico, and the United Kingdom. The location, square footage, and use of the most significant facilities at June 3, 2000, were as follows:

      The company also maintains showrooms or sales offices near most major metropolitan areas throughout North America, Europe, the Middle East, Asia/Pacific, and South America. The company considers its existing facilities to be in excellent condition, efficiently utilized, well suited, and adequate for its design, production, distribution, and selling requirements.

ITEM 3 PENDING LEGAL PROCEEDINGS

The company, for a number of years, has sold various products to the United States Government under General Services Administration (GSA) multiple award schedule contracts. The GSA is permitted to audit the company’s compliance with the GSA contracts. At any point in time, a number of GSA audits are either scheduled or in progress. Management had been notified that the GSA had referred an audit of the company to the Department of Justice for consideration of a potential civil False Claims Act case. In the second quarter of fiscal 2000, the Justice Department informed the company that the audit had been returned to the GSA without the filing of a Civil False Claims Act case. Management does not expect resolution of the audits to have a material adverse effect on the company’s consolidated financial statements.

      The company is also involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the company’s consolidated financial statements.

ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the year ended June 3, 2000.

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ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information relating to Executive Officers of the company is as follows:

      Except as discussed in this paragraph, each of the named officers has served the company in an executive capacity for more than five years.Mr. Frey joined Herman Miller, Inc., in November 1996, and prior to 1996 was chairman of the board and chief executive officer of Asian operations and an elected executive vice president at Whirlpool Corporation. Mr. Knibbe was the vice president of sales and distribution for Herman Miller, Inc., from March 1996 to May 1997; president of Workplace Resource, Inc. (a subsidiary of Herman Miller, Inc.), from March 1995 to April 1996; and vice president of sales and distribution for Meridian, Inc.(a subsidiary of Herman Miller, Inc.), from April 1990 to March 1995. Mr. Miyamoto was the president at Community Medical Center Healthcare System from January 1995 to February 1996 and executive vice president and chief operating officer of St. Vincent Medical Center from June 1992 to January 1995. Ms. Nickels joined Herman Miller, Inc., in February 2000, and prior to 2000 was chief financial officer of Universal Forest Products, Inc., for seven years. For more than five years prior to January 1998, Mr. Norman was the president of Miller SQA (a subsidiary of Herman Miller, Inc.). Mr. VanSpronsen was the president of Miller SQA from January 1998 to September 1998, and vice president and general manager of Miller SQA from June 1992 to December 1997. Mr. Walker was the executive vice president, finance and business development, and chief financial officer for Herman Miller, Inc., from March 1996 to February 2000; vice president of finance for Herman Miller, Inc., from May 1995 to March 1996; vice president of finance and management information systems of Milcare, Inc. (a subsidiary of Herman Miller, Inc.), from July 1994 to May 1995; and vice president of finance for Herman Miller Europe from December 1991 to July 1994.

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PART II

ITEM 5 MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

SHARE PRICE, EARNINGS, AND DIVIDENDS SUMMARY

Herman Miller, Inc., common stock is quoted in the NASDAQ-National Market System (NASDAQ-NMS Symbol:MLHR). As of August 7, 2000, there were approximately 26,000 shareholders of record for the company’s common stock.

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ITEM 6 SELECTED FINANCIAL DATA

REVIEW OF OPERATIONS

	(1)		Shown as a percent of net sales.
	(2)		Retroactively adjusted to reflect two-for-one stock splits occurring in 1998 and 1997.
	(3)		Amounts restated to reflect reclassification of certain expenses to conform to 2000 presentation.
	(4)		Calculated using current assets less non-interest bearing current liabilities.

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ITEM 7    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS

The issues discussed in management’s discussion and analysis should be read in conjunction with the company’s consolidated financial statements and the notes to the consolidated financial statements.

      Basis of Presentation When considering year-over-year growth statistics, it is important to keep in mind that fiscal year 2000 contained 53 weeks, compared to 52 weeks in fiscal 1999 and 1998.

FORWARD-LOOKING STATEMENTS

This discussion and analysis of financial condition and results of operations, as well as other sections of our Form 10K, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates, and projections about the office furniture industry, the economy, and about the company itself. Words such as “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict with regard to timing, extent, likelihood, and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed or forecasted in such forward-looking statements. Furthermore, Herman Miller, Inc., undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

OVERVIEW

We had a record-setting year at Herman Miller in a number of categories, including sales, orders, backlog, and earnings per share. While all of these critical measures improved, we did not achieve our goals for sales and net income growth. Our results were impacted by three primary factors: a general industry slowdown, manufacturing inefficiencies, and the decision to continue investing in our key strategic initiatives. The decline in industry demand, which fell short of expectations, began to affect our order entry in the third quarter of fiscal 1999 and impacted our financial results in the first half of fiscal 2000. In addition, net income growth was restricted as a result of our strategic investments. While it would have been possible to increase earnings by reducing our strategic investments, such a decision would have delayed critical development of new products and processes that will enhance the value we deliver to customers. We believe that the rapidly changing dynamics in the office furniture industry have led to a stratification of buyer attitudes we characterize as value propositions, groups of customer needs we are dedicated to serving. We also believe that creating a customer-centered business is extremely dependent upon developing customized portals and other forms of connectivity that utilize the rapidly evolving technology being deployed in the emerging business-to-business and business-to-customer paradigms.

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      To meet these challenges, companies must deploy new functionality; to be a leader, the deployment must be rapid. Over the past two years, we have made a commitment to our customers, our vendors, our business partners, and ourselves, to reinvent our industry. Completely changing how we interact with all of these groups is no small task, a fact we have recognized since we began this effort. We do believe, however, that the results will be more than worth the investment in capital, expenses, time, and even delayed earnings growth. We have already realized tangible benefits from this work, as will be evidenced throughout this discussion. Although we also faced challenges this year that were not anticipated in our initial plans, we believe we are developing holistic solutions that further enhance our value proposition approach.

      As mentioned in the Letter to Shareholders, innovation demands investment. We made substantial investments in our business during fiscal 2000. These took the form of expanded facilities and equipment, increased operating expenditures, and additional personnel. Our investments were in four primary areas: development and implementation of our customer- centered technology platform; consolidation of our Georgia, U.S. operations into a new facility; production capability enhancements; and new products. As we expected, capital expenditures increased to $135.7 million. Our operating expenses increased $34.6 million, or 7.5 percent. Our design and research expenditures increased approximately 8.7 percent. These investments are core building blocks that will enable us to implement our strategy, get connected, and change the game in the office furniture industry.

      At Herman Miller, we use Economic Value Added (EVA) to measure the value we have created for our employee-owners and shareholders. We evaluate all of our business decisions using this metric, to ensure that we are applying our resources to those opportunities that create the highest return. We also use EVA as the basis for calculating our incentive compensation. Making EVA such an important part of our overall compensation structure has driven a much higher level of business literacy throughout our workforce, providing better decision-making throughout the company.

      EVA declined by $3.2 million in fiscal 2000 for several reasons we will elaborate upon throughout this discussion. Because of this decline, incentive compensation payments were reduced substantially from last year. In essence, having a percentage of our compensation vary based on EVA simulated an across-the-board pay cut of $42.6 million. Prior to the EVA implementation, we would have been forced to undergo sizeable terminations to experience the same results. Our employees obviously suffered, but our belief in the future is so strong that continuing to invest in our strategy was the most effective way we could continue to create value. In addition to the remarkable improvement in business literacy, we have derived substantial benefits from the system as a whole. We continue to believe that EVA is the best method of rewarding our employees in a manner that is consistent with the rewards we provide to our shareholders, and market research validates this perspective.

      While EVA has not predicted short-term swings in our stock price, since its implementation, our stock price has increased 285.4 percent, while EVA grew 753.4 percent. We continue to believe that there is a strong correlation between stock price and expected EVA. Therefore, again this year, we have presented a summarized calculation of our EVA for fiscal 2000, 1999, and 1998. In addition, we have noted throughout our analysis the impact that changes in performance had on EVA.

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(1)		Imputed interest as if the total noncancelable lease payments were capitalized.
(2)		The reported current tax provision is adjusted for the statutory tax impact of interest expense.
(3)		Total assets less noninterest-bearing liabilities plus the LIFO, doubtful accounts, and notes receivable reserves, warranty reserve, amortized goodwill, deferred taxes, and capitalized design and research expense. Design and research expense is capitalized and amortized over 5 years.
(4)		Management’s estimate of the weighted average of the minimum equity and debt returns required by the providers of capital. Reevaluated every year and adjusted when necessary to reflect the current rate environment and capital structure.

      As you can see, we generated $87.9 million of EVA this year, compared to $91.1 million last year, and $78.4 million in 1998. In 2000, our EVA decreased 3.5 percent after increasing 16.2 percent in 1999.

KEY DRIVERS

Net Sales   In fiscal 2000, our sales increased 9.7 percent, after increasing 2.8 percent in 1999, and 14.9 percent in 1998. Our goal continues to be 15 percent per annum sales growth; throughout this discussion, we will identify growth drivers for the upcoming year that we believe will help us approach that level.

      As discussed above, demand was soft during the first half of our fiscal year. This was primarily due to concerns over a possible recession and customers postponing capital spending to address Year 2000 (Y2K). Demand improved strongly in the second half of the fiscal year for two reasons. One, corporate profits continued to be strong, which eased recession fears. Two, pent-up demand created by Y2K was released. Additionally, our international markets were positively impacted as the economic environments where we have a presence also rebounded during the year. Each of these topics is expanded upon below.

      Domestic Operations Our domestic sales grew 9.9 percent this year, after growing 3.8 percent in 1999, and 16.7

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percent in 1998. Excluding acquisitions and the extra week in fiscal 2000, our domestic sales increased 3.0 percent in 2000, 2.3 percent in 1999, and 15.9 percent in 1998. In the current year, we acquired Geiger Brickel, Inc., to complement our product offerings. Our core domestic growth has been primarily driven by unit volume increases. We have not materially changed list prices in over four years. During 2000, incremental discounts given to customers reduced our net sales by approximately $16.5 million. Changes in discounts reduced net sales in 1999 by $11.0 million and were not significant in 1998.

      The Business and Institutional Furniture Manufacturers Association (BIFMA) reported that U.S. sales grew approximately 4.4 percent in the 12 months ended May 2000, after increasing 3.1 percent in 1999, and 11.9 percent in 1998. Given that our growth has exceeded the industry’s growth, we believe we have gained market share in each of the past five years.

      We believe demand for office furniture in the U.S. is driven by three primary factors in the macro economy: corporate profits, white-collar employment, and nonresidential fixed investments. During the last three fiscal years, each of these factors improved year-over-year. Secular trends, such as the deployment of technology into work environments and new and emerging work styles, have also positively influenced demand in recent years. Over the past year, industry growth has not correlated well with these drivers. We believe the recession fears and Y2K disruption mentioned above caused this. Also, our industry has historically lagged behind changes in the macro economy by approximately six months. This is demonstrated by BIFMA’s sales growth, which was 1.1 percent during the first half of our fiscal year, and 7.9 percent during the second half. BIFMA is currently estimating that industry shipments will increase 5 to 7 percent in calendar 2000, and 3 to 5 percent in calendar 2001.

      International Operations and Exports from the United States We are delighted with the results of our International Operations, which, for the first time ever, generated positive EVA. This is also the third consecutive year that International Operations positively impacted consolidated results with continued growth in sales, orders, and profitability.

      Net sales of International Operations and export sales from the U.S. for the year increased 8.7 percent in 2000 to $281.7 million, compared with $259.1 million last year, and $266.7 million in 1998. This year, our international sales have been positively impacted by improving economic conditions in the geographic areas where we have a significant presence, particularly the United Kingdom and Japan. As is the case domestically, the increases are primarily attributable to unit volume changes.

      Net income for 2000 was $11.5 million, versus $8.1 million last year and $7.6 million in 1998. All regions reported net income. These positive results are primarily attributable to increased sales growth and cost-containment efforts. The 42.0 percent increase in current year profitability was the result of creating an infrastructure with sufficient capacity to provide increased throughput without substantially increasing costs, thereby providing strong operating margins on incremental sales.

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      Gross Margin Consolidated gross margin, as a percent of net sales, decreased to 37.8 percent for the year, compared to 38.9 percent in the prior year, and 38.2 percent in 1998. Certain expenses were reclassified as operating expenses to conform to industry reporting. We have restated all years presented to reflect this change.

      Four primary factors are responsible for the decline in gross margin: deeper discounting, product mix shifts to newer products with lower margins, the ramp-up of new products, and manufacturing inefficiencies. These unfavorable factors were partially offset by an improvement in per-unit material costs and a reduction in our incentive compensation. These incentives are available to all employees and are tied to year-over-year improvement in EVA.

      As discussed above, during the first half of our fiscal year, industry demand was relatively soft. In this environment, competition was heightened, as companies were willing to accept reduced pricing to utilize excess capacity. As we moved into the second half of our fiscal year, demand strengthened and pricing stabilized; however, it stabilized at the pricing levels we experienced during the first half of the year. As was noted above, the increased discounting reduced sales and gross margin $16.5 million, which resulted in a .9 percent decrease in gross margin.

      We have invested in developing and enhancing production capabilities for several new products, most notably
Q(TM), Passage(TM), and Resolve(TM) systems. These products are currently generating lower margins than our more established product lines. We are continuing to invest in these products to improve their manufacturability. As the impact of these investments takes hold and volume increases, we expect the margins to improve.

      We have been implementing lean manufacturing techniques throughout our operations for the past several years, and have realized substantial benefits from this work. These techniques are a process of continuous improvement that focuses on the elimination of waste in all aspects of our business. To further accelerate these benefits, we are strengthening our relationship with the Toyota Supplier Support Center to develop a dedicated team whose sole function is the implementation of the Herman Miller Production System. We believe that continuation of this work will enhance our throughput and productivity, improve our cost structure, and enable us to achieve our reliability goals.

      As part of our focus on reliability, we increased our investment in working capital. Our efforts to improve our production capabilities reduced our manufacturing flow predictability for a period of time. As we worked toward reducing cycle times, the process changes we implemented caused fluctuations in production and shipping schedules. To eliminate the impact this had on customer shipments, we changed our internal scheduling to ensure that manufacturing of orders was completed to allow adequate time for staging and shipping. A result of this change is that we have significantly increased our shipment reliability, which has consistently been over 95 percent since the third quarter. While the change in internal scheduling led to a slight increase in our working capital, we believe it is the right answer for our customers. At the end of 2000, the days sales outstanding in the sum of our accounts receivable and inventory had increased to 53.6 days, compared to 52.5 days and 56.2 days at the end of 1999 and 1998, respectively. As you can see, we have maintained a large portion of the gains realized in previous years. These improvements are the result of faster cycle times, improved connectivity with our vendors, and eliminating steps in the physical distribution process. We expect that continued increases in throughput will further improve this turnover rate during fiscal 2001.

      To support our customer-focused vision, we require absolute reliability from our supply base. Our operation is very strongly aligned with our suppliers, and as we increase our customers’ expectations regarding speed and reliability, providing suppliers with accurate, real-time information becomes essential. The work to accomplish these objectives is proceeding on several fronts, with the primary focus on technologically enabling the process, which we believe is the only way to be cost competitive while attaining the new, required levels of performance.

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We have developed internet-based capabilities for selected suppliers on a customized web site, allowing them to have the latest material requirements whenever they want it. During fiscal 2000, over 23 percent of our material requirements were filled utilizing this capability.

      Raw material purchases represent 64.5 percent of our cost of goods sold. By keeping our vertical integration to a strategically determined level, we are better able to increase the variability of our cost structure. We are also able to utilize the capabilities of our supply base to their fullest extent, which provides greater flexibility in selecting new materials and processes in the research, design, and development of new products. As we invest in our supplier relationships, both technologically and developmentally, our suppliers have reciprocated by partnering with us, sharing both their expertise and cost savings created. Our material cost improved by approximately $17 million in 2000 and $10 million in 1999 as a direct result.

      Over the past year, we have continued the implementation of our Enterprise Resource Planning (ERP) system in most of our U.S. operations. Our internal expertise is developed to the point that we have been able to nearly eliminate the need for external consulting resources, dramatically reducing the ongoing implementation cost. We now have six West Michigan manufacturing sites implemented on the new system with minimal, if any, disruption to the operations. We have also focused on improving our reliability and quality, while reducing lead times. We believe this focus has paid off, making us a leader in the industry and exceeding customer expectations, as our implementation has provided faster and more accurate data regarding the operations and material planning needs. Our previous estimate for the total project cost of $100 million has not changed. We expect to implement the new system at the majority of our manufacturing sites over the next 12 months.

      During fiscal 2001, we expect gross margins to remain in the range of 37.5 to 38.5 percent of net sales. Continued productivity improvements and material cost reductions will be offset, to some degree, by additional discounting and the resumption of incentive compensation payments to North American employees.

      Operating Expenses During the past two years, we invested heavily in two primary areas: technology and new products. We believe that leadership in the office furniture industry will be determined by those organizations that provide high-speed, seamless, on-demand communications throughout the value chain that begins and ends with the customer. Further, these tools must be customized into a specific business model that fits the individual customer’s needs, not be “one size fits all.” We have developed four distinct value propositions, which are tailored to types of customers, based on how they perceive value. In each of these models, customization opportunities are available to further enhance the customer’s experience. Central to all of these capabilities, however, is our understanding of customers’ expectations based on their input. It is important to note that customers have ready access to any of the tools deployed throughout the suite of competencies and methods that compose our value propositions.

      Essentially, customers can select the means by which they communicate with us, across a spectrum of interaction levels and contact points that range from placing orders through our online store at www.hermanmiller.com, utilization of a custom-designed web site, or engaging our design team to implement a fully-realized environment.

      As we stated in the overview, creating real value for customers also relies heavily on the product offering. Over the years, Herman Miller has continually led the office furniture industry in product and business design innovation. Elsewhere in this report you can see some of our major milestones. During fiscal 2000 we renewed our commitment to developing leading-edge products that, by their nature, enhance work environment productivity. This was demonstrated by the product offering displayed in our NeoCon showroom, which won the Grand Award for best showroom this year.

      The other area of incremental expenditure was design and research. Design and research costs, excluding royalty payments, were $35.1 million in 2000, compared to $33.4 million in 1999, and $29.0 million in 1998. Royalty payments made to designers of the company’s products as the products are sold are not included in research and development costs, since they are considered to be a variable cost of the product. As a percentage of net sales, research and development costs were 1.8 percent in 2000, 1.9 percent in 1999, and 1.7 percent in 1998.

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As discussed earlier, new product design and development has been, and continues to be, a core value of Herman Miller. The increased expenditures are directly related to the increased number of new products introduced and currently in development. Also, several products moved from development to commercialization, driving increased marketing costs.

      The market response to our new products has been exceptional. In particular, our award-winning Resolve system has made a significant impact on customers’ perceptions about office environments and how they impact a company’s image and culture. We introduced Resolve at the industry’s annual trade show, NeoCon, in June of 1999, where it won a best-of-show gold award. During fiscal 2000, we focused on establishing production, and commercializing this product. In June of 2000, the Resolve system became available for unrestricted order entry. Although it is still quite early for Resolve, we believe that it will set a new reference point for office furniture environments in its flexibility, approach to privacy, cost, and presentation and utilization of space.

      In addition to these areas, we had incremental operating expenses from acquisitions completed during fiscal 2000, 1999, and 1998, and increases in wages and benefits for the existing work force of approximately 3 percent.

      The improvement in our operating expense ratio—to 25.7 percent in 2000 as compared to 26.2 percent in 1999—was primarily due to reduced variable incentive compensation payments, which responded to the decline in EVA. Once again, we restated all years for reclassification of certain expenses from cost of goods sold.

      Our long-term goal is to reduce operating expenses to 24 percent. However, we expect this ratio may increase slightly next year. As is the case in gross margin, continued improvements and leveraging of the cost structure will be offset by increases for incentive compensation payments. While we are diligently pursuing initiatives to further improve our cost structure, we will improve this ratio primarily by increasing sales at a higher rate than costs.

      Our operating expense improvement trend has slowed over the past two years. As we have discussed throughout this report, the deployment of technology has been and will continue to be a key focus for us. To support this work, we have increased the size and expertise of our information technology staff. This year, the team was focused on implementing our new ERP system and upgrading our information technology infrastructure. We expect our information technology costs to remain consistent with fiscal 2000 levels for the foreseeable future. We believe that most companies who lead their industry also lead in the deployment of technology. Our investments in both our ERP platform and customer-focused sales capabilities will continue to be primary drivers of our cost structure. This is due both to the ever-increasing importance of these investments as well as the rapidity with which they change. Historically, capital investments were amortized over an extended period of time. In the new, technology-driven business model, however, capital investments impact the income statement much more quickly, driving higher expense levels and greater needs for renewed assets.

      Operating Income The decline in gross margin was partially offset by the reduction in the operating expense ratio, resulting in a slight decline in operating margin. As a percent of sales, operating income declined to 12.1 percent in 2000 from 12.7 percent in 1999, and was consistent with the 12.1 percent in 1998.

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      Other Expenses and Income Other expense was $12.9 million in fiscal 2000, while in 1999 we generated other income of $5.6 million. The change is primarily attributable to increased debt and the impact of nonproductive asset disposals. Throughout this document, we have discussed how we are investing in the business. We are also optimizing our capital structure with an appropriate mixture of debt and equity capital, by continuing our share repurchase program. To fund these and other investments, interest-bearing debt has increased, driving interest expense to $13.4 million, as compared to $7.3 million last year. At the end of fiscal 2000, interest-bearing debt was $225.6 million, an increase of $78.0 million from fiscal 1999.

      We disposed of several nonproductive assets in the current year, which generated a pre-tax loss of $5.0 million for the year. Last year’s results included gains on the sales of our sites in Grandville, Michigan, and Roswell, Georgia, as well as excess land in Chippenham, U.K. In total, these disposals contributed a net $6.9 million pre-tax gain to prior year’s results.

      Income Taxes Our effective tax rate was 37.0 percent in 2000, compared to 38.3 percent and 38.8 percent in 1999 and 1998, respectively. The lower tax rate is due to lower state taxes, international tax benefits, and other initiatives. We expect the effective tax rate for fiscal 2001 to be in the range of 36.0 to 37.0 percent.

      Liquidity and Capital Resources The table below shows certain key cash flow and capital highlights:

      Our cash flow from operations decreased 1.7 percent in 2000, to $202.1 million, from last year’s $205.6 million. The decrease from last year was due to an increased working capital investment of $20.1 million. As noted earlier, the working capital increase was due in part to manufacturing inefficiencies. Days sales outstanding in the total of accounts receivable and inventory increased 1.1 days. During the fourth quarter, we were able to reduce the level of investment as shipment velocity, coupled with operational improvements, improved our turnover rate.

      Fiscal 2000 capital expenditures were primarily for investments in our customer-centered selling technology platform, new facilities, construction of the new plant in Georgia, and equipment for operational enhancements to expand capacity. At the end of the fiscal year, $16.3 million of capital was committed for future expenditures.

      During 1999, we completed the sale of our manufacturing site and excess land in Roswell, Georgia, a building in Grandville, Michigan, and excess land in the United Kingdom. Total proceeds from the sale of these properties were $26.0 million. The Grandville site is no longer needed and will not be replaced. The Georgia facility was replaced by a new facility that was completed in 2000. The new facility enabled us to consolidate the operations performed at our Roswell site with operations performed at two leased locations, thus lowering our total operating costs and providing increased capacity.

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      We expect capital expenditures, net of redeployments, will be between $120 million and $140 million in 2001. The largest planned expenditures will be for continued development of our e-business initiatives, and manufacturing capabilities to support product lines that will drive our growth in the upcoming year.

      In 2000, we acquired Geiger Brickel, Inc., a manufacturer of wood casegood products. Included in this purchase was a Geiger Brickel sales office in the United Kingdom. We also acquired a privately owned North American dealer as part of our service strategy. These organizations were acquired for approximately $8.7 million and 1,312,187 shares of Herman Miller stock. We expect to invest between $10 million and $20 million in acquiring additional local and regional service operations in 2001. In addition, we will continue to investigate acquisitions and alliances to fill strategically identified gaps in our product offering.

      At the end of 2000, we continued to have a high level of cash and cash equivalents. We intend to utilize our available cash to partially fund the repurchase of the company’s stock, acquisitions, and future capital expenditures.

      During the fourth quarter of fiscal 2000, we completed a $300 million shelf registration that will enable us to undertake an initial public debt offering to replace currently amortizing fixed-rate debt and existing variable-rate debt. In addition, the shelf registration provides us with flexibility as potential new financing needs arise. Our available credit, combined with our existing cash and expected cash flow, is adequate to fund our day-to-day operations, strategic investments, and share repurchases.

      In 1999, we renegotiated the covenants on existing debt and obtained a new $300 million unsecured revolving credit facility. Going forward, our capital structure will be managed based on one overriding tenet: We will maintain the financial strength and flexibility that would enable our debt to be rated investment grade, including the maintenance of a minimum EBITDA-to-interest expense ratio and a maximum debt-to-EBITDA ratio. (EBITDA stands for Earnings Before Interest Expense, Taxes, Depreciation, and Amortization.)

      The Board of Directors first authorized the company to repurchase its common stock in 1984, and has periodically renewed its authorization. During 2000, we repurchased 3.3 million shares of our common stock for $79.7 million under the Board-approved stock repurchase program. Over the past five years, we have repurchased 29,474,478 shares of our common stock for $548.3 million, adjusted for stock splits in fiscal 1998 and 1997. This represents approximately 29.7 percent of the common shares outstanding at the end of 1995. Management and the Board of Directors believe the share 23 repurchase program is an excellent means of returning value to our shareholders and preventing dilution from employee-ownership programs. In September 1999, our Board of Directors approved an additional $50 million, and in July 2000, they approved an additional $100 million to be used for share repurchases. We currently have $127.1 million remaining on our authorization.

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      Over the years, we have developed a variety of ways for our employees to buy and hold shares of stock in Herman Miller, Inc. In June 2000 we awarded an option to purchase 100 shares of stock to each of our non-executive, North American employees who were with the company for the entire fiscal year. The purpose of this special one-time grant is to provide our employees with a greater share of the value created by their hard work and by substantial investments we made during fiscal 2000. We have always believed that employees who are also owners are better employees and are more likely to create economic value in the business.

CONTINGENCIES

The company, for a number of years, has sold various products to the United States Government under General Services Administration (GSA) multiple award schedule contracts. The GSA is permitted to audit the company’s compliance with the GSA contracts. At any point in time, a number of GSA audits are either scheduled or in progress. Management had been notified that the GSA referred an audit of the company to the Department of Justice for consideration of a potential civil False Claims Act case. In the second quarter of fiscal 2000, the Justice Department informed the company that the audit has been returned to the GSA without the filing of a civil False Claims Act case. Management does not expect resolution of the audits to have a material adverse effect on the company’s consolidated financial statements.

      We are not aware of any other litigation or threatened litigation that would have a material impact on the company’s consolidated financial statements.

CONCLUSION

In conclusion, the office furniture industry is in a period of rapid, fundamental change, and we are determined to lead the way. As we have described our strategic intent to you throughout this document, we hope that you have a better understanding of how we are creating new value for our shareholders and employee-owners. Breaking new ground is always a higher-risk approach than following the pack, but we believe our approach safeguards the company’s existing value while it also allows us to pursue a higher return business model. While we did not achieve all of our financial objectives last year, when reflecting on the progress we made toward realizing our goals, we believe fiscal 2000 allowed us to build a winning platform for successes yet to come. We are more optimistic than ever about our future, and we believe fiscal 2001 will capitalize on the work we have started, setting new reference points for Herman Miller and the industry.

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 item. Foreign currency exchange rate fluctuations related to the company’s international operations did not have a material impact on the financial results of the company during fiscal 2000. The company has no material sensitivity to changes in foreign currency exchange rates. For further information, refer to the Fair Value of Financial Instruments and Financial Instruments with Off-Balance-Sheet Risk disclosures in the Notes to Consolidated Financial Statements filed as part of this report.

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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUARTERLY FINANCIAL DATA

Summary of the unaudited quarterly operating results on a consolidated basis: