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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 3, 1998
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 52761-7109
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 13, 1998, was: $1,536,722,087, assuming all 5% holders
are affiliates.
The number of shares outstanding of the registrant's common stock, as of March
13, 1998, was: 30,826,307 (prior to giving effect to the two-for-one stock split
effective March 27, 1998).
Documents Incorporated by Reference
Portions of the registrant's Proxy Statement dated March 27, 1998, for the May
12, 1998, 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
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PART I
Page
----
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 12
Item 3. Legal Proceedings................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
Table I - Executive Officers of the Registrant................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 17
Item 6. Selected Financial Data -- Eleven-Year Summary................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 25
Item 8. Financial Statements and Supplementary Data...................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 25
PART III
Item 10. Directors of the Registrant...................................... 26
Item 11. Executive Compensation........................................... 26
Item 12. Securities Ownership of Certain Beneficial Owners and Management. 26
Item 13. Certain Relationships and Related Transactions................... 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 27
Signatures ................................................................ 30
Financial Statements....................................................... 32
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 designs and manufactures value-priced office
furniture and furniture systems in the United States. The Company's products are
marketed through multiple distribution channels to small- through large-sized
businesses and to home offices on the basis of lower-than-expected price,
higher-than-expected quality, a broad selection of products, and quick delivery.
The Company refers to this combination of benefits as "compelling value." In
addition to its core office furniture business, the Company, through its Hearth
Technologies Inc. subsidiary, markets hearth products through the "Heatilator"
and "Heat-N-Glo" brand names. In fiscal 1997, the Company had net sales of
$1.36 billion, of which $1.16 billion was attributable to office furniture
products and $204.5 million was attributable to hearth products. See Business
Segment Information in the Notes to the Consolidated Financial Statements for
further information about business 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 and Canada. See Item 2. Properties for additional related
discussion. Four operating units, marketing under various brand names,
participate in the office furniture industry. These operating units include: a
division, The HON Company, and three wholly owned subsidiaries, including 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.
A fourth wholly owned subsidiary, 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.
A fifth wholly owned subsidiary, HON Export Limited, 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 and Bevis operate under The HON Company and Panel
Concepts operates under BPI Inc.
During 1996, the Company sold its wholly owned subsidiary, Ring King
Visibles, Inc. (January 24), a manufacturer and marketer of a limited line of
personal computer accessories, and acquired Heat-N-Glo Fireplace Products, Inc.
(October 2), a leading hearth products manufacturer, noted previously. The sale
of Ring King resulted in an after-tax gain of $2.0 million, and the purchase
price of the Heat-N-Glo totaled approximately $79 million.
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
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addition, the Company's RCI efforts enable it to offer short average lead times
of two to four weeks, from receipt of order to shipment, for most of its
products. The Company's ability to apply RCI techniques to reduce manufacturing
costs 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, BT Office Products International, Inc., U.S. Office
Products Company, Corporate Express Inc., 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 cross-docking 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 1997 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 the Consolidated Financial
Statements, which are filed as part of this report: Nature of Operations,
Business Combinations, Business Disposition, and Business 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 hearth products industries; a concentrating customer base as a
result of market consolidations; risks associated with managing growth; risk of
environmental liabilities as a result of changing federal, state and local
environmental laws and regulations; macroeconomic factors affecting the
industries in which the Company does business; issues associated with
acquisition and integration of acquisitions; operating risks; the availability
and cost of capital to finance planned growth; as well as risks, uncertainties
and other factors described in this report, and from time to time, in the
Company's other 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 $11,445,000,000 in 1997, have grown at a compound annual
growth rate of approximately 9% over the three-year period ended December 31,
1997. The Company believes that growth in the office furniture industry is being
driven by changing customer needs due to the emergence of open office floor
plans to support team work environments, shared and multi-purpose office spaces
for flexible work arrangements, new office technology which requires furniture
systems
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that support the use of hardware and software, and an increased focus on
ergonomics and employee comfort.
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.
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 3, 1998, the Company employed approximately 9,400 persons,
8,900 of whom were members and 500 of whom were temporary personnel. Of the
approximately 9,400 persons employed by the Company, 5,600 were in the Company's
manufacturing operations. The Company employed approximately 600 members who
were members of unions. The Company believes that its labor relations are good.
As a result of acquisitions during 1997, approximately 1,500 members were added.
Products.
Office Furniture.
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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
HON Company Division ("The HON Company") and the Company's wholly-owned
subsidiaries--BPI Inc. ("BPI"), Holga Inc. ("Holga") and The Gunlocke Company
("Gunlocke").
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 non-wood materials.
The following is a description of the Company's major product categories and
product lines:
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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 free-standing 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 free-standing 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 wood
curved legs, arms and backs through the steambending process, which produces
strong and attractive seating components.
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
work settings, 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 work spaces and work spaces shared by several
employees who are frequently out of the office. A typical installation of office
panels often includes associated sales of seating, case goods, 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, teamwork settings
and open floor plans. Tables are produced in wood veneer and laminate and are
available in numerous sizes, shapes and base styles.
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Hearth Products.
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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, and Arrow-Dover brand
names. The Company's line of hearth products includes wood- and gas-burning
fireplaces and stoves, fireplace inserts, chimney systems and related
accessories. In October 1996, the Company acquired Heat-N-Glo and combined it
with its existing Heatilator operations to form Hearth Technologies, through
which it sells all its hearth products. Heatilator and Heat-N-Glo are leaders
in the two largest segments of the home fireplace market: vented-gas and wood
fireplaces.
Historically, the hearth products industry has consisted primarily of low-cost
builders' box fireplaces sold through builder distributors and wood stoves and
high efficiency fireplaces sold through dealer showrooms. With the acquisition
of Heat-N-Glo in October 1996, Hearth Technologies began marketing a "direct
vent" fireplace, which replaces the top-venting chimney system used in
traditional fireplaces. See "Business--Intellectual Property."
Manufacturing.
The HON Company manufactures office furniture in California, Georgia, Iowa,
Kentucky, Mississippi, North Carolina, Pennsylvania, South Carolina, Tennessee,
Texas, and Virginia. BPI Inc. manufactures office furniture in California,
North Carolina, and Washington. 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, and
Alberta, 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.
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
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corporate level, the staff at the Company's Stanley 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
$15.4 million, $10.4 million, and $11.6 million in product development during
fiscal 1997, 1996 and 1995, respectively, and has budgeted in excess of $16
million for product development in fiscal 1998.
Intellectual Property.
As of January 3, 1998, the Company owns 139 U.S. and 100 foreign patents and
has applications pending for 53 U.S. and 80 foreign patents. In addition, the
Company holds registrations for 96 U.S. and 140 foreign trademarks, and has
applications pending for 45 U.S. and 67 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 patents nor the Company's patents
in the aggregate are material to the Company's business as a whole.
When Hearth Technologies 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 the space
above the fireplace up 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 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.
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
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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 1997, the Company's ten largest customers represented approximately 40% of
its consolidated net sales. The increased 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 that 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, BT Office
Products International, Inc., U.S. Office Products Company, Corporate Express
Inc., 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 lay-
out 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 12%, 12%, and 13% of the Company's consolidated net sales in 1997,
1996, and 1995, 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 3, 1998, the Company's office furniture sales force consisted of
19 regional sales managers supervising 114 salespersons, plus approximately 60
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.
The Company also makes export sales through HON Export Limited to
approximately 90 office furniture dealers and wholesale distributors serving
select foreign markets. Distributors are
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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 1997.
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 1,300 dealers and 450 distributors. The company has a field sales
organization of 11 regional sales managers supervising 28 salespersons and 10
firms of independent manufacturers' representatives.
As of January 3, 1998, the Company has an order backlog of approximately
$106.4 million which will be filled in the ordinary course of business within
the current fiscal year. This compares with $59.1 million as of December 28,
1996, and $54.9 million as of December 30, 1995. Backlog, in terms of
percentage of net sales, was 7.8%, 5.9%, and 6.1% for fiscal years 1997, 1996,
and 1995, respectively. The dollar amount of the ongoing backlog of orders at
any point in time is not considered by management to be a leading indicator of
the Company's expected sales for any particular fiscal period. Large dollar
amounts of order backlogs are unusual since most of the Company's products are
manufactured and shipped within a few weeks following receipt of order, and a
low backlog is an indicator of responsive customer service.
For a discussion of the seasonal nature of the Company's sales, see Business
Segment Information in the Notes to the 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.
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
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the Company's significant on-going investment in product development, highly-
efficient and low cost manufacturing operations, and an extensive distribution
network.
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 to 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 cost 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 wherever 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
1998 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 further information regarding the Company's environmental matters, refer
to Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, and the Contingencies note in the
Notes to the Consolidated Financial Statements.
-11-
Business Development.
The development of the Company's business during the fiscal years ended
January 3, 1998, December 28, 1996, and December 30, 1995, is discussed in Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
ITEM 2. PROPERTIES.
- --------------------
The Company maintains its corporate headquarters in Muscatine, Iowa, and
conducts its operations at locations throughout the United States and Canada
which house manufacturing and distribution operations and offices totaling an
aggregate of approximately 7.9 million square feet. Of this total, approximately
2 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 443,334 Owned Manufacturing non-wood
casegoods office
furniture(1)
Chester, Virginia 280,682 Leased (2) Manufacturing non-wood
casegoods office
furniture(1)
Florence, Alabama 308,763 Owned Manufacturing non-wood
casegoods office furniture
Jackson, Tennessee 301,000 Leased Manufacturing parts for
office furniture(1)
Jackson, Tennessee 155,000 Leased Manufacturing non-wood
office seating
Lake City, Minnesota 235,000 Leased Manufacturing metal
prefabricated
fireplaces(1)
Louisburg, North 176,354 Owned Manufacturing wood
Carolina casegoods office furniture
Milan, Tennessee 358,000 Leased Manufacturing systems
office furniture
Mt. Joy, Iowa 159,500 Leased Warehousing office
furniture
Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal
prefabricated
fireplaces(1)
Muscatine, Iowa 286,000 Owned Manufacturing non-wood
casegoods office furniture
Muscatine, Iowa 397,284 Owned Warehousing office
furniture
-12-
Muscatine, Iowa 184,700 Owned Manufacturing wood
casegoods office furniture
Muscatine, Iowa 142,850 Owned Manufacturing systems
office furniture(1)
Muscatine, Iowa 142,850 Owned Manufacturing systems
office furniture
Muscatine, Iowa 237,800 Owned Manufacturing non-wood
office seating
Owensboro, Kentucky 311,575 Owned Manufacturing wood office
seating
Richmond, Virginia 101,400 Leased Temporary warehousing
office furniture
South Gate, California 520,270 Owned Manufacturing non-wood
casegoods and seating
office furniture(1)
Sulphur Springs, Texas 155,690 Owned Manufacturing non-wood
casegoods office furniture
Wayland, New York 692,226 Owned Manufacturing wood
casegoods and seating
office furniture(1)
West Hazelton,
Pennsylvania 268,800 Owned Manufacturing non-wood
casegoods office furniture
Williamsport,
Pennsylvania 224,637 Owned Manufacturing wood office
seating
Winnsboro, South
Carolina 181,523 Owned Manufacturing non-wood
office seating
Verona, Mississippi 257,000 Owned Manufacturing systems
office furniture
- --------------
(1) Also includes a regional warehouse/distribution center.
(2) A capital lease.
Other Company manufacturing and distribution facilities, under 100,000 square
feet in size, are located in Muscatine and Mt. Pleasant, Iowa; Van Nuys and
Santa Ana, California; Kent, Washington; Salisbury, North Carolina; Richmond,
Virginia; Rome and Cedartown, Georgia; Aurora, Illinois; Savage, Minnesota; and
Calgary, Alberta, Canada. These facilities total approximately 964,400 square
feet with approximately 883,400 square feet used for the manufacture and
distribution of office furniture and approximately 81,000 square feet for hearth
products. Of this total, approximately 477,600 square feet are leased. The
Company also leases sales showroom space in office furniture market centers in
several major metropolitan areas.
The Company has a 104,000 square foot leased plant in Savage, Minnesota, which
is in the process of being subleased. This plant has been used for the
manufacture of metal prefabricated fireplaces. The production from this
facility was consolidated with production at the Company's Lake City, Minnesota,
and Calgary, Alberta, Canada, plants.
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
-13-
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 3, 1998, the Company has approximately 600,000 additional square
feet of production and warehousing space in various stages of construction at
six existing plant sites which are scheduled for completion during 1998.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
Along with several other potentially responsible parties ("PRPs"), the Company
has been involved with site investigation and clean-up activities imposed by the
Federal Comprehensive Environmental Response Compensation and Liability Act
("CERCLA") at one waste disposal site in Georgia which allegedly received waste
materials containing hazardous substances generated by the Company or its
subsidiaries. In general, under CERCLA, each PRP which actually contributes
hazardous substances to a Superfund site is jointly and severally liable for the
costs associated with investigating and cleaning up the site. Customarily, the
PRPs will work with the Environmental Protection Agency ("EPA") or equivalent
state agency to agree upon and implement a plan for site remediation. PRPs for
the Georgia site have been required to institute a monitoring program, a
background groundwater study, and a possible remediation work plan. The EPA has
issued a Record of Decision for the site ("ROD") following the completion of a
Remedial Investigation/Feasibility Study. The ROD identified manganese, a
constituent not included in waste sent by the Company to the site, as the sole
constituent of concern. The Company also owns a portion of the property which
is part of the site. The original property owner has agreed to repurchase the
property from the Company and indemnify the Company against environmental
liabilities arising from the Company's ownership of the property.
The Company also is involved in certain continuing clean-up activities under
the supervision of the Pennsylvania state environmental authorities at one site
formerly used by a Company subsidiary. The costs associated with this site are
comprised primarily of remediation efforts associated with groundwater
contamination. In this matter, the Company has worked with appropriate
authorities to resolve the issues involved.
The Company was named, along with three other PRPs, as a party to an Imminent
or Substantial Endangerment Order and Remedial Action Order dated April 28, 1994
by the California Department of Toxic Substances Control ("DTSC") in connection
with the former Firestone Tire & Rubber Company facility in South Gate,
California ("Firestone Site"). The DTSC is seeking to cover the cost of
investigating soil and groundwater contamination and preparing a remedial action
plan for the Firestone Site. From 1927 to 1981, the site was owned by The
Firestone Tire & Rubber Company (now known as Bridgestone/Firestone, Inc.) and
operated from 1928 to 1980 primarily as a tire manufacturing facility. The
Company purchased a portion of the Firestone Site in 1981, and subsequently sold
a portion of that property to a company now in bankruptcy proceedings. The
Company continues to own a part of the Firestone Site. The Company believes its
potential liability at the Firestone Site arises from the Company's status as an
owner of the property and not as a contributor to contamination. The Company
has cooperated in the preparation of a Remedial Investigation/Feasibility Study
Work Plan ("RI/FS Work Plan") which was approved by DTSC in June 1995. The
investigation under the RI/FS Work Plan began in August 1995 and is expected to
be completed in 1998. The Company has, however, denied liability and believes
that substantially all investigation and clean-up costs should be borne by
Bridgestone/Firestone, Inc. The Company also is reviewing available defenses
and claims it may have against third parties, including Bridgestone/Firestone,
Inc.
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,
-14-
therefore, has accrued liabilities reflecting management's best estimate of the
eventual future cost of the Company's anticipated share (based upon estimated
ranges of remediation costs, the existence of many other larger PRPs 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 volume and type of
waste the Company is believed to have contributed to the sites, and the
anticipated periods of time over which such costs may be paid) of remediation
costs. Potential insurance reimbursements are not anticipated. While the
final resolution of these contingencies could result in expenses in excess of
current accruals and, therefore, have an impact on the Company's consolidated
financial result in a future reporting period, management believes that the
ultimate outcome will not have a material effect on the Company's financial
position or operations.
For additional information on this item, 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.
-15-
PART I, TABLE I
---------------
EXECUTIVE OFFICERS OF THE REGISTRANT. (Information as of January 3, 1998)
- -------------------------------------
Family Position Other Business Experience
Name Age Relationship Position Held Since During Past Five Years
---- --- ------------ -------- ---------- -------------------------
Jack D. Michaels 60 None Chairman of the Board 1996 Chairman, President and Chief Executive
President 1990 Officer.
Chief Executive Officer 1991
Director 1990
Jeffrey D. Fick 36 None Vice President, 1997 Secretary and Acting General Counsel
Member and Community (1997); Senior Counsel, (1994-97),
Relations HON INDUSTRIES Inc.; Attorney,
Gray, Plant, Mooty, Mooty & Bennett
(1986-94).
James I. Johnson 49 None Vice President, 1997 General Counsel and Secretary, Norand
General Counsel Corporation (1990-97).
and Secretary
George J. Koenigsaecker III 52 None President, The HON 1995 Executive Vice President, Operations, The
Company HON Company (1992-95); Senior Vice
President, HON INDUSTRIES Inc. (1995).
Melvin L. McMains 56 None Controller 1980
Thomas K. Miller 59 None Vice President, 1996 Vice President, Marketing and Distribution,
Marketing and (1996); Vice President, Strategic
International Development-Office Depot (1995-96),
HON INDUSTRIES Inc.; President,
Ring King Visibles, Inc. (1991-96).
David W. Strohl 55 None Vice President, 1993
Technical Development
David C. Stuebe 57 None Vice President and 1994 President, CEO, and Director, Diversified
Chief Financial Officer Industries, Inc. (1990-94).
-16-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- ------------------------------------------------------------------------------
The Company's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market under the symbol: HONI. As of year-end 1997, the Company had
5,399 stockholders of record.
The Company serves as its own stock transfer agent. Shareholders may report a
change of address or make inquiries by writing or telephoning:
Stock Transfer Department
HON INDUSTRIES Inc.
P.O. Box 1109
Muscatine, IA 52761-7109
Telephone: 319/264-7223
Common Stock Market Price and Price/Earnings Ratio and Quarterly Common Stock
Market Prices and Dividends are presented in the Investor Information section
which follows the Notes to the Consolidated Financial Statements material filed
as part of this report. The market price quotations were published by the
National Association of Securities Dealers, Inc. The quotations represent prices
between dealers; do not include retail markup, markdown, or commissions; and do
not necessarily represent actual transactions.
The Company expects to continue its policy of paying regular cash dividends on
the first business day of March, June, September, and December. The average
dividend payout percentage for the most recent three-year period has been 28% of
prior year earnings. Future dividends are dependent on future earnings, capital
requirements, and the Company's financial condition.
HON INDUSTRIES Inc. and Subsidiaries
ITEM 6. Selected Financial Data -- Eleven-Year Summary.
- --------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Per Common Share Data
Income from Continuing Operations...................... $ 1.45 $ 1.13 $ .67
Income from Discontinued Operations.................... - - -
Cumulative Effect of Accounting Changes................ - - -
Gain on Sale of Discontinued Operations................ - - -
Net Income............................................. 1.45 1.13 .67
Cash Dividends......................................... .28 .25 .24
Book Value............................................. 6.19 4.25 3.56
Net Working Capital.................................... 1.53 .89 1.07
Operating Results (Thousands of Dollars)
Net Sales.............................................. $ 1,362,713 $ 998,135 $ 893,119
Cost of Products Sold.................................. 933,157 679,496 624,700
Gross Profit........................................... 429,556 318,639 268,419
Interest Expense....................................... 8,179 4,173 3,569
Income from Continuing Operations before Income Taxes.. 139,128 105,267 65,517
Income before Income Taxes as a % of Net Sales......... 10.21% 10.55% 7.34%
Federal and State Income Taxes......................... $ 52,173 $ 37,173 $ 24,419
Effective Tax Rate for Continuing Operations........... 37.50% 35.31% 37.27%
Income from Continuing Operations...................... $ 86,955 $ 68,094 $ 41,098
Income from Continuing Operations as a % of Net Sales.. 6.38% 6.82% 4.60%
Income before Cumulative Effect of Accounting Changes.. $ 86,955 $ 68,094 $ 41,098
Income from Discontinued Operations.................... - - -
Net Income............................................. 86,955 68,094 41,098
Cash Dividends and Share Purchase Rights Redeemed...... 16,736 14,970 14,536
Addition to (Reduction of) Retained Earnings........... 37,838 33,860 18,863
Net Income Applicable to Common Stock.................. 86,955 68,094 41,098
% Return on Average Shareholders' Equity............... 27.43% 29.06% 20.00%
Depreciation and Amortization.......................... $ 35,610 $ 25,252 $ 21,416
Distribution of Net Income
% Paid to Shareholders................................. 19.25% 21.98% 35.37%
% Reinvested in Business............................... 80.75% 78.02% 64.63%
Financial Position (Thousands of Dollars)
Current Assets......................................... $ 295,150 $ 205,527 $ 194,183
Current Liabilities.................................... 200,759 152,553 128,915
Working Capital........................................ 94,391 52,974 65,268
Net Property, Plant, and Equipment..................... 341,030 234,616 210,033
Total Assets of Continuing Operations.................. 754,673 513,514 409,518
Total Assets of Discontinued Operations - Net.......... - - -
Total Assets........................................... 754,673 513,514 409,518
% Return on Beginning Assets Employed.................. 28.27% 25.93% 17.91%
Long-Term Debt and Capital Lease Obligations........... 134,511 77,605 42,581
Shareholders' Equity................................... 381,662 252,397 216,235
Retained Earnings...................................... 265,203 227,365 193,505
Current Ratio.......................................... 1.47 1.35 1.51
Current Share Data
Number of Shares Outstanding at Year-End............... 61,659,316 59,426,530 60,788,674
Weighted Average Shares Outstanding During Year........ 59,779,508 60,228,590 60,991,284
Number of Shareholders of Record at Year-End........... 5,399 5,319 5,479
Other Operational Data
Capital Expenditures - Net (Thousands of Dollars)...... $ 85,491 $ 44,684 $ 53,879
Members (Employees) at Year-End........................ 9,390* 6,502* 5,933
* Includes acquisitions completed during year.
-18-
1994 1993 1992 1991 1990 1989 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------
$ .87 $ .69 $ .59 $ .51 $ .65 $ .39 $ .34 $ .29
- - - - - - .02 .02
- .01 - - - - - -
- - - - - - .11 -
.87 .70 .59 .51 .65 .39 .47 .31
.22 .20 .19 .18 .15 .12 .10 .10
3.17 2.83 2.52 2.32 2.03 1.88 1.98 1.66
1.27 1.23 1.23 1.07 .82 .83 1.29 .97
$ 845,998 $ 780,326 $ 706,550 $ 607,710 $ 663,896 $ 602,009 $ 532,456 $ 516,262
573,392 537,828 479,179 411,168 458,522 409,942 366,599 355,456
272,606 242,498 227,371 196,542 205,374 192,067 165,857 160,806
3,248 3,120 3,441 3,533 3,611 3,944 4,188 3,512
86,338 70,854 61,893 52,653 69,085 44,656 41,919 41,887
10.21% 9.08% 8.76% 8.66% 10.41% 7.42% 7.87% 8.11%
$ 31,945 $ 26,216 $ 23,210 $ 19,745 $ 25,907 $ 17,193 $ 16,139 $ 18,431
37.00% 37.00% 37.50% 37.50% 37.50% 38.50% 38.50% 44.00%
$ 54,393 $ 44,638 $ 38,683 $ 32,908 $ 43,178 $ 27,463 $ 25,780 $ 23,456
6.43% 5.72% 5.47% 5.42% 6.50% 4.56% 4.84% 4.54%
$ 54,393 $ 44,638 $ 38,683 $ 32,908 $ 43,178 $ 27,463 $ 25,780 $ 23,456
- - - - - - 9,515 1,310
54,156 45,127 38,683 32,908 43,178 27,463 35,295 24,766
13,601 12,587 12,114 11,656 9,931 8,298 7,956 7,957
13,563 17,338 26,569 18,182 (11,952) (17,444) 20,986 (18,750)
54,156 45,127 38,683 32,908 43,178 27,463 35,295 24,766
28.95% 26.35% 24.75% 23.41% 33.24% 19.92% 25.77% 18.85%
$ 19,042 $ 16,631 $ 15,478 $ 14,084 $ 13,973 $ 12,866 $ 11,860 $ 10,227
25.11% 27.89% 31.32% 35.42% 23.00% 30.22% 22.54% 32.13%
74.89% 72.11% 68.68% 64.58% 77.00% 69.78% 77.46% 67.87%
$ 188,810 $ 188,419 $ 171,309 $ 150,901 $ 146,591 $ 162,576 $ 175,367 $ 139,679
111,093 110,759 91,780 82,275 93,465 106,104 78,787 66,136
77,717 77,660 79,529 68,626 53,126 56,472 96,580 73,543
177,844 157,770 145,849 125,465 124,603 114,116 94,339 95,372
372,568 352,405 322,746 280,893 276,984 284,322 275,928 235,621
- - - - - - - 9,734
372,568 352,405 322,746 280,893 276,984 284,322 275,928 245,355
24.72% 22.14% 22.18% 19.66% 24.00% 16.32% 18.46% 17.71%
45,877 45,916 50,961 32,734 37,250 36,996 37,863 41,467
194,640 179,553 163,009 149,575 131,612 128,203 147,549 126,388
174,642 161,079 143,741 117,172 98,990 110,942 128,386 107,400
1.70 1.70 1.87 1.83 1.57 1.53 2.23 2.11
61,349,206 63,351,692 64,737,912 64,417,370 64,769,794 68,194,176 74,647,164 75,953,272
62,435,450 64,181,088 65,517,990 64,742,976 66,220,810 69,632,100 74,853,672 79,588,124
5,556 4,653 4,534 4,466 4,331 4,124 4,134 3,218
$ 35,005 $ 27,541 $ 26,626 $ 13,907 $ 20,709 $ 12,807 $ 10,299 $ 15,669
6,131 6,257 5,926 5,599 6,073 6,385 5,423 5,840
-19-
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 net sales represented by
certain items reflected in the Company's statements of income for the periods
indicated.
Fiscal
------------------------
1997 1996 1995
Net sales............................. 100.0% 100.0% 100.0%
Cost of products sold................. 68.5 68.1 69.9
----- ----- -----
Gross profit.......................... 31.5 31.9 30.1
Selling and administrative expenses... 20.9 21.6 22.6
Gain on sale of subsidiary............ - 0.3 -
----- ----- -----
Operating income...................... 10.6 10.6 7.5
Interest expense (net)................ .4 0.1 0.1
----- ----- -----
Income before income taxes............ 10.2 10.5 7.4
Income taxes.......................... 3.8 3.7 2.8
----- ----- -----
Net income............................ 6.4 6.8 4.6
===== ===== =====
As a result of the Company's October 1996 acquisition of Heat-N-Glo, it has two
reportable core business segments: office furniture and hearth products.
Fiscal Year Ended January 3, 1998, Compared to Fiscal Year Ended December 28,
1996
Net Sales
- ---------
Net sales increased by 37% to $1.36 billion in 1997 from $998.1 million in the
prior year. The Company increased sales in both core segments by offering
compelling value products through a combination of broad selection, features,
quality, price and service. Office furniture products net sales increased 31% in
1997 to $1.16 billion from $887.3 million in 1996 due in part from the Company's
acquisitions of Allsteel Inc., Panel Concepts, Inc., and the assets and business
of Bevis Custom Furniture, 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 most recent five-year compounded annual growth rate is 14% in
net sales, while industry growth for office furniture and hearth products is
estimated to be in the 7-8% range.
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 reduced margin is due to the combination of productivity gains and
cost control initiatives being more than offset by strategic selling price
reductions on select Company products to increase sales volume and the impact of
lower operating margins for certain 1997 acquisitions.
-20-
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 developing more efficient
business processes, which has improved member productivity, coupled with
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 that facilitate providing higher level
of service to customers, and the ongoing commitment to developing and marketing
new products.
Selling and administrative expenses, 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 with the 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 is a result of the higher operating income being
partially offset by an increase in interest expense associated with acquisitions
and the resumption of a more normal effective income tax rate. The 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
shares outstanding decreased to 59.8 million in 1997 from 60.2 million in 1996.
Fiscal Year Ended December 28, 1996, Compared to Fiscal Year Ended December 30,
1995
Net Sales
- ---------
Net sales increased by 12% to $998.1 million in 1996 from $893.1 million in the
prior year. The increase in net sales for both core business segments was due to
continued gains in market share, which management believes resulted from the
Company's offering of an ongoing stream of innovative and quality new products
and a commitment to manufacturing excellence. Office furniture products net
sales increased 8% in 1996 to $887.3 million from $818.9 million in 1995. Hearth
products net sales increased 49% in 1996 to $110.8 million from $74.2 million in
1995 due in part to the Company's October 1996 acquisition of Heat-N-Glo
Fireplace Products, Inc.
Gross Profit
- ------------
Gross profit increased by 19% to $318.6 million in 1996 from $268.4 million in
the prior year. The increase in gross profit was primarily attributable to the
Company's sales growth in both business segments, which has been driven by unit
sales growth as opposed to pricing growth. Gross profit margin increased to
31.9% for 1996 compared to 30.1% for 1995. This increase was a result of the
elimination of production inefficiencies associated with two operations closed
during 1995 and increased production unit volume, productivity improvements, and
effective cost control efforts, partially offset by continued price reductions
on selected Company products.
-21-
Selling and Administrative Expenses
- ------------------------------------
Selling and administrative expenses increased by 7% to $215.6 million in 1996
from $201.7 million in the prior year. Selling and administrative expenses as a
percentage of net sales decreased to 21.6% in 1996 from 22.6% in 1995. This
decrease was a result of continued implementation of the Company's RCI process,
which led to more efficient business processes and increased efficiencies
associated with higher net sales. These decreases were partially offset by more
aggressive marketing programs, greater use of cooperative advertising programs,
freight costs escalating at a more rapid rate than product price increases and
additional costs of pursuing a proactive acquisition strategy.
Operating Income
- ----------------
Operating income increased by 54% to $103.0 million (excluding a nonrecurring
pre-tax gain on the sale of a subsidiary of $3.2 million) in 1996 from $66.7
million in 1995. The increase was a result of the increase in gross profit and
lower selling and administrative expenses as a percentage of net sales.
Net Income
- ----------
Net income, excluding the $2.0 million nonrecurring after-tax gain on the sale
of a subsidiary, increased by 61% to $66.1 million in 1996 from $41.1 million in
the prior year. This increase was primarily attributable to increased operating
income, lower net interest expense and a lower effective income tax rate. The
effective tax rate was 35.3% for 1996 compared to 37.3% for 1995. The rate for
1996 was favorably impacted by non-recurring income tax credits of $2.1 million,
or $0.04 per share, recorded in the third quarter of 1996.
Net income per common share increased by 64% to $1.10 (excluding a nonrecurring
after-tax gain of $0.03 per share) in 1996 from $0.67 for 1995. The Company's
net income per share performance for 1996 benefited from the Company's common
stock repurchase program.
The Company closed, consolidated, and sold several operations over the past two
years in an effort to concentrate further on its core strengths. In addition,
the Company resolved several litigation uncertainties, reduced its work force,
addressed several asset realization concerns, and benefited from special tax
credits. The net effect of these unusual business events was to reduce annual
net income by $3.3 million, or $0.05 per share, in 1996, and $4.8 million, or
$0.08 per share, in 1995.
Fiscal Year Ended December 30, 1995, Compared to Fiscal Year Ended December 31,
1994
Net Sales
- ---------
Net sales increased by 6% to $893.1 million in 1995 from $846.0 million in the
prior year. Sales growth in 1995 was impacted by a difficult market environment
which resulted in aggressive product pricing and inventory adjustments related
to some major customers. Office furniture products net sales increased 6% in
1995 to $818.9 million from $772.3 million in 1994. Hearth products net sales
increased by less than 1% in 1995 to $74.2 million from $73.7 million in 1994.
Gross Profit
- ------------
Gross profit decreased by 2% to $268.4 million in 1995 from $272.6 million in
the prior year. The gross profit margin decreased to 30.1% in 1995 from 32.2% in
1994. This decrease in margin was primarily attributable to competitive price
decreases, inventory adjustments, and production inefficiencies of two
financially marginal operations which were closed or consolidated during the
year. These decreases were partially offset by the Company's on-going RCI
efforts.
-22-
Selling and Administrative Expenses
- -----------------------------------
Selling and administrative expenses increased by 9% to $201.7 million in 1995
from $185.5 million in the prior year. Selling and administrative expenses as a
percentage of net sales increased to 22.6% in 1995 from 21.9% in 1994. These
expenses were adversely impacted in 1995 by increased sales support and freight
costs, acquisition exploration expenses, temporary business disruption costs
resulting from increasing warehouse capacity, increased investment in new
product development, and nonrecurring expenses of $7.6 million associated with
closing marginal operations and severance payments.
Operating Income
- ----------------
Operating income decreased by 23% to $66.7 million in 1995 from $87.1 million
for 1994. The decrease was a result of lower gross profit and higher selling and
administrative expenses.
Net Income
- ----------
Net income decreased by 24% to $41.1 million in 1995 from $54.4 million in the
prior year (excluding a charge for the cumulative effect of an accounting
change). This decrease was primarily attributable to reduced operating income.
Net income per common share decreased by 23% to $0.67 in 1995 from $0.87 for
1994. The Company's net income per share performance for 1994 benefited from the
Company's common stock repurchase program.
Liquidity and Capital Resources
During 1997, cash from operations was $141.4 million which provided the funds
necessary to meet working capital needs, help finance acquisitions, invest in
capital improvements, repay long-term debt and pay increased dividends.
Cash Management
- ---------------
Cash, cash equivalents, and short-term investments totaled $46.3 million
compared to $32.7 million at the end of 1996 and $46.9 million at the end of
1995. These funds, coupled with future cash from operations and additional long-
term debt, if needed, are expected to be adequate to finance operations, planned
improvements and internal growth.
Another major element in maintaining a strong balance sheet is managing the
investment in receivables and inventories. The Company's success in managing
receivables is in large part due to maintaining close communications with its
customers and utilizing prudent risk assessment techniques. Inventory levels and
turns continue to improve as a function of reducing production cycle times.
Trade receivables turns have approximated 10 times for the past several years,
including 1997, and inventory turns have been in the 14 to 17 range, with 1997
reaching 18 turns.
The Company also had a cash infusion during the fourth quarter of 1997 from its
primary offering of 2,300,000 shares of common stock at an offering price of $26
per share. This transaction netted the Company approximately $56.8 million which
was used to finance acquisitions and to repay debt associated with acquisitions.
Capital Expenditure Investments
- -------------------------------
Capital expenditures, net of disposals, were $85.5 million in 1997, $44.7
million in 1996 and $53.9 million in 1995. Expenditures in 1997 were principally
for machinery, equipment, process improvements, support for new products,
production and warehouse capacity, and information technology. Expenditures in
1996 were principally for machinery, equipment, process improvements and tooling
for new products. Approximately $11.0 million of the expenditures in 1995 were
for facility capacity expansion and improvements, with the remainder invested in
more productive machinery, equipment, process improvements and tooling of new
products.
-23-
Acquisitions
- ------------
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. These
acquisitions added new products, product line extensions, manufacturing and
distribution capacity, new customers and a quality workforce. In October 1996,
the Company acquired Heat-N-Glo Fireplace Products, Inc., a leading hearth
products manufacturer, for a purchase price of approximately $79 million. These
acquisitions were accounted for under the purchase method of accounting and
financed by a combination of cash and long-term debt.
Long-Term Debt
- --------------
Long-term debt, including capital lease obligations, was 26% of total
capitalization at January 3, 1998 and 24% at December 28, 1996. The Company does
not expect future capital resources to be a constraint on planned growth.
Significant additional borrowing capacity is available through a revolving bank
credit agreement in the event cash generated from operations should be
inadequate to meet future capital needs.
Cash Dividends
- --------------
Cash dividends were $0.28 per common share for 1997, $0.25 for 1996, and $0.24
for 1995. The Board of Directors announced a 14.3% increase in the quarterly
dividend, from $0.07 to $0.08 per common share effective with the February 28,
1998, dividend payment. The previous quarterly dividend increase was from $0.06
to $0.07, effective with the December 1, 1996, 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 28% of prior year earnings. The Board of Directors
also announced a two-for-one stock split in the form of a 100 percent stock
dividend to be paid on March 27, 1998, to shareholders of record on March 6,
1998. Shareholders will receive one share of common stock for each share held of
record. The Company's last stock split was also a two-for-one 100% stock
dividend paid in 1990.
Common Share Repurchases
- ------------------------
During 1997, the Company repurchased 183,154 shares at a cost of approximately
$4.1 million, or an average price of $22.30. As of January 3, 1998,
approximately $4.6 million of the Board's last $20.0 million purchase
authorization remained unspent. The Company chose to conserve cash and reduce
the amount of its repurchases of common stock during 1997 as it pursued an
active acquisition strategy. This same stock repurchase posture is expected to
be perpetuated in 1998. During 1996, the Company repurchased 1,507,600 shares at
a cost of approximately $21.9 million, or an average price of $14.54. During
1995, 734,634 shares were reacquired at a cost of approximately $9.8 million.
Litigation and Uncertainties
- ----------------------------
The Company is involved in various legal actions arising in the course of
business, including certain environmental matters. These uncertainties are
referenced in the "Contingencies" note included in the notes to consolidated
financial statements.
Year 2000 Issue
- ---------------
The Company utilizes computer software and related technologies throughout its
business that are date sensitive and some will require maintenance, modification
or replacement in order to be Year 2000 compliant. An internal study is
currently underway to determine the full scope and related costs of this
compliance effort so the Company's business systems continue to meet internal
and external needs. Based on the assessment effort to date, the Company believes
that any required maintenance or modifications costs will be expensed as
incurred and will not be material to its business, operations or financial
condition. Any replacement software required will be capitalized and amortized
over the software's useful life.
-24-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ---------------------------------------------------------------------
Not required for fiscal year 1997 because the Company's market
capitalization was less than $2.5 billion as of January 28, 1997.
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 is presented in
the Investor Information section which follows the Notes to the Consolidated
Financial Statements filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ----------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
- ------------------------------------
HON INDUSTRIES Inc. (the "Company") dismissed Ernst & Young LLP, its
independent auditors, effective May 14, 1996.
In connection with the audits of the two most recent fiscal years, and
during the interim period prior to dismissal, there were no disagreements with
the former auditors on any matter or accounting principle or practice, financial
statement disclosure, or auditing scope or procedure.
The former auditor's report on the financial statements of the Company for
fiscal year 1995 was unqualified.
The Company engaged Arthur Andersen LLP as its new independent public
accountants effective with the dismissal of its former accountants. During the
Company's two most recent fiscal years and during the interim period prior to
the engagement, there were no consultations with the newly engaged accountants
with regard to either the application of accounting principle as to any specific
transaction, either completed or proposed; the type of audit opinion that would
be rendered on the Company's financial statements; or any matter of
disagreements with the former accountants.
The Company's Board of Directors approved management's recommendation to
change accountants.
-25-
PART III
ITEM 10. DIRECTORS 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 12,
1998, 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 12, 1998, 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 12, 1998, 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 12, 1998, 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 12, 1998, is incorporated herein by reference.
-26-
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 1997 Annual Report to
Shareholders are filed as a part of this report pursuant to Item 8:
Page
----
Report of Independent Public Accountants.................. 32
Consolidated Statements of Income for the Years Ended
January 3, 1998; December 28, 1996; and
December 30, 1995......................................... 34
Consolidated Balance Sheets -- January 3, 1998;
December 28, 1996 and December 30, 1995................... 35
Consolidated Statements of Shareholders' Equity for the
Years Ended January 3, 1998; December 28, 1996; and
December 30, 1995......................................... 36
Consolidated Statements of Cash Flows for the Years Ended
January 3, 1998; December 28, 1996; and
December 30, 1995......................................... 37
Notes to Consolidated Financial Statements................ 38
Investor Information...................................... 52
(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 3, 1998; December 28,
1996; and December 30, 1995.................. 54
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.
--------------------
The Company filed two Reports on Form 8-K in its fiscal fourth quarter
1997. On October 8, 1997, a Report on Form 8-K was filed reporting the
Company had signed a purchase agreement to acquire substantially all of the
assets of Bevis Custom Furniture, Inc., a wholly owned subsidiary of Hunt
Manufacturing Co. This transaction subsequently closed on November 13,
1997, and was reported with the Company's Quarterly Report on Form 10-Q for
the period ended October 4, 1997, filed on November 14, 1997. On October
22, 1997, a Report on Form 8-K was filed reporting the Company's press
release announcing its third fiscal quarter consolidated results of
operations for the period ended October 4, 1997.
-27-
(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:
Page(s) in
Exhibit Form 10-K
------- ---------
(10xi) Stock Purchase Agreement........................ 58
(10xii) Real Estate Contract............................ 64
(21) Subsidiaries of the Registrant.................. 68
(23A) Consent of Independent Public Accountants....... 69
(23B) Consent of Independent Auditors................. 70
(27) Financial Data Schedule.........................
(d) Financial Statement Schedules.
------------------------------
See Item 14(a)(2).
-28-
(THIS PAGE INTENTIONALLY LEFT BLANK)
-29-
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 20, 1998 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
--------- ----- ----
/s/ Jack D. Michaels Chairman, President and CEO, 3/20/98
- ----------------------- Principal Executive Officer,
Jack D. Michaels and Director
/s/ Melvin L. McMains Controller and Principal 3/20/98
- ----------------------- Accounting Officer
Melvin L. McMains
/s/ David C. Stuebe Vice President and 3/20/98
- ----------------------- Chief Financial Officer
David C. Stuebe
-30-
Signature Title Date
--------- ----- ----
/s/ Robert W. Cox Director 3/20/98
- ------------------------
Robert W. Cox
/s/ W. James Farrell Director 3/20/98
- ------------------------
W. James Farrell
/s/ Stanley M. Howe Director 3/20/98
- ------------------------
Stanley M. Howe
/s/ Robert L. Katz Director 3/20/98
- ------------------------
Robert L. Katz
/s/ Celeste C. Michalski Director 3/20/98
- ------------------------
Celeste C. Michalski
/s/ Michael S. Plunkett Director 3/20/98
- ------------------------
Michael S. Plunkett
/s/ Herman J. Schmidt Director 3/20/98
- ------------------------
Herman J. Schmidt
/s/ Richard H. Stanley Director 3/20/98
- ------------------------
Richard H. Stanley
/s/ Lorne R. Waxlax Director 3/20/98
- ------------------------
Lorne R. Waxlax
-31-
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 3, 1998, and December 28, 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the two 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 3, 1998, and December 28, 1996, and the results
of its operations and its cash flows for each of the two fiscal years then
ended, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
February 11, 1998
-32-
Report of Independent Auditors
Board of Directors and Shareholders
HON INDUSTRIES Inc.
We have audited the accompanying consolidated balance sheet of HON INDUSTRIES
Inc. and subsidiaries as of December 30, 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of HON
INDUSTRIES Inc. and subsidiaries as of December 30, 1995, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Ernst & Young LLP
Chicago, Illinois
January 30, 1996
-33-
HON INDUSTRIES Inc. and Subsidiaries
Consolidated Statements of Income
For the Years 1997 1996 1995
- -----------------------------------------------------------------------------------------
Net sales................................. $1,362,713,000 $998,135,000 $893,119,000
Cost of products sold..................... 933,157,000 679,496,000 624,700,000
- -----------------------------------------------------------------------------------------
Gross Profit............................ 429,556,000 318,639,000 268,419,000
Selling and administrative expenses....... 284,397,000 215,646,000 201,691,000
Gain on sale of subsidiary................ - 3,200,000 -
- -----------------------------------------------------------------------------------------
Operating Income........................ 145,159,000 106,193,000 66,728,000
- -----------------------------------------------------------------------------------------
Interest income........................... 2,148,000 3,247,000 2,358,000
Interest expense.......................... 8,179,000 4,173,000 3,569,000
- -----------------------------------------------------------------------------------------
Income Before Income Taxes.............. 139,128,000 105,267,000 65,517,000
Income taxes.............................. 52,173,000 37,173,000 24,419,000
- -----------------------------------------------------------------------------------------
Net Income.............................. $ 86,955,000 $ 68,094,000 $ 41,098,000
=========================================================================================
Net Income Per Common Share............. $1.45 $1.13 $ .67
=========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
=====================================================================
NOTE TO THE READER
The U.S. Securities and Exchange Commission requires all related
financial data to be retroactively restated to reflect a stock split
that occurs subsequent to the closing of the latest fiscal year
being reported on but before the Report is published to
shareholders. Therefore, all appropriate common share and per common
share financial data in this Report has been retroactively restated
for all periods reported to reflect the March 1998, two-for-one
stock split in the form of a 100% stock dividend "as if" it had
occurred on January 3, 1998, the end of the Company's 1997 fiscal
year.
=====================================================================
-34-
HON INDUSTRIES Inc. and Subsidiaries
Consolidated Balance Sheets
As of Year-End 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
Assets
- ----------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents.............................. $ 46,080,000 $ 31,196,000 $ 32,231,000
Short-term investments................................. 260,000 1,502,000 14,694,000
Receivables............................................ 158,408,000 109,095,000 88,178,000
Inventories............................................ 60,182,000 43,550,000 36,601,000
Deferred income taxes.................................. 14,391,000 9,046,000 14,180,000
Prepaid expenses and other current assets.............. 15,829,000 11,138,000 8,299,000
- ----------------------------------------------------------------------------------------------------
Total Current Assets.................................. 295,150,000 205,527,000 194,183,000
Property, Plant, and Equipment.......................... 341,030,000 234,616,000 210,033,000
Goodwill................................................ 98,720,000 51,213,000 908,000
Other Assets............................................ 19,773,000 22,158,000 4,394,000
- ----------------------------------------------------------------------------------------------------
Total Assets.......................................... $754,673,000 $513,514,000 $409,518,000
====================================================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued expenses.................. $183,738,000 $127,910,000 $117,273,000
Income taxes........................................... 8,133,000 2,574,000 5,361,000
Note payable and current maturities of long-term debt.. 2,545,000 16,244,000 3,811,000
Current maturities of other long-term obligations...... 6,343,000 5,825,000 2,470,000
- ----------------------------------------------------------------------------------------------------
Total Current Liabilities............................. $200,759,000 $152,553,000 $128,915,000
Long-Term Debt.......................................... 123,487,000 71,285,000 34,881,000
Capital Lease Obligations............................... 11,024,000 6,320,000 7,700,000
Other Long-Term Liabilities............................. 18,601,000 20,183,000 11,030,000
Deferred Income Taxes................................... 19,140,000 10,726,000 10,757,000
Minority Interest in Subsidiary......................... - 50,000 -
Commitments and Contingencies...........................
Shareholders' Equity
Common stock........................................... 61,659,000 29,713,000 30,394,000
Paid-in capital........................................ 55,906,000 360,000 550,000
Retained earnings...................................... 265,203,000 227,365,000 193,505,000
Receivable from HON Members Company Ownership Plan..... (1,099,000) (5,041,000) (8,214,000)
Equity adjustment from foreign currency translation.... (7,000) - -
- ----------------------------------------------------------------------------------------------------
Total Shareholders' Equity............................ 381,662,000 252,397,000 216,235,000
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity............ $754,673,000 $513,514,000 $409,518,000
====================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-35-
HON INDUSTRIES Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
For the Years 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Common Stock
Balance, beginning of year................................. $ 29,713,000 $ 30,394,000 $ 30,675,000
Stock split effected in the form of a 100% stock dividend.. 30,830,000 - -
Purchase of shares......................................... (92,000) (754,000) (367,000)
Shares issued through public stock offering................ 1,150,000 - -
Shares issued under Members Stock Purchase Plan
and stock awards......................................... 58,000 73,000 86,000
- ----------------------------------------------------------------------------------------------------------
Balance, end of year..................................... $ 61,659,000 $ 29,713,000 $ 30,394,000
- ----------------------------------------------------------------------------------------------------------
Paid-In Capital
Balance, beginning of year................................. $ 360,000 $ 550,000 $ 434,000
Purchase of shares......................................... (2,441,000) (1,896,000) (1,725,000)
Shares issued through public stock offering................ 55,616,000 - -
Shares issued under Members Stock Purchase Plan
and stock awards......................................... 2,371,000 1,706,000 1,841,000
- ----------------------------------------------------------------------------------------------------------
Balance, end of year..................................... $ 55,906,000 $ 360,000 $ 550,000
- ----------------------------------------------------------------------------------------------------------
Retained Earnings
Balance, beginning of year................................. $227,365,000 $193,505,000 $174,642,000
Stock split effected in the form of a 100% stock dividend.. (30,830,000) - -
Net income................................................. 86,955,000 68,094,000 41,098,000
Purchase of shares......................................... (1,551,000) (19,264,000) (7,699,000)
Dividends paid............................................. (16,736,000) (14,970,000) (14,536,000)
- ----------------------------------------------------------------------------------------------------------
Balance, end of year..................................... $265,203,000 $227,365,000 $193,505,000
- ----------------------------------------------------------------------------------------------------------
Receivable from HON Members Company Ownership Plan
Balance, beginning of year................................. $ (5,041,000) $ (8,214,000) $(11,111,000)
Principal repaid by HON Members Company
Ownership Plan........................................... 3,942,000 3,173,000 2,897,000
- ----------------------------------------------------------------------------------------------------------
Balance, end of year..................................... $ (1,099,000) $ (5,041,000) $ (8,214,000)
- ----------------------------------------------------------------------------------------------------------
Equity Adjustment from Foreign Currency Translation
Balance, beginning of year................................. $ - $ - $ -
Translation adjustment..................................... (7,000) - -
- ----------------------------------------------------------------------------------------------------------
Balance, end of year $ (7,000) $ - $ -
- ----------------------------------------------------------------------------------------------------------
Shareholders' Equity
Balance, end of year..................................... $381,662,000 $252,397,000 $216,235,000
==========================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
HON INDUSTRIES Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows From (To) Operating Activities:
Net income..................................................$ 86,955,000 $ 68,094,000 $ 41,098,000
Noncash items included in net income:
Depreciation and amortization............................. 35,610,000 25,252,000 21,416,000
Gain on sale of subsidiary, net of tax.................... - (2,016,000) -
Other postretirement and postemployment benefits.......... 1,397,000 1,398,000 2,273,000
Deferred income taxes..................................... 7,128,000 5,103,000 (3,952,000)
Cumulative effect of accounting changes................... - - -
Other-net................................................. (35,000) 252,000 1,185,000
Changes in working capital, excluding acquisition and
disposition:
Receivables............................................... (15,169,000) (5,085,000) 6,091,000
Inventories............................................... 3,134,000 184,000 6,658,000
Prepaid expenses and other current assets................. (1,574,000) (2,613,000) 676,000
Accounts payable and accrued expenses..................... 16,789,000 998,000 17,009,000
Accrued facilities closing and reorganization expenses.... (256,000) (1,147,000) 366,000
Income taxes.............................................. 6,881,000 (3,971,000) 412,000
Increase in other liabilities............................... 525,000 6,860,000 (216,000)
- ----------------------------------------------------------------------------------------------------------
Net cash flows from (to) operating activities........... 141,385,000 93,309,000 93,016,000
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows From (To) Investing Activities:
Capital expenditures-net.................................... (85,491,000) (44,684,000) (53,879,000)
Acquisition spending, net of cash acquired.................. (121,424,000) (79,136,000) -
Net proceeds from sale of subsidiary........................ - 7,336,000 -
Principal repaid by HON Members Company
Ownership Plan............................................ 3,942,000 3,173,000 2,897,000
Short-term investments-net.................................. 442,000 12,392,000 (11,611,000)
Other-net................................................... 1,792,000 (976,000) (205,000)
- ----------------------------------------------------------------------------------------------------------
Net cash flows from (to) investing activities........... (200,739,000) (101,895,000) (62,798,000)
- ----------------------------------------------------------------------------------------------------------
Net Cash Flows From (To) Financing Activities:
Purchase of HON INDUSTRIES common stock..................... (4,085,000) (21,912,000) (9,791,000)
Net proceeds from public offering of
HON INDUSTRIES common stock............................... 56,766,000 - -
Proceeds from long-term debt................................ 100,238,000 51,072,000 104,000
Payments of note and long-term debt......................... (64,374,000) (8,416,000) (3,350,000)
Proceeds from sale of HON INDUSTRIES
common stock to members................................... 2,429,000 1,777,000 1,927,000
Dividends paid.............................................. (16,736,000) (14,970,000) (14,536,000)
- ----------------------------------------------------------------------------------------------------------
Net cash flows from (to) financing activities............. 74,238,000 7,551,000 (25,646,000)
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents........... 14,884,000 (1,035,000) 4,572,000
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year................. 31,196,000 32,231,000 27,659,000
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year....................... $46,080,000 $31,196,000 $32,231,000
- ----------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest.................................................. $ 8,404,000 $ 3,334,000 $ 3,401,000
Income taxes.............................................. $38,246,000 $36,318,000 $27,560,000
==========================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-37-
HON INDUSTRIES Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Nature of Operations
HON INDUSTRIES Inc. and subsidiaries (the Company) are 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 "Business 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- and gas-burning factory-built fireplaces,
fireplace inserts, gas logs, and stoves. 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 1997 ended on January 3, 1998; 1996 ended on December
28, 1996; and 1995 ended on December 30, 1995. The financial statements for
fiscal year 1997 are based on a 53-week period, fiscal years 1996 and 1995 are
on a 52-week basis.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents generally consist of cash and commercial paper. These
securities have original maturity dates not exceeding three months from date of
purchase.
Short-Term Investments
- ----------------------
Short-term investments are classified as available-for-sale and are highly
liquid debt and equity securities. These investments are stated at cost which
approximates market value.
Receivables
- -----------
Accounts receivable are presented net of an allowance for doubtful accounts of
$3,277,000; $1,830,000; and $1,867,000 for 1997, 1996, and 1995, respectively.
Inventories
- -----------
Inventories are valued at the lower of cost or market, determined principally by
the last-in, first-out (LIFO) method.
Property, Plant, and Equipment
- ------------------------------
Property, plant, and equipment are carried at cost. Depreciation has been
computed by the straight-line method over estimated useful lives: land
improvements, 10-20 years; buildings, 10-40 years; and machinery and equipment,
3-12 years. The Company capitalized interest costs of $22,000; $95,000; and
$256,000 in 1997, 1996, and 1995, respectively.
-38-
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 3, 1998.
1997 1996 1995
---------------------------
(In thousands)
Goodwill....................... $100,667 $52,051 $2,865
Patents........................ 16,450 16,060 -
Less accumulated amortization.. 3,781 838 1,957
---------------------------
$113,336 $67,273 $ 908
===========================
Product Development Costs
- -------------------------
Product development costs relating to the development of new products and
processes, including significant improvements and refinements to existing
products, are expensed as incurred. The amounts charged against income were
$15,371,000 in 1997, $10,423,000 in 1996, and $11,591,000 in 1995.
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 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.
Actual results could differ from those estimates.
New Accounting Standards
- ------------------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No.128,
"Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital
Structure," as of January 3, 1998, year-end 1997; and SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," in the first quarter of 1996. Their adoption had no material effect on
financial condition or results of operations.
Reclassifications
- -----------------
Certain prior year information has been reclassified to conform to the current
year presentation.
Business Combinations
The Company completed three office furniture business acquisitions during fiscal
year 1997: Allsteel Inc. (June 17); Bevis Custom Furniture, Inc. (November 13);
and Panel Concepts, Inc. (December 1). Each of the transactions were accounted
for under the purchase method of accounting and all were financed by a
combination of cash and long-term debt.
Allsteel Inc. was a stock purchase acquired from ACI America Holdings Inc., a
subsidiary of BTR plc. 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 Hazelton, Pennsylvania. Bevis
was an asset purchase acquired from Hunt Manufacturing Co. It manufactures
-39-
and markets a line of affordably priced office furniture with a manufacturing
operation located in Florence, Alabama. Allsteel and Bevis operate as part of
the Company's division, The HON Company. Panel Concepts was a stock purchase
acquired from Standard Pacific Corp. 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.
The purchase price and allocation for each acquisition is shown below. The
purchase price of each transaction is not yet finalized and is subject to
further asset valuation and liability assessment.
Allsteel Bevis Panel Concepts
-----------------------------------
(In thousands)
Purchase Price $66,000 $45,100 $8,379
Preliminary Allocation of Purchase Price:
Working capital, other than cash......... $27,819 $ 3,347 $1,516
Property, plant, and equipment........... 38,378 8,284 625
Goodwill................................. 6,104 33,469 5,518
Other intangible assets.................. - - 720
Other liabilities........................ 6,301 - -
In October 1996, the Company acquired Heat-N-Glo Fireplace Products, Inc.,
located in Savage, Minnesota, for a combination of cash and debt, totaling
approximately $79 million. The transaction was accounted for under the purchase
method. The Company merged Heat-N-Glo into Heatilator Inc. which changed its
name to Hearth Technologies Inc. Both Heatilator and Heat-N-Glo are engaged in
the manufacture and marketing of quality hearth products and operate as
divisions of Hearth Technologies Inc. Assuming this transaction had occurred as
of the beginning of fiscal year 1995, the Company's pro forma consolidated net
sales would have been approximately $1.07 billion and $971.6 million in 1996 and
1995, respectively.
Assuming the acquisition of Heat-N-Glo Fireplace Products, Inc., Allsteel Inc.,
Bevis Custom Furniture, Inc., and Panel Concepts, Inc. had occurred on December
31, 1995, the beginning of the Company's 1996 fiscal year, instead of the actual
dates reported above, the Company's pro forma consolidated net sales would have
been approximately $1.5 billion and $1.3 billion for 1997 and 1996,
respectively. Pro forma consolidated net income and net income per share for
1997 and 1996 would not have been materially different than the reported
amounts.
Business Disposition
On January 24, 1996, the Company sold the outstanding stock of Ring King
Visibles, Inc., a wholly owned subsidiary, for $8.0 million in cash and the
forgiveness of intercompany receivables of approximately $2.0 million. The sale
resulted in an approximate $3.2 million pretax gain for the Company (an after-
tax gain of $2.0 million, or $0.03 per share) which was recorded in the first
quarter of fiscal year 1996.
Inventories
1997 1996 1995
------------------------------
(In thousands)
Finished products.............. $ 26,352 $ 20,303 $ 15,339
Materials and work in process.. 48,186 36,184 35,188
LIFO allowance................. (14,356) (12,937) (13,926)
------------------------------
$ 60,182 $ 43,550 $ 36,601
==============================
-40-
Property, Plant, and Equipment
1997 1996 1995
----------------------------
(In thousands)
Land and land improvements................. $ 10,059 $ 9,114 $ 9,701
Buildings.................................. 111,387 92,509 95,310
Machinery and equipment.................... 333,216 231,780 208,707
Construction and equipment
installation in progress................. 60,832 42,507 30,036
----------------------------
515,494 375,910 343,754
Less allowances for depreciation........... 174,464 141,294 133,721
----------------------------
$341,030 $234,616 $210,033
============================
Accounts Payable and Accrued Expenses
1997 1996 1995
----------------------------
(In thousands)
Trade accounts payable................. $ 76,623 $ 44,762 $ 47,617
Compensation........................... 6,339 6,331 4,855
Profit sharing and retirement expense.. 15,013 11,736 11,490
Vacation pay........................... 10,879 8,064 8,492
Marketing expenses..................... 38,096 36,550 23,930
Workers' compensation, general, and
product liability expenses........... 5,201 3,787 4,032
Other accrued expenses................. 31,587 16,680 16,857
----------------------------
$183,738 $127,910 $117,273
============================
Long-Term Debt
1997 1996 1995
----------------------------
(In thousands)
Industrial development revenue
bonds, various issues, payable
through 2013 with interest
at 4.50-8.50% per annum............ $ 23,549 $ 24,063 $ 24,542
Note payable to bank, term loan
payable in 2001 with interest
at 7.11% per annum................. - 27,200 -
Note payable to bank, revolving
credit agreement with interest
at a variable rate (5.90-6.09% at
year-end 1997)*.................... 80,000 - -
Note payable to bank, with
interest at a variable rate........ - - 7,750
Convertible debenture payable to
individuals, due in 1999 with
interest at 7.0% per annum......... 12,000 12,000 -
Other notes and amounts............. 7,938 8,022 2,589
----------------------------
$123,487 $ 71,285 $ 34,881
============================
* The revolving bank credit agreement is payable in the year 2002 with a maximum
borrowing limit of $200,000,000.
-41-
Aggregate maturities of long-term debt are as follows (in thousands):
1998........ $ 608
1999........ 12,631
2000........ 3,315
2001........ 3,234
2002........ 719
Thereafter.. 103,588
The note and convertible debenture payable to individuals are payable to the
former owners of a business acquired by the Company in 1996. These individuals
continue as officers of a subsidiary of the Company following the merger. The
convertible debenture is convertible into shares of common stock of Hearth
Technologies Inc., a subsidiary of the Company, representing 10% of the current
issued and outstanding stock of Hearth Technologies Inc.
Certain of the above borrowing arrangements include covenants which limit the
assumption of additional debt and lease obligations. The fair value of the
Company's outstanding long-term debt obligations at year-end 1997 approximates
the recorded aggregate amount.
Property, plant, and equipment, with net carrying values of approximately
$36,789,000 at the end of 1997, are mortgaged.
Selling and Administrative Expenses
1997 1996 1995
----------------------------
(In thousands)
Freight expense to customer................. $ 73,261 $ 51,662 $ 40,478
Amortization of intangible assets........... 2,943 838 339
Product development costs................... 15,371 10,423 11,591
General selling and administrative expense.. 192,822 152,723 149,283
----------------------------
$284,397 $215,646 $201,691
============================
Income Taxes
Significant components of the provision for income taxes are as follows:
1997 1996 1995
----------------------------
(In thousands)
Current:
Federal.................................... $38,989 $27,958 $25,360
State...................................... 4,695 3,932 3,011
----------------------------
43,684 31,890 28,371
Deferred.................................... 8,489 5,283 (3,952)
----------------------------
$52,173 $37,173 $24,419
============================
-42-
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:
1997 1996 1995
---------------------------------
Federal statutory tax rate................ 35.0% 35.0% 35.0%
State taxes, net of federal
tax effect.............................. 2.6 2.7 2.6
Federal and state tax credits............. (.2) (2.2) -
Other, net................................ .1 (.2) (.3)
---------------------------------
Effective tax rate 37.5% 35.3% 37.3%
=================================
The Company recognized one-time federal and state research and development and
new jobs tax credits totaling $2.1 million, or $0.04 per share, in 1996 related
to prior tax years.
Deferred income taxes reflect the net tax effects of temporary 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:
1997 1996 1995
----------------------------------
(In thousands)
Net long-term deferred tax liabilities:
Tax over book depreciation.............. $(25,743) $(17,584) $(16,358)
OPEB obligations........................ 3,920 2,947 2,048
Other - net............................. 2,683 3,911 3,553
----------------------------------
Total net long-term deferred
tax liabilities............... (19,140) (10,726) (10,757)
----------------------------------
Net current deferred tax assets:
Workers' compensation, general,
and product liability accruals........ 2,054 1,548 1,670
Vacation accrual........................ 892 1,855 3,167
Inventory obsolescence reserve.......... 2,631 580 711
Other - net............................. 8,814 5,063 8,632
----------------------------------
Total net current deferred tax
assets.............................. 14,391 9,046 14,180
----------------------------------
Net deferred tax (liabilities)
assets.............................. $ (4,749) $ (1,680) $ 3,423
==================================
Shareholders' Equity and Earnings Per Share
1997 1996 1995
---------------------------------------
Common Stock, $1 Par Value
Authorized.............................. 100,000,000 100,000,000 100,000,000
Issued and outstanding.................. 61,659,316 59,426,530 60,788,674
Preferred Stock
Authorized.............................. 1,000,000 1,000,000 1,000,000
Issued and outstanding.................. - - -
The Company purchased 183,154; 1,507,600; and 734,634 shares of its common stock
during 1997, 1996, and 1995, 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.
-43-
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 1997, 5,400 shares of Company common stock were issued
under the plan.
Cash dividends declared and paid per share for each year are:
[CAPTION]
1997 1996 1995
----------------------------------------
Common shares.................... $.28 $.25 $.24
Net income per common share is based on the weighted average number of shares of
common stock outstanding during each year including allocated and unallocated
ESOP shares. The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share" and SFAS No. 129 "Disclosure of Information
about Capital Structure," as of January 3, 1998, which is the end of its 1997
fiscal year. The effect of adoption was immaterial.
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 520,568
shares were available for issuance under the plan at January 3, 1998. The
effect of the application of adopting Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation," was not material
to the Company. Shares of common stock were issued in 1997, 1996, and 1995
pursuant to a members' stock purchase plan as follows:
[CAPTION]
1997 1996 1995
----------------------------------------
Shares issued.................... 84,552 122,740 172,098
Average price per share.......... $20.77 $12.45 $11.20
The Company granted restricted stock awards aggregating 151,000 shares of common
stock to certain officers as a recruiting incentive to join the Company. The
officers were entitled to dividends and had voting rights on all shares awarded.
Unearned compensation, representing the fair market value of the shares at the
date of grant, was charged to income over the vesting period. Approximately,
$37,000 were charged to income as a result of the awards for the year 1995. All
of the awarded shares were vested as of year-end 1995.
Pursuant to the Company's Shareholder Rights Plan, each share of common stock
carries with it one Right. Each Right entitles a shareholder to buy one four-
hundredth of a share of a new series of preferred stock at an exercise price of
$75.00. Each one four-hundredth of a share of the new preferred stock has terms
designed to make it the economic equivalent of one share of common stock. Rights
will be exercisable only if a person or group acquires 20% or more of the
Company's common stock or announces a tender offer, the consummation of which
would result in ownership by a person or group of 20% or more of the common
stock. If the Company is acquired in a merger or other business combination
transaction, each Right will entitle its holder to purchase, at the then current
exercise price of the Right, a number of the acquiring company's common shares
having a market value at that time of twice the exercise price of the Right.
-44-
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
salary and the average of the prior two years' bonuses.
Stock Options
The Company's 1995 Stock-Based Compensation Plan, approved by the shareholders
in March 1994, and the Restated Plan, as amended and approved in March 1997,
provides for the issuance to key executives shares of Company Common Stock in
the form of non-statutory stock options. The Plan is administered by the Human
Resources and Compensation Committee of the Board of Directors ("Committee")
comprised of outside directors, none of whom are eligible to participate in the
Plan. Grant prices are determined by the Committee and are established as the
fair market value of the Common Stock at the date of grant. Options are subject
to four-year cliff vesting and are exercisable in part or in full by the
executive within ten years from date of grant. Shares may be exercised by
written notice to the Company and the method of payment may be by cash, delivery
of previously owned whole shares of Common Stock held for a period of at least
six months, authorization to withhold whole shares of Common Stock equal to the
aggregate price due at exercise date, cash payment by a broker-dealer acceptable
to the Company, or any combination of the first three methods of payment.
The Company accounts for executive stock options issued under this Plan using
Accounting Principles Board Opinion No. 25, which results in no charge to
earnings when options are issued at fair market value. The Company has elected
the disclosure requirements of Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation."
If compensation costs had been determined based on the fair value at the grant
dates for awards under this Plan, consistent with SFAS 123, the impact on net
earnings and earnings per share would be less than one cent per share. The fair
value of each option grant under the Plan is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0.65% for all years; expected Common Stock
volatility of 15.47%; risk-free interest rate of 6.69%; and expected life of 10
years for the options.
A summary of the status of the Company's fixed stock option plan as of January
3, 1998, and changes during the year is presented below:
Weighted-Average
Fixed Options Shares Exercise Price
--------------- -------- ------------------
Outstanding at beginning of year....... - -
Granted................................ 156,000 $24.74
Exercised.............................. - -
Forfeited.............................. - -
-------
Outstanding at end of year............. 156,000
=======
Options exercisable at year-end........ -
Weighted-average fair value of
options granted during the year...... $11.85
-45-
The following table summarizes information about fixed stock options outstanding
at January 3, 1998:
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- -------------------
Weighted-Average Number Exercisable
Range of Number Remaining Weighted-Average at
Exercise Prices Outstanding Contractual Life Exercise Price January 3, 1998
- ----------------- ----------- ---------------- ---------------- -------------------
$24.50 to $28.25 156,000 9.5 years $24.74 -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
$14,558,000; $11,118,000; and $10,955,000 in 1997, 1996, and 1995, respectively.
The Company sponsors defined benefit plans which include a limited number of
salaried and hourly employees at certain subsidiaries. The Company's funding
policy is generally to contribute annually the minimum actuarially computed
amount. Net pension costs relating to these plans were $93,000; $146,000; and
$256,000 for 1997, 1996, and 1995, respectively. The actuarial present value of
benefit obligations, less related plan assets at fair value, is not significant.
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.
Selected financial data pertaining to the ESOP is as follows:
1997 1996 1995
----------------------------------
(In thousands, except share data)
Company contribution to ESOP........... $ 3,735 $ 3,348 $ 3,302
Dividend income of ESOP................ 487 446 436
Company interest expense on ESOP
loan.................................. - 555 749
Shares of common stock allocated to
ESOP participant accounts............. 351,574 305,466 299,498
Shares held in suspense (unallocated)
by ESOP as of year-end................ 96,304 447,878 753,344
Fair value of shares held in suspense
by ESOP as of year-end................ $ 2,757 $ 7,264 $ 8,758
Closing market price of common stock
as of year-end........................ $ 28.63 $ 16.22 $ 11.63
Postretirement Health Care
The Company adopted Statement of Financial Accounting Standards 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:
-46-
1997 1996 1995
- --------------------------------------------------------------------------
(In thousands)
Accumulated postretirement benefit
obligation (APBO):
Retirees................................. $ 8,381 $ 6,535 $ 8,138
Fully eligible active plan participants.. 3,258 3,916 5,612
Other active plan participants........... 3,770 4,808 7,809
Unrecognized net (loss)/gain.............. 6,586 6,919 (933)
Unrecognized prior service cost........... (2,630) (2,776) (2,922)
Unrecognized transition obligation........ (10,788) (11,501) (12,214)
-------- -------- --------
Accrued postretirement benefit cost $ 8,577 $ 7,901 $ 5,490
======== ======== ========
Net periodic postretirement benefits costs include:
Service cost.............................. $ 480 $ 810 $ 685
Interest cost............................. 1,115 1,629 1,344
Amortization of transition obligation
over 20 years............................ 713 713 718
Amortization of prior service cost........ 146 146 -
Amortization of (gains) and losses........ (922) - -
-------- -------- --------
Net periodic postretirement
benefits cost............................ $ 1,532 $ 3,298 $ 2,747
======== ======== ========
The discount rates at fiscal year-end 1997, 1996, and 1995 were 7.0%, 7.5%, and
7.75%, respectively. The pre-65 1998 gross trend rates begin at 10% for the
medical and prescription drug coverages and grade down to 5% in 2006 and remain
at this level for all future years. The post-64 gross trend rates begin at 8%
for the medical coverage and decrease until the maximum Company subsidy (cap) is
reached in 2003. For the prescription drug coverage, the 1998 gross trend rates
begin at 10% and decrease until the cap is reached in 2003. If the health care
cost trend rates were increased by 1.0% for each year, the accumulated
postretirement benefit obligation as of January 3, 1998, would increase by
$948,670; and the sum of the service and interest cost components of the net
periodic postretirement benefit cost for fiscal year 1997 would increase by
$135,540. The Company's postretirement health care plans are not funded.
Leases
The Company leases certain warehouse and plant facilities and equipment.
Commitments for minimum rentals under noncancellable leases at the end of 1997
are as follows:
Capitalized Operating
Leases Leases
----------------------
(In thousands)
1998............................... $ 2,871 $10,414
1999............................... 3,757 8,587
2000............................... 3,757 6,308
2001............................... 2,851 4,631
2002............................... 1,511 3,043
Thereafter......................... 1,858 3,011
------- -------
Total minimum lease payments....... 16,605 $35,994
=======
Less amount representing interest.. 3,644
-------
Present value of net minimum
lease payments, including current
maturities of $1,937,000.......... $12,961
=======
Property, plant, and equipment at year-end include the following amounts for
capitalized leases:
1997 1996 1995
-----------------------------
(In thousands)
Buildings.................... $ 3,299 $ 3,299 $ 3,299
Machinery and equipment...... 15,805 8,419 8,419
-----------------------------
19,104 11,718 11,718
Less allowances for
depreciation................ 6,139 4,854 3,569
-----------------------------
$12,965 $ 6,864 $ 8,149
=============================
Rent expense for the years 1997, 1996, and 1995 amounted to approximately
$7,555,000; $6,788,000; and $7,439,000, respectively. The Company has operating
leases for office and production facilities with annual rentals totaling
$578,000 with the former owners of a business acquired in 1996. These
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 $581,000;
$353,000; and $608,000 for the years 1997, 1996, and 1995, respectively.
Contingencies
The Company is involved in various legal actions arising in the ordinary course
of business. Although management cannot predict the ultimate outcome of these
matters with certainty, it believes, after taking into consideration evaluations
of such actions by legal counsel, that the outcome of these matters will not
have a material effect on the financial position or results of operations of the
Company.
The Company and certain subsidiaries are party to three environmental actions
which have arisen in the ordinary course of business. These include possible
obligations to investigate and mitigate the effects on the environment of the
disposal or release of certain chemical substances at various sites, such as
Superfund sites and other operating or closed facilities. The effect of these
actions on the Company's financial position and operations to date has not been
significant. The Company is participating in environmental assessments and
monitoring, and liabilities have been accrued reflecting management's best
estimate of the eventual future cost of the Company's anticipated share (based
upon estimated ranges of remediation costs, the existence of many other larger
"potentially responsible parties" who are financially viable to share in such
costs, the Company's experience to date in relation to the determination of its
allocable share, the volume and type of waste the Company is believed to have
contributed to each site, and the anticipated periods of time over which such
costs may be paid) of remediation costs. Potential insurance reimbursements are
not anticipated. The Company is also reviewing available defenses and claims it
may have against third parties. 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. While the final resolution of these contingencies could result
in expenses in excess of current accruals and therefore have an impact on the
Company's consolidated financial results in a future reporting period,
management believes that the ultimate outcome will not have a material effect on
the Company's financial position or results of operations.
Business Segment Information
The Company has two reportable business segments: office furniture and hearth
products. However, the manufacture and marketing of office furniture is the
Company's principal business 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- and wood-
burning fireplaces and stoves, fireplace inserts, and chimney systems
principally for the home.
-48-
The Company's October 2, 1996, acquisition of Heat-N-Glo Fireplace Products,
Inc., resulted in hearth products becoming a reportable segment. Prior to this
acquisition, the Company had only one reportable segment, office furniture.
Refer to the "Business Combinations" note for additional information regarding
this acquisition.
The Company's two business 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 1997, 58.2% of the Company's
consolidated net sales of office furniture were generated in the third and
fourth quarters and 53.5% of consolidated net sales of hearth products (pro
forma to reflect the Heat-N-Glo acquisition) 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. 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. The Company will adopt
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" effective January 4, 1998, the
beginning of fiscal year 1998.
Reportable segment data reconciled to the consolidated financial statements for
the years ended 1997, 1996, and 1995 is as follows:
1997 1996 1995
-----------------------------------
(In thousands)
Net sales
Office furniture......................... $1,158,228 $887,299 $818,907
Hearth products.......................... 204,485 110,836 74,212
-----------------------------------
$1,362,713 $998,135 $893,119
===================================
Operating profit:
Office furniture......................... $ 139,710 $106,824 $ 79,085
Hearth products.......................... 24,817 14,155 6,395
-----------------------------------
Total operating profit................... 164,527 120,979 85,480
Unallocated corporate expenses........... (25,399) (15,712) (19,963)
-----------------------------------
Income before income taxes............... $ 139,128 $105,267 $ 65,517
===================================
Identifiable assets:
Office furniture......................... $ 551,120 $330,575 $308,783
Hearth products.......................... 128,361 122,037 25,811
General corporate........................ 75,192 60,902 74,924
-----------------------------------
$ 754,673 $513,514 $409,518
===================================
Depreciation and amortization expense:
Office furniture......................... $ 27,633 $ 21,140 $ 18,328
Hearth products.......................... 6,590 2,813 1,424
General corporate........................ 1,387 1,299 1,664
-----------------------------------
$ 35,610 $ 25,252 $ 21,416
===================================
Capital expenditures, net:
Office furniture......................... $ 73,659 $ 41,186 $ 50,816
Hearth products.......................... 13,055 4,060 2,857
General corporate........................ (1,223) (562) 206
-----------------------------------
$ 85,491 $ 44,684 $ 53,879
===================================
One office furniture customer accounted for approximately 12%, 12%, and 13% of
consolidated net sales in 1997, 1996, and 1995, respectively.
-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
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Year-End 1997: (a)
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
Year-End 1996: (b)
Net sales............................ $233,477 $219,260 $255,254 $290,144
Cost of products sold................ 160,006 150,227 176,403 192,860
-------- -------- -------- --------
Gross profit......................... 73,471 69,033 78,851 97,284
Selling and administrative expenses.. 49,846 49,507 53,605 62,688
Gain on sale of subsidiary........... 3,200 - - -
-------- -------- -------- --------
Operating income..................... 26,825 19,526 25,246 34,596
Interest income (expense)(net)....... (119) (8) 91 (890)
-------- -------- -------- --------
Income before income taxes........... 26,706 19,518 25,337 33,706
Income taxes......................... 9,881 7,222 7,430 12,640
-------- -------- -------- --------
Net income........................... 16,825 12,296 17,907 21,066
======== ======== ======== ========
Net income per common share.......... .28 .20 .30 .35
Weighted average common
shares outstanding................ 60,690 60,340 60,126 59,758
As a Percentage of Net Sales
----------------------------
Net sales............................ 100.0% 100.0% 100.0% 100.0%
Gross profit......................... 31.5 31.5 30.9 33.5
Selling and administrative expenses.. 21.3 22.6 21.0 21.6
Operating income..................... 11.5 8.9 9.9 11.9
Income taxes......................... 4.2 3.3 2.9 4.4
Net income........................... 7.2 5.6 7.0 7.3
Year-End 1995: (c)
Net sales............................ $216,498 $206,604 $228,195 $241,822
Cost of products sold................ 147,556 146,246 160,319 170,579
-------- -------- -------- --------
Gross profit......................... 68,942 60,358 67,876 71,243
Selling and administrative expenses.. 48,565 47,688 48,084 57,354
-------- -------- -------- --------
Operating income..................... 20,377 12,670 19,792 13,889
Interest income (expense)(net)....... (258) (304) (344) (305)
-------- -------- -------- --------
Income before income taxes........... 20,119 12,366 19,448 13,584
Income taxes......................... 7,544 4,638 7,209 5,028
-------- -------- -------- --------
Net income........................... 12,575 7,728 12,239 8,556
======== ======== ======== ========
Net income per common share.......... .21 .12 .20 .14
Weighted average common
shares outstanding................ 61,288 61,085 60,833 60,759
As a Percentage of Net Sales
----------------------------
Net sales............................ 100.0% 100.0% 100.0% 100.0%
Gross profit......................... 31.8 29.2 29.7 29.5
Selling and administrative expenses.. 22.4 23.1 21.1 23.7
Operating income..................... 9.4 6.1 8.7 5.7
Income taxes......................... 3.5 2.2 3.2 2.1
Net income........................... 5.8 3.7 5.4 3.5
(a) 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 1996 and 1995. 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.
(b) First quarter 1996 includes $3,200,000 pretax gain on the sale of Ring King
Visibles, Inc. (aftertax gain of $2,000,000, or $0.03 per share). Third
quarter includes one-time federal and state income tax credits of
$2,100,000, or $0.04 per share. Fourth quarter includes the results of
operation of Heat-N-Glo Fireplace Products, Inc., acquired October 2, 1996.
(c) Fourth quarter 1995 includes various pretax charges totaling $5,575,000
(aftertax effect of $3,512,000, or $0.06 per share) for nonrecurring costs
primarily associated with closing several leased facilities and severance
arrangements from eliminating certain administrative positions.
Subsequent Stock Split
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 to be paid on March 27, 1998,
to shareholders of record at the close of business on March 6, 1998.
Shareholders will receive one share of common stock for each share held of
record. All share and per share amounts listed in this report have been
restated on a retroactive basis to reflect this stock split as required by the
Securities and Exchange Commission.
Subsequent Acquisition (Unaudited)
On February 20, 1998, the Company purchased the assets of Aladdin Steel Products
Inc. located in Colville, Washington. Aladdin is a manufacturer of wood-,
pellet-and gas-burning stoves and inserts with annual sales of approximately $16
million. The purchase price was approximately $10.0 million and is being
financed with existing lines of credit and cash. Aladdin will be operated by
Hearth Technologies Inc., the Company's hearth products subsidiary.
-51-
HON INDUSTRIES Inc. and Subsidiaries
Investor Information
Common Stock Market Prices and Dividends
(Unaudited)
Quarterly 1997 - 1996
1997 by Dividends
Quarter High* Low* per Share*
------- ---- --- ---------
1st $21 1/2 $15 7/8 $.07
2nd 27 1/8 17 1/2 .07
3rd 32 1/8 22 1/8 .07
4th 31 23 13/16 .07
----
Total Dividends Paid $.28
====
1996 by Dividends
Quarter High* Low* per Share*
------- -------- -------- ---------
1st $12 1/8 $ 9 1/4 $.06
2nd 15 1/4 11 .06
3rd 20 3/8 13 7/8 .06
4th 21 3/8 15 1/4 .07
----
Total Dividends Paid $.25
====
*Adjusted for the effect of stock splits.
Common Stock Market Price and Price/
Earnings Ratio (Unaudited)
Fiscal Years 1997 - 1987
Price/
Market Earnings
Price* Earnings Ratio
---------------------- per ------------
Year High Low Share* High Low
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 15/16 4 3/8 .39 25 11
1988 5 1/8 3 15/16 .47 11 8
1987 5 3/4 4 1/16 .31 19 13
-----------
*Eleven-Year Average 20 12
===========
*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 two fiscal years ended January 3, 1998, and December
28, 1996, 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 11, 1998
-53-
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
HON INDUSTRIES INC. AND SUBSIDIARIES
January 3, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------------------
DESCRIPTION Balance at Beginning (1) (2) Deductions-- Balance at End
of Period Charged to Costs Charged to Other Describe of Period
and Expenses Accounts--Describe
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Reserves deducted in the consolidated
balance sheet from the assets to
which they apply:
Year ended January 3, 1998:
Allowance for doubtful accounts $1,830 $2,162 $ 715(A) $3,277
====== ====== ====== ======
Year ended December 28, 1996:
Allowance for doubtful accounts $1,867 $1,222 $1,259(A) $1,830
====== ====== ====== ======
Year ended December 30, 1995:
Allowance for doubtful accounts $1,654 $1,099 $ 886(A) $1,867
====== ====== ====== ======
Notes A--Excess of accounts written-off over recoveries.
-54-
ITEM 14(a)(3) - INDEX OF EXHIBITS.
- ----------------------------------
Exhibit Page
Number Description of Document Number
------- ----------------------- ------
(3i) Articles of Incorporation of the Registrant,
incorporated by reference to Exhibit 3(a) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.............................. -
(3ii) By-Laws of the Registrant, incorporated by reference
to Exhibit 4.2 to the Registrant's Registration Statement
No. 333-27121 on Form S-8 filed May 14, 1997.............. -
(4i) Rights Agreement dated as of July 7, 1988 between
the Registrant and First Chicago Trust Company
of New York, incorporated by reference to Exhibit
1 to Registration Statement on Form 8-A filed
July 12, 1988, as amended by amendment dated
May 1, 1990, incorporated by reference to Exhibit 1
to Amendment No. 1 to Registration Statement on
Form 8 filed May 20, 1990................................. -
(10i) Management compensatory plan or arrangement,
1995 Stock Based Compensation Plan, as amended
and restated effective May 13, 1997, incorporated
by reference to Exhibit A to the Registrants' proxy
statement dated March 28, 1997, related to the
Registrant's annual meeting of shareholders held
on May 13, 1997........................................... -
(10ii) Management compensatory plan or arrangements,
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) Management compensatory plan or arrangement,
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) Management compensatory plan or arrangement,
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) Management compensatory plan or arrangement,
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.......................... -
-55-
(10vi) Management compensatory plan or arrangement,
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) Management compensatory plan or arrangement,
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) Management compensatory plan or arrangement,
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) Management compensatory plan or arrangement,
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.............................. 58
(10xii) Real Estate Contract of the Registrant, dated
November 15, 1997, between the Registrant
and Terrence L. and Loretta B. Mealy........................ 64
(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.............................. 68
(23A) Consent of Independent Public Accountants...................... 69
(23B) Consent of Independent Auditors................................ 70
(27) Financial Data Schedule.........................................
-56-
(99A) Management compensatory plan or arrangement,
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) Management compensatory plan or arrangement,
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..................................... -
Long-term debt of the Registrant or various of its subsidiaries is outstanding
under numerous instruments. No such instrument authorizes an amount of
securities thereunder in excess of 10% of the total assets of Registrant and its
subsidiaries on a consolidated basis. The Registrant agrees that it will furnish
a copy of any such instrument to the Securities and Exchange Commission upon its
request.
-57-