- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 (FEE REQUIRED) For the fiscal year ended December 28, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. 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. Name of each exchange on which registered: The Nasdaq Stock Market. 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. X The aggregate market value of the voting stock held by nonaffiliates of the registrant, as of March 14, 1997, was: $759,297,526, assuming all 5% holders are affiliates. The number of shares outstanding of the registrant's common stock, as of March 14, 1997, was: 29,693,916. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement dated March 28, 1997, for the May 13, 1997, Annual Meeting of Shareholders are incorporated by reference into Part III. Index of Exhibits is located on Page 43. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1
ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I <TABLE> <CAPTION> PAGE ---- <C> <S> <C> Item 1. Business....................................................... 3 Item 2. Properties..................................................... 7 Item 3. Legal Proceedings.............................................. 8 Item 4. Submission of Matters to a Vote of Security Holders............ 9 Table I--Executive Officers of the Registrant.................. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................ 9 Item 6. Selected Financial Data--Eleven-Year Summary................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 14 Item 8. Financial Statements and Supplementary Data.................... 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................... 17 PART III Item 10. Directors of the Registrant.................................... 18 Item 11. Executive Compensation......................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management. 18 Compliance with Section 16(a) of the Securities Exchange Act of 1934........................................................... 18 Item 13. Certain Relationships and Related Transactions................. 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8- K.............................................................. 18 Signatures............................................................... 20 Financial Statements..................................................... 22 Financial Statement Schedules............................................ 41 Index of Exhibits........................................................ 43 </TABLE> 2
ANNUAL REPORT ON FORM 10-K PART I ITEM 1. BUSINESS. GENERAL. HON INDUSTRIES Inc. is principally a national manufacturer and marketer of office furniture. It also is a major manufacturer and marketer of metal prefabricated fireplaces and related products for the hearth products industry. The Company is ranked as a Fortune 1000 company. 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. The combined sales of these units rank HON INDUSTRIES Inc. as one of the larger manufacturers of office furniture in the United States. 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. This combination of two well-known and highly respected manufacturers of factory- built wood- and gas-burning fireplaces, fireplace inserts, freestanding stoves and accessories positions Hearth Technologies Inc. as the leading manufacturer and marketer in the North American hearth industry. 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. In January 1996, the Company completed the sale of its wholly owned subsidiary, Ring King Visibles, Inc., a manufacturer and marketer of a limited line of personal computer accessories. The sale resulted in an after-tax gain of $2.0 million. During 1995, the Company began to gradually close down its Chandler Attwood Limited subsidiary (six small leased manufacturing sites). The final site was exited in April 1996. Chandler Attwood Limited was a start-up operation in 1992 as a first effort with distributed manufacturing of a limited line of custom-made office furniture in select major metropolitan areas. For further information with respect to the Company's business, including operations information, the sale of Ring King Visibles, Inc., and the acquisition of Heat-N-Glo Fireplace Products, Inc., 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; the relationship between supply and demand for value-priced office furniture and direct vent gas and wood-burning hearth products; the effects of economic conditions; issues associated with the acquisition and 3
integration of Heat-N-Glo; operating risks; the ability of the Company's distributors to successfully market and sell the Company's products; and the availability of capital to finance planned growth, as well as the risks, uncertainties and other factors described in this report and from time to time in the Company's other filings with the Securities and Exchange Commission. EMPLOYEES. The Company has 6,502 employees (members) and, of this total, 3858 are production personnel. The Company employs 285 members who are a party to a collective bargaining agreement. PRODUCTS. Office Furniture. A broad line of metal and wood commercial and home office furniture is manufactured and marketed through The HON Company division and the Company's wholly owned subsidiaries: BPI Inc., Holga Inc., and The Gunlocke Company. Major products include: file cabinets, desks, freestanding office partitions, panel systems, credenzas, chairs, storage cabinets, tables, bookcases, machine stands, and reception area furniture. These products are typically available in contemporary and conventional styles and are priced to sell in different channels of distribution and at different price points. Hearth Products. Hearth Technologies Inc., a wholly owned subsidiary, manufactures and markets a broad line of manufactured fireplaces, principally for the home, sold under the Heatilator and Heat-N-Glo brand names. Products include wood- and gas-burning fireplaces and stoves, fireplace inserts, chimney systems, masonry forms, and fireplace accessories. MANUFACTURING. The HON Company manufactures office furniture in California, Georgia, Iowa, Kentucky, North Carolina, Pennsylvania, South Carolina, Texas, and Virginia. BPI Inc. manufactures office furniture in 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. PRODUCT DEVELOPMENT. The Company's product development investments are principally focused on new product development, improvement of existing products, product line extension, application of ergonomic research, improvement of manufacturing processes, application of new materials, and providing engineering support and training to its operating units. The Company's investment in product development during 1996, 1995, and 1994 totaled $10.4 million, $11.6 million, and $10.1 million, respectively. INTELLECTUAL PROPERTY. The Company owns 77 U.S. and 28 foreign patents and has applications pending for 40 U.S. and 62 foreign patents. In addition, the Company holds registrations for 72 U.S. and 111 foreign trademarks and has applications pending for 15 U.S. and 61 foreign trademarks. The Company's primary products do not require frequent technical changes. The majority of patents are design patents. They expire at various times depending on when the particular patent was issued. No individual patent nor all the Company's patents in the aggregate are material to its business. 4
The Company actively protects trademarks which it believes have a significant goodwill value. The Company applies for patent protection where it believes the expense of doing so is justified. It believes that the duration of its registered patents is adequate to protect these rights. The Company also pays royalty fees in certain instances for the use of patents on products and processes owned by others. SALES AND DISTRIBUTION: CUSTOMERS. Office furniture is distributed nationally through more than 5,000 office product dealers, 30 wholesalers/distributors, over 50 national and regional retailers, and various contract customers. Several of the Company's office furniture operating units distribute products through common dealers, wholesalers/distributors, and retailers. Several operating units also sell products directly to state governments and to the United States government through the General Services Administration. Government sales are for certain products, for a certain price, and for a certain time period; thus, none are subject to price renegotiation. One customer, United Stationers Inc., accounted for approximately 12%, 13%, and 13% of the Company's consolidated net sales in 1996, 1995, 1994, respectively. The industry trend is toward increased consolidation of distribution which implies larger and fewer customers for the Company's office furniture and related products. The office furniture field sales organization consists of 16 regional sales managers supervising 70 salespersons, plus approximately 150 manufacturers' representatives, providing nationwide coverage. Sales managers and salespersons are compensated by a combination of salary and incentive bonus. 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 1,700 dealers and 250 distributors. The company has a field sales organization of 9 regional sales managers supervising 22 salespersons and 15 manufacturers' representatives. HON Export Limited sales are made through approximately 75 office furniture dealers and wholesale distributors serving select foreign markets. They are principally located in the U.S., Latin America, and the Caribbean. The company has a field sales organization of 1 regional sales manager and 3 salespersons. HON INDUSTRIES' office furniture business has a seasonality trend with the third (July-September) and fourth (October-December) fiscal quarters historically being the two highest sales quarters each year. Hearth products sales tend to have an even larger concentration in third and fourth fiscal quarters. For related information regarding the Company's customers, refer to the "Nature of Operations" note in the Notes to the Consolidated Financial Statements, filed as part of this report. As of December 28, 1996, the Company has an order backlog of approximately $59.1 million which will be filled in the ordinary course of business within the current fiscal year. This compares with $54.9 million as of December 30, 1995, and $52.3 million as of December 31, 1994. 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. COMPETITION. The principal competitive factors for both office furniture and hearth products are product performance, product quality, complete and on-time delivery to the customer, price, and customer service support. The Company believes it is well positioned to compete in all of its served markets due to its market share, engineering and manufacturing capability, broad product offering, national field sales representation, and long-standing customer relationships. 5
Competitive conditions vary for HON INDUSTRIES Inc. based on the industry, industry segment, channel of distribution, products involved, and the prevailing U.S. general economic environment. The U.S. office furniture industry for calendar year 1996 is estimated by industry sources to be $10.0 billion, up approximately 6% from 1995. It consists of several hundred domestic manufacturing companies plus foreign companies who import products. The Company's primary strength in the office furniture industry lies with its products for the "value market" segment. This expanding segment of the industry typically serves the small- and medium-sized businesses who tend to be more price/value sensitive consumers. However, the Company's total office furniture sales makes it a significant player in the broader U.S. office furniture industry. Hearth products, consisting of prefabricated metal fireplaces and related products, are manufactured by a number of national and regional competitors. However, a limited number of manufacturers dominate the sales in this relatively small industry. Hearth Technologies Inc. is the largest U.S. manufacturer of prefabricated metal fireplaces. 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. However, the Company does not consider the current rate of inflation in the U.S. to be a significant business issue or concern. The Company adjusts the selling prices of its products to maintain profit margins whenever possible. 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. For further discussion of the effects of inflation on the Company's business, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 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 1997 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. 6
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. BUSINESS DEVELOPMENT. The development of the Company's business during the fiscal years ended December 28, 1996; December 30, 1995; and December 31, 1994, 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 in 18 cities throughout the United States and Canada which house manufacturing and distribution operations and offices. These total an aggregate 6,029,955 square feet. Of this total, 976,987 square feet are leased, including 283,040 square feet under a capital lease. While the plants are of varying ages, the Company considers that 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: <TABLE> <CAPTION> APPROXIMATE LOCATION SQUARE FEET OWNED LEASED DESCRIPTION OF USE -------- ----------- --------- ------- ------------------ <S> <C> <C> <C> <C> Cedartown, GA 443,334 X Mfg. steel casegoods office furniture** Lake City, MN 235,000 X Mfg. metal prefabricated fireplaces Louisburg, NC 176,354 X Mfg. wood casegoods office furniture Mt. Pleasant, IA 288,006 X Mfg. metal prefabricated fireplaces Muscatine, IA 231,444 X Mfg. steel office seating Muscatine, IA 612,713 X Mfg. steel casegoods office furniture** Muscatine, IA 177,000 X Mfg. wood casegoods office furniture Muscatine, IA 209,100 X Mfg. systems panels office furniture Owensboro, KY 311,575 X Mfg. wood office seating Richmond, VA 283,040 X* Mfg. metal casegoods office furniture** Savage, MN 103,500 X Mfg. metal prefabricated fireplaces South Gate, CA 520,270 X Mfg. steel casegoods & seating office furniture** Sulphur Springs, TX 155,690 X Mfg. steel casegoods office furniture Wayland, NY 692,226 X Mfg. wood casegoods & seating office furniture Williamsport, PA 238,326 X Mfg. wood office seating Winnsboro, SC 180,093 X Mfg. steel office seating TOTAL SQUARE FEET 4,236,131 621,540 ========= ======= </TABLE> - -------- *A capital lease. **Also includes a regional warehouse/distribution center. The Company also owns a 223,680 square foot manufacturing facility located in Muscatine, Iowa, which it leases to another company; and it owns a 164,667 square foot office and manufacturing facility located in Avon, New York, which is listed for sale. Other manufacturing facilities are located in Savage, MN; Dallas, TX; Kent, WA; Mt. Pleasant and Muscatine, IA; Salisbury, NC; Van Nuys, CA; and Calgary, Alberta, Canada. These facilities total an aggregate of 783,937 square feet. Of this total, 355,447 square feet are leased. The Company also leases sales showroom space in office furniture market centers in several major metropolitan areas. 7
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 and Other Liabilities" note in the Notes to Consolidated Financial Statements, filed as a part of this report. Refer to the "Property, Plant, and Equipment" note in the Notes to Consolidated Financial Statements for related cost, accumulated depreciation, and net book value data. 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 investigation and remediation efforts associated with soil and 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 waste generator. 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 1997. 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, 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 8
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. PART I, TABLE I EXECUTIVE OFFICERS OF THE REGISTRANT. (Information as of December 28, 1996) <TABLE> <CAPTION> FAMILY POSITION OTHER BUSINESS EXPERIENCE NAME AGE RELATIONSHIP POSITION HELD SINCE DURING PAST FIVE YEARS ---- --- ------------ -------- ---------- ------------------------- <C> <C> <C> <C> <C> <S> Jack D. Michaels 59 None Chairman of the Board, 1996 Chairman, President and President, Chief 1990 Chief Executive Officer Executive Officer and 1991 Director 1990 R. Michael Derry 59 None Senior Vice President, 1996 Senior Vice President, Human Resources Administration (1990-96) A. Mosby Harvey, Jr. 53 None Vice President, 1993 Principal, Harvey and General Counsel Associates (1991-93) and Secretary George J. Koenigsaecker III 51 None President, The HON 1995 Executive Vice Company President, Operations, The HON Company (1992-95); Senior Vice President, HON INDUSTRIES Inc. (1995); Group Executive, Danaher Corporation (1990-92) Melvin L. McMains 55 None Controller 1980 David C. Stuebe 56 None Vice President and 1994 President, CEO, and Chief Financial Officer Director, Diversified Industries, Inc. (1990-94) </TABLE> 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 1996, the Company had 5,319 stockholders of record. 9
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. Historically, the dividend payout percentage has ranged from approximately 22% to 33% of the previous year's earnings. Future dividends are dependent on future earnings, capital requirements, and the Company's financial condition. In addition, the payment of dividends is subject to the restrictions described in the "Long-Term Debt and Other Liabilities" note included in the Notes to Consolidated Financial Statements, filed as part of this report. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS <TABLE> <CAPTION> APPROXIMATE NUMBER OF EQUITY TITLE OF CLASS SECURITY HOLDERS OF RECORD AS OF DECEMBER 28, 1996 - -------------- -------------------------------------------------- <S> <C> Common Stock, $1.00 Par Value...................... 5,319 Preferred Stock, $1.00 Par Value...................... -0- </TABLE> 10
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HON INDUSTRIES INC. AND SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA--ELEVEN-YEAR SUMMARY. <TABLE> <CAPTION> 1996 1995 1994 ----------- ----------- ----------- <S> <C> <C> <C> PER COMMON SHARE DATA: Income from Continuing Operations...... $ 2.26 $ 1.35 $ 1.74 Income from Discontinued Operations.... -- -- -- Cumulative Effect of Accounting Changes............................... -- -- (.01) Gain on Sale of Discontinued Operations............................ -- -- -- Net Income............................. 2.26 1.35 1.73 Cash Dividends......................... .50 .48 .44 Book Value............................. 8.49 7.11 6.35 Net Working Capital.................... 1.78 2.15 2.53 OPERATING RESULTS (Thousands of Dollars) Net Sales.............................. $ 998,135 $ 893,119 $ 845,998 Cost of Products Sold.................. 679,496 624,700 573,392 Gross Profit........................... 318,639 268,419 272,606 Interest Expense....................... 4,173 3,569 3,248 Income from Continuing Operations before Income Taxes................... 105,267 65,517 86,338 Income before Income Taxes as a % of Net Sales............................. 10.55% 7.34% 10.21% Federal and State Income Taxes......... $ 37,173 $ 24,419 $ 31,945 Effective Tax Rate for Continuing Operations............................ 35.31% 37.27% 37.00% Income from Continuing Operations...... $ 68,094 $ 41,098 $ 54,393 Income from Continuing Operations as a % of Net Sales........................ 6.82% 4.60% 6.43% Income before Cumulative Effect of Accounting Changes.................... $ 68,094 $ 41,098 $ 54,393 Income from Discontinued Operations.... -- -- -- Net Income............................. 68,094 41,098 54,156 Cash Dividends and Share Purchase Rights Redeemed....................... 14,970 14,536 13,601 Addition to (Reduction of) Retained Earnings.............................. 33,860 18,863 13,563 Net Income Applicable to Common Stock.. 68,094 41,098 54,156 % Return on Average Shareholders' Equity................................ 29.06% 20.00% 28.95% Depreciation and Amortization.......... $ 25,252 $ 21,416 $ 19,042 DISTRIBUTION OF NET INCOME % Paid to Shareholders................. 21.98% 35.37% 25.11% % Reinvested in Business............... 78.02% 64.63% 74.89% FINANCIAL POSITION (Thousands of Dollars) Current Assets......................... $ 205,527 $ 194,183 $ 188,810 Current Liabilities.................... 152,553 128,915 111,093 Working Capital........................ 52,974 65,268 77,717 Net Property, Plant, and Equipment..... 234,616 210,033 177,844 Total Assets of Continuing Operations.. 513,514 409,518 372,568 Total Assets of Discontinued Operations--Net....................... -- -- -- Total Assets........................... 513,514 409,518 372,568 % Return on Beginning Assets Employed.. 25.93% 17.91% 24.72% Long-Term Debt, Other Liabilities, and Capital Lease Obligations............. $ 97,788 $ 53,611 $ 54,741 Shareholders' Equity................... 252,397 216,235 194,640 Retained Earnings...................... 227,365 193,505 174,642 Current Ratio.......................... 1.35 1.51 1.70 CURRENT SHARE DATA Number of Shares Outstanding at Year- End................................... 29,713,265 30,394,337 30,674,603 Weighted Average Shares Outstanding During Year........................... 30,114,295 30,495,642 31,217,725 Number of Shareholders of Record at Year-End.............................. 5,319 5,479 5,556 OTHER OPERATIONAL DATA Capital Expenditures--Net (Thousands of Dollars).............................. $ 44,684 $ 53,879 $ 35,005 Members (Employees) at Year-End........ 6,502* 5,933 6,131 </TABLE> - -------- *Includes members resulting from an acquisition made on October 2, 1996. 12
<TABLE> <CAPTION> 1993 1992 1991 1990 1989 1988 1987 1986 ---- ---- ---- ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> $ 1.39 $ 1.18 $ 1.02 $ 1.30 $ .79 $ .69 $ .59 $ .68 -- -- -- -- -- .03 .03 .03 .02 -- -- -- -- -- -- -- -- -- -- -- -- .22 -- -- 1.41 1.18 1.02 1.30 .79 .94 .62 .71 .40 .37 .36 .30 .24 .20 .20 .16 5.67 5.04 4.64 4.06 3.76 3.96 3.33 3.35 2.45 2.46 2.13 1.64 1.66 2.59 1.94 1.79 $ 780,326 $ 706,550 $ 607,710 $ 663,896 $ 602,009 $ 532,456 $ 516,262 $ 460,137 537,828 479,179 411,168 458,522 409,942 366,599 355,456 301,197 242,498 227,371 196,542 205,374 192,067 165,857 160,806 158,940 3,120 3,441 3,533 3,611 3,944 4,188 3,512 3,417 70,854 61,893 52,653 69,085 44,656 41,919 41,887 53,960 9.08% 8.76% 8.66% 10.41% 7.42% 7.87% 8.11% 11.73% $ 26,216 $ 23,210 $ 19,745 $ 25,907 $ 17,193 $ 16,139 $ 18,431 $ 26,000 37.00% 37.50% 37.50% 37.50% 38.50% 38.50% 44.00% 48.18% $ 44,638 $ 38,683 $ 32,908 $ 43,178 $ 27,463 $ 25,780 $ 23,456 $ 27,960 5.72% 5.47% 5.42% 6.50% 4.56% 4.84% 4.54% 6.08% $ 44,638 $ 38,683 $ 32,908 $ 43,178 $ 27,463 $ 25,780 $ 23,456 $ 27,960 -- -- -- -- -- 9,515 1,310 1,294 45,127 38,683 32,908 43,178 27,463 35,295 24,766 29,254 12,587 12,114 11,656 9,931 8,298 7,956 7,957 6,569 17,338 26,569 18,182 (11,952) (17,444) 20,986 (18,750) 15,737 45,127 38,683 32,908 43,178 27,463 35,295 24,766 29,254 26.35% 24.75% 23.41% 33.24% 19.92% 25.77% 18.85% 22.74% $ 16,631 $ 15,478 $ 14,084 $ 13,973 $ 12,866 $ 11,860 $ 10,227 $ 8,746 27.89% 31.32% 35.42% 23.00% 30.22% 22.54% 32.13% 22.46% 72.11% 68.68% 64.58% 77.00% 69.78% 77.46% 67.87% 77.54% $ 188,419 $ 171,309 $ 150,901 $ 146,591 $ 162,576 $ 175,367 $ 139,679 $ 140,329 110,759 91,780 82,275 93,465 106,104 78,787 66,136 67,560 77,660 79,529 68,626 53,126 56,472 96,580 73,543 72,769 157,770 145,849 125,465 124,603 114,116 94,339 95,372 84,622 352,405 322,746 280,893 276,984 284,322 275,928 235,621 242,366 -- -- -- -- -- -- 9,734 11,841 352,405 322,746 280,893 276,984 284,322 275,928 245,355 254,207 22.14% 22.18% 19.66% 24.00% 16.32% 18.46% 17.71% 22.71% $ 51,114 $ 54,240 $ 35,664 $ 39,575 $ 38,271 $ 38,712 $ 42,328 $ 38,542 179,553 163,009 149,575 131,612 128,203 147,549 126,388 136,336 161,079 143,741 117,172 98,990 110,942 128,386 107,400 126,150 1.70 1.87 1.83 1.57 1.53 2.23 2.11 2.08 31,675,846 32,368,956 32,208,685 32,384,897 34,097,088 37,323,582 37,976,636 40,724,192 32,090,544 32,758,995 32,371,488 33,110,405 34,816,050 37,426,836 39,794,062 41,083,028 4,653 4,534 4,466 4,331 4,124 4,134 3,218 3,179 $ 27,541 $ 26,626 $ 13,907 $ 20,709 $ 12,807 $ 10,299 $ 15,669 $ 16,953 6,257 5,926 5,599 6,073 6,385 5,423 5,840 5,492 </TABLE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal year 1996 was a record financial year for HON INDUSTRIES. Net sales for the year were only a breath away from reaching the $1 billion milestone. Each fiscal quarter set a new quarterly record for net sales, net income, and net income per share. Overall Financial Results For the year ended December 28, 1996, net sales were $998.1 million compared to $893.1 million in 1995 and $846.0 million in 1994. The Company's sales growth was 11.8% in 1996, 5.6% in 1995, and 8.4% in 1994; and net sales for each of these years represented a record level. Net income for 1996 was $68.1 million, up 65.7%, compared to $41.1 million in 1995 and $54.2 million in 1994. Net income per share was up 67.4% reaching $2.26 compared to $1.35 in 1995 and $1.73 in 1994. A brief summary of key operating results follows: <TABLE> <CAPTION> (% OF NET SALES FOR PERIOD) ------------------- 1996 1995 1994 ----- ----- ----- <S> <C> <C> <C> Net sales............................................ 100.0% 100.0% 100.0% Cost of products sold................................ 68.1 69.9 67.8 Selling & administrative expenses.................... 21.6 22.6 21.9 Operating income..................................... 10.6 7.5 10.3 Interest expense..................................... .4 .4 .4 Income taxes......................................... 3.7 2.7 3.8 Net income........................................... 6.8 4.6 6.4 </TABLE> Strategic Acquisition One highlight of 1996 was the acquisition of Heat-N-Glo Fireplace Products, Inc., a leading national fireplace manufacturer. The acquisition was completed on October 2, 1996. Heat-N-Glo was integrated with the Company's Heatilator operation to form a new subsidiary, Hearth Technologies Inc. This strategic consolidation positions Hearth Technologies as the leading manufacturer and marketer in the U.S. hearth industry and further strengthens this important business segment for HON INDUSTRIES. For further details about this important acquisition transaction, refer to the "Business Combination" and "Long-Term Debt and Other Liabilities" notes in the accompanying Notes to Consolidated Financial Statements. Core Business The Company participates in two core business segments: office furniture and hearth products. It has a strong national leadership position in both. For 1996, office products comprised 89% of net sales, and hearth products was a growing 11%, with Heat-N-Glo contributing to the results for only the fourth quarter. Industry Growth The office furniture industry continues to be a healthy and growing industry. The industry reported growth of 6% in 1996, 8% in 1995, and 8% in 1994. The Company's experience suggests the hearth products industry is growing at an even more accelerated rate than office furniture. Growth in this industry is being fueled by a combination of new gas fireplace and stove products and technologies, which are being demanded by the consumer-specified market and is Heat-N-Glo's primary market focus; more stringent environmental regulations, and retrofitting older wood-burning and gas fireplace and stove products with the newer gas technologies. 14
Net Sales The growth of the Company's net sales in both core business segments during fiscal year 1996 shows continuing gains in market share as customers search for value products, which are a major product focus of HON INDUSTRIES. Management is supporting this marketing focus for both segments with an ongoing stream of innovative and quality new products and a commitment to manufacturing excellence, which includes providing shorter and more reliable order lead times, providing superior customer service, offering competitively priced products, and making customer satisfaction the paramount objective. Net sales in 1995 were impacted by a fiercely competitive market environment. The Company focused on strengthening its core commercial and budget office furniture business which serves small-and medium-sized businesses, including offices in the home. Fiscal year 1994 net sales benefited from a rebound in U.S. demand for office furniture. Gross Profit In general, the Company's sales growth over the past several years in both business segments has come through unit sales growth as opposed to pricing growth. The competitive marketplace has discouraged general price increases during the past three years. Experience has shown the best opportunity to improve gross profits is through the introduction of new products. As a result, HON INDUSTRIES will continue to introduce a steady stream of new compelling- value products to achieve its future sales and profitability growth objectives. Another major factor influencing the gross profit equation is the Company's commitment to being a low-cost producer of office furniture and hearth products. Increased production costs have been offset to a significant extent by productivity gains, partnering with vendors to find lower cost and higher quality material solutions, efficiencies gained by virtue of increased unit production volume, and improved production processes. Cost of products sold and gross profit, as a percentage of net sales for the 1996 through 1994 time period, have felt the competitive pressure of deeper discounting of net sales. Gross profit margins for 1996, 1995, and 1994 were 31.9%, 30.1%, and 32.2%, respectively. Selling and Administrative Expenses Leveraging selling and administrative expenses has been another emphasis of management; that is, managing these costs so they represent a decreasing percentage of net sales as net sales increase. This is a major ongoing challenge. More aggressive marketing programs, greater use of cooperative advertising programs, freight costs escalating at a more rapid rate than product price increases, costs of financing an aggressive new product development strategy, and costs to pursue a proactive acquisition strategy all contribute to the challenge. For example, product development expense alone represented $10.4 million, $11.6 million, and $10.1 million in 1996, 1995, and 1994, respectively. These expenditures relate directly to the Company's new product commitment. Selling and administrative expenses as a percentage of net sales were 21.6% in 1996, 22.6% in 1995, and 21.9% in 1994. Income Taxes The Company's effective tax rate was 35.3% for 1996, 37.3% for 1995, and 37.0% for 1994. The rate for 1996 was favorably impacted by one-time federal research and development and state new jobs income tax credits of $2.1 million, or $0.7 per share, recorded in the third quarter of 1996. The normal 1996 annual effective tax rate would have been 37.3%. Enhanced Shareholder Value HON INDUSTRIES' net income per share performance for 1996, 1995, and 1994 benefited from the Company's active common stock repurchase program activity during this period. Reported earnings per share for 1996, 1995, and 1994 were enhanced by $0.11, $0.05, and $0.03, respectively, as a result of the repurchases. Similarly, share repurchases have increased the book value of shares outstanding. The impact was $0.52, $0.28, and $0.21 per share for 1996, 1995, and 1994, respectively. 15
Unusual Business Income and Charges The Company closed, consolidated, and sold several operations over the past two years in an effort to concentrate further 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 $0.11 per share, in 1996, and $4.8 million, or $0.16 per share, in 1995. FINANCIAL CONDITION During 1996, cash from operations was $93.3 million, which provided the funds necessary to meet working capital needs, help finance an acquisition, invest in capital improvements, repay long-term debt, pay increased dividends, and repurchase Company stock. Cash Management Cash, cash equivalents, and short-term investments totaled $32.7 million at the end of 1996, compared to $46.9 million at the end of 1995, and $30.7 million at year-end 1994. 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 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 the 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 hovered around 10 for the past several years, including 1996; and inventory turns have been in the 14 to 16 range, with 1996 reaching 17 turns. Capital Expenditure Investments Capital expenditures, net of disposals, were $44.7 million in 1996, $53.9 million in 1995, and $35.0 million in 1994. Expenditures for 1996 were principally for machinery, equipment, and process improvements. 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, and process improvements. Expenditures for 1994 were also principally for machinery, equipment, and process improvements. Looking forward, the projected capital expenditure level for 1997 is at a slightly higher level than in 1996 and will include some facility capacity expansion, but the bulk of the investment will be for more productive and flexible machinery, equipment, and processes as in the past. Acquisition Strategy A major objective of HON INDUSTRIES continues to be exploring potential acquisitions as a key element of its growth strategy. As a result, considerable executive management effort is devoted to this pursuit. An acquisition must present profitable growth opportunities within the Company's core businesses, must be well managed, and must be well respected by its customers. Long-Term Debt Long-term debt, including capital lease obligations, stood at 23.5% of total capitalization at December 28, 1996, after recording the debt associated with the Heat-N-Glo acquisition. The Company does not expect future capital resources to be a concern. The Company has significant additional borrowing capacity and treasury stock available in the event cash generated from operations should be inadequate to meet future capital needs. 16
Cash Dividends Annualized cash dividends were $0.50 per common share for 1996, $0.48 for 1995, and $0.44 for 1994. The Board of Directors announced a 17% increase in quarterly dividend rate, from $0.12 to $0.14 per common share, in November 1996, effective with the December 1, 1996, dividend payment. The last quarterly dividend increase was from $0.11 to $0.12, effective with the March 1, 1995, dividend payment. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. The dividend payout percentage has ranged from approximately 22% to 33% of prior year earnings. Common Share Repurchases In August 1996, the Board of Directors authorized an additional $20.0 million to acquire the Company's common stock. During 1996, 753,800 shares were reacquired at a cost of approximately $21.9 million, or an average price of $29.07. During 1995, 367,317 shares were reacquired at a cost of approximately $9.8 million, and 1,078,835 shares were purchased in 1994 at a cost of approximately $29.6 million. The Company purchases its own shares in open market transactions. The stock repurchase strategy was initiated in 1985. Approximately 15.9 million shares have been repurchased since program inception at a cost of approximately $228.9 million. As of December 28, 1996, approximately $8.7 million of the Board's last $20.0 million purchase authorization remained unspent. 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 and more fully described in "Item 3. Legal Proceedings" in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. Management believes that the Company's contingent liability for these matters, including the various environmental issues, will not have a material effect on the financial position or results of operations of the Company. 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 each of the past two fiscal years 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. 17
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 13, 1997, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information under the caption "Executive Compensation" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the caption "Beneficial Owners of Common Stock" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997, is incorporated herein by reference. The information under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 13, 1997, 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 13, 1997, is incorporated herein by reference. 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 1996 Annual Report to Shareholders are filed as a part of this report pursuant to Item 8: <TABLE> <CAPTION> PAGE ---- <S> <C> Report of Independent Public Accountants.............................. 22 Consolidated Statements of Income for the Years Ended December 28, 1996; December 30, 1995; and December 31, 1994....................... 24 Consolidated Balance Sheets--December 28, 1996; December 30, 1995; and December 31, 1994.............................. 25 Consolidated Statements of Shareholders' Equity for the Years Ended December 28, 1996; December 30, 1995; and December 31, 1994.......... 26 Consolidated Statements of Cash Flows for the Years Ended December 28, 1996; December 30, 1995; and December 31, 1994....................... 27 Notes to Consolidated Financial Statements............................ 28 Investor Information (including Summary of Unaudited Quarterly Results of Operations)....................................................... 40 (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 December 28, 1996; December 30, 1995; and December 31, 1994... 42 </TABLE> 18
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. A Report on Form 8-K, dated October 16, 1996, was filed to disclose the acquisition by Heatilator Inc., a wholly owned subsidiary of HON INDUSTRIES Inc., of Heat-N-Glo Fireplace Products, Inc. Simultaneous with the merger, the name of Heatilator Inc. was changed to Hearth Technologies Inc. with the former Heatilator and Heat-N-Glo businesses operating as divisions of this subsidiary. Effective November 18, 1996, the Securities and Exchange Commission revised the rules which required registrants to provide financial statement and pro forma financial information for acquisitions that do not meet the "significant subsidiary" test, thus, the Company determined it was exempt from filing this information as a result of complying with the new rule. Subsequently on November 21, 1996, a Report on Form 8-K/A (an amendment) was filed to bring closure to the missing financial statement and pro forma financial information that was not available when the initial Report on Form 8-K was filed. (c) EXHIBITS. The following exhibits are filed pursuant to Item 601 of Regulation S-K: <TABLE> <CAPTION> PAGE(S) IN EXHIBIT FORM 10-K ------- ---------- <S> <C> (3ii)By-Laws of the Registrant................................. 44 (21)Subsidiaries of the Registrant............................. 81 (23A)Consent of Independent Public Accountants................. 82 (23B)Consent of Independent Auditors........................... 83 (27)Financial Data Schedule.................................... 84 (99A)Executive Bonus Plan of the Registrant.................... 85 (99B)Executive Deferred Compensation Plan...................... 89 </TABLE> (d) FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2). 19
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. /s/ Jack D. Michaels By___________________________________ Jack D. Michaels Chairman, President and CEO Date: February 12, 1997 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. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /s/ Jack D. Michaels Chairman, President and CEO, 2/12/97 ____________________________________ Principal Executive Jack D. Michaels Officer, and Director /s/ Melvin L. McMains Controller and Principal 2/12/97 ____________________________________ Accounting Officer Melvin L. McMains /s/ David C. Stuebe Vice President and 2/12/97 ____________________________________ Chief Financial Officer David C. Stuebe /s/ Robert W. Cox Director 2/12/97 ____________________________________ Robert W. Cox /s/ W. James Farrell Director 2/12/97 ____________________________________ W. James Farrell /s/ Stanley M. Howe Director 2/12/97 ____________________________________ Stanley M. Howe /s/ Robert L. Katz Director 2/12/97 ____________________________________ Robert L. Katz /s/ Lee Liu Director 2/12/97 ____________________________________ Lee Liu /s/ Celeste C. Michalski Director 2/12/97 ____________________________________ Celeste C. Michalski </TABLE> 20
<TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /s/ Michael S. Plunkett Director 2/12/97 ____________________________________ Michael S. Plunkett /s/ Herman J. Schmidt Director 2/12/97 ____________________________________ Herman J. Schmidt /s/ Richard H. Stanley Director 2/12/97 ____________________________________ Richard H. Stanley /s/ Lorne R. Waxlax Director 2/12/97 ____________________________________ Lorne R. Waxlax </TABLE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 28, 1996, and the related consolidated statement of income, shareholders' equity, and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit 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 28, 1996, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois January 30, 1997 22
REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders HON INDUSTRIES Inc. We have audited the accompanying consolidated balance sheets of HON INDUSTRIES Inc. and subsidiaries as of December 30, 1995, and December 31, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for the years 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 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 consolidated financial position of HON INDUSTRIES Inc. and subsidiaries as of December 30, 1995, and December 31, 1994, and the consolidated results of their operations and their cash flows for the years 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. As discussed in the Notes to Consolidated Financial Statements, the Company changed its method of accounting for postemployment benefits in 1994. Ernst & Young LLP Chicago, Illinois January 30, 1996 23
HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> FOR THE YEARS 1996 1995 1994 - ------------- ------------ ------------ ------------ <S> <C> <C> <C> Net sales.............................. $998,135,000 $893,119,000 $845,998,000 Cost of products sold.................. 679,496,000 624,700,000 573,392,000 ------------ ------------ ------------ Gross Profit....................... 318,639,000 268,419,000 272,606,000 Selling and administrative expenses.... 215,646,000 201,691,000 185,490,000 Gain on sale of subsidiary............. 3,200,000 -- -- ------------ ------------ ------------ Operating Income....................... 106,193,000 66,728,000 87,116,000 ------------ ------------ ------------ Interest income........................ 3,247,000 2,358,000 2,470,000 Interest expense....................... 4,173,000 3,569,000 3,248,000 ------------ ------------ ------------ Income Before Income Taxes............. 105,267,000 65,517,000 86,338,000 Income taxes........................... 37,173,000 24,419,000 31,945,000 ------------ ------------ ------------ Income Before Cumulative Effect of Accounting Changes.................... 68,094,000 41,098,000 54,393,000 Cumulative effect of accounting changes............................... -- -- (237,000) Net Income......................... $ 68,094,000 $ 41,098,000 $ 54,156,000 ============ ============ ============ Net Income Per Common Share: Income before cumulative effect of accounting changes.................... $ 2.26 $ 1.35 $ 1.74 Cumulative effect of accounting changes............................... -- -- (.01) Net Income......................... $ 2.26 $ 1.35 $ 1.73 ============ ============ ============ </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 24
HON INDUSTRIES INC. AND SUBSIDIARIES BALANCE SHEET <TABLE> <CAPTION> AS OF YEAR-END 1996 1995 1994 - -------------- ------------ ------------ ------------ <S> <C> <C> <C> ASSETS Current Assets Cash and cash equivalents.......... $ 31,196,000 $ 32,231,000 $ 27,659,000 Short-term investments............. 1,502,000 14,694,000 3,083,000 Receivables........................ 109,095,000 88,178,000 94,269,000 Inventories........................ 43,550,000 36,601,000 43,259,000 Deferred income taxes.............. 9,046,000 14,180,000 11,565,000 Prepaid expenses and other current assets............................ 11,138,000 8,299,000 8,975,000 ------------ ------------ ------------ Total Current Assets............. 205,527,000 194,183,000 188,810,000 Property, Plant, and Equipment....... 234,616,000 210,033,000 177,844,000 Goodwill............................. 51,213,000 908,000 1,247,000 Other Assets......................... 22,158,000 4,394,000 4,667,000 ------------ ------------ ------------ Total Assets..................... $513,514,000 $409,518,000 $372,568,000 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses.......................... $127,910,000 $117,273,000 $ 99,898,000 Income taxes....................... 2,574,000 5,361,000 4,949,000 Note payable and current maturities of long-term obligations.......... 22,069,000 6,281,000 6,246,000 ------------ ------------ ------------ Total Current Liabilities........ 152,553,000 128,915,000 111,093,000 Long-Term Debt and Other Liabilities. 91,468,000 45,911,000 46,080,000 Capital Lease Obligations............ 6,320,000 7,700,000 8,661,000 Deferred Income Taxes................ 10,726,000 10,757,000 12,094,000 Minority Interest in Subsidiary...... 50,000 -- -- Commitments and Contingencies Shareholders' Equity Common stock....................... 29,713,000 30,394,000 30,675,000 Paid-in capital.................... 360,000 550,000 434,000 Retained earnings.................. 227,365,000 193,505,000 174,642,000 Receivable from HON Members Company Ownership Plan.................... (5,041,000) (8,214,000) (11,111,000) ------------ ------------ ------------ Total Shareholders' Equity....... 252,397,000 216,235,000 194,640,000 ------------ ------------ ------------ Total Liabilities and Shareholders' Equity............ $513,514,000 $409,518,000 $372,568,000 ============ ============ ============ </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 25
HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY <TABLE> <CAPTION> FOR THE YEARS 1996 1995 1994 - ------------- ------------ ------------ ------------ <S> <C> <C> <C> Common Stock Balance, beginning of year......... $ 30,394,000 $ 30,675,000 $ 31,676,000 Purchase of shares................. (742,000) (367,000) (1,078,000) Shares issued under Members Stock Purchase Plan and restricted stock awards............................ 61,000 86,000 77,000 ------------ ------------ ------------ Balance, end of year............. $ 29,713,000 $ 30,394,000 $ 30,675,000 ------------ ------------ ------------ Paid-In Capital Balance, beginning of year......... $ 550,000 $ 434,000 $ 281,000 Purchase of shares................. (1,654,000) (1,725,000) (1,567,000) Shares issued under Members Stock Purchase Plan and restricted stock awards............................ 1,464,000 1,841,000 1,720,000 ------------ ------------ ------------ Balance, end of year............. $ 360,000 $ 550,000 $ 434,000 ------------ ------------ ------------ Retained Earnings Balance, beginning of year......... $193,505,000 $174,642,000 $161,079,000 Net income......................... 68,094,000 41,098,000 54,156,000 Purchase of shares................. (19,264,000) (7,699,000) (26,992,000) Dividends paid..................... (14,970,000) (14,536,000) (13,601,000) ------------ ------------ ------------ Balance, end of year............. $227,365,000 $193,505,000 $174,642,000 ------------ ------------ ------------ Receivable from HON Members Company Ownership Plan Balance, beginning of year......... $ (8,214,000) $(11,111,000) $(13,483,000) Principal repaid by HON Members Company Ownership Plan............ 3,173,000 2,897,000 2,372,000 ------------ ------------ ------------ Balance, end of year............. $ (5,041,000) $ (8,214,000) $(11,111,000) ------------ ------------ ------------ Shareholders' Equity Balance, end of year............. $252,397,000 $216,235,000 $194,640,000 ============ ============ ============ </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 26
HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> FOR THE YEARS 1996 1995 1994 ------------- ------------- ------------ ------------ <S> <C> <C> <C> NET CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net income......................... $ 68,094,000 $ 41,098,000 $ 54,156,000 Noncash items included in net income: Depreciation and amortization.... 25,252,000 21,416,000 19,042,000 Gain on sale of subsidiary, net of tax.......................... (2,016,000) -- -- Other postretirement and postemployment benefits......... 1,398,000 2,273,000 2,104,000 Deferred income taxes............ 5,103,000 (3,952,000) 854,000 Cumulative effect of accounting changes......................... -- -- 237,000 Other--net....................... 252,000 1,185,000 54,000 Changes in working capital, excluding acquisition and disposition: Receivables...................... (5,085,000) 6,091,000 (10,619,000) Inventories...................... 184,000 6,658,000 (4,629,000) Prepaid expenses and other current assets.................. (2,613,000) 676,000 1,484,000 Accounts payable and accrued expenses........................ 998,000 17,009,000 4,619,000 Accrued facilities closing and reorganization expenses......... (1,147,000) 366,000 (1,885,000) Income taxes..................... (3,971,000) 412,000 (1,847,000) Increase in other liabilities...... 6,860,000 (216,000) 1,077,000 ------------- ------------ ------------ Net cash flows from (to) operating activities.......... 93,309,000 93,016,000 64,647,000 ------------- ------------ ------------ NET CASH FLOWS FROM (TO) INVESTING ACTIVITIES: Capital expenditures--net.......... (44,684,000) (53,879,000) (35,005,000) Acquisition spending, net of cash acquired.......................... (79,136,000) -- -- Net proceeds from sale of subsidiary........................ 7,336,000 -- -- Principal repaid by HON Members Company Ownership Plan............ 3,173,000 2,897,000 2,372,000 Short-term investments--net........ 12,392,000 (11,611,000) 8,515,000 Other--net......................... (976,000) (205,000) (291,000) ------------- ------------ ------------ Net cash flows from (to) investing activities.......... (101,895,000) (62,798,000) (24,409,000) ------------- ------------ ------------ NET CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Purchase of HON INDUSTRIES common stock............................. (21,912,000) (9,791,000) (29,637,000) Proceeds from long-term debt....... 51,072,000 104,000 -- Payments of note and long-term debt.............................. (8,416,000) (3,350,000) (3,916,000) Proceeds from sale of HON INDUSTRIES common stock to members........................... 1,777,000 1,927,000 1,797,000 Dividends paid..................... (14,970,000) (14,536,000) (13,601,000) ------------- ------------ ------------ Net cash flows from (to) financing activities.......... 7,551,000 (25,646,000) (45,357,000) ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents.................. (1,035,000) 4,572,000 (5,119,000) ------------- ------------ ------------ Cash and cash equivalents at beginning of year................. 32,231,000 27,659,000 32,778,000 ------------- ------------ ------------ Cash and cash equivalents at end of year.............................. $ 31,196,000 $ 32,231,000 $ 27,659,000 ------------- ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest......................... $ 3,334,000 $ 3,401,000 $ 3,234,000 Income taxes..................... $ 36,318,000 $ 27,560,000 $ 32,534,000 ============= ============ ============ </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 27
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 predominately 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's fiscal year ends on the Saturday nearest December 31. Fiscal year 1996 ended on December 28, 1996; 1995 ended on December 30, 1995; and 1994 ended on December 31, 1994. 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 $1,830,000; $1,867,000; and $1,654,000 for 1996, 1995, and 1994, 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 $95,000 and $256,000 in 1996 and 1995, respectively. 28
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 predominately over 40 years. Patents are being amortized on a straight-line basis over their estimated useful lives which range from 7 to 16 years. Patents are reported by the Company as "Other Assets." 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 December 28, 1996. <TABLE> <CAPTION> 1996 1995 1994 ------- ------ ------ (IN THOUSANDS) <S> <C> <C> <C> Goodwill........................................... $52,051 $2,865 $2,865 Patents............................................ 16,060 -- -- Less accumulated amortization...................... 838 1,957 1,618 ------- ------ ------ $67,273 $ 908 $1,247 ======= ====== ====== </TABLE> 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 $10,423,000 in 1996, $11,591,000 in 1995, and $10,081,000 in 1994. 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 Policies The Company adopted Financial Accounting Standards Board Statement 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. The adoption had no material effect on results of operations. BUSINESS COMBINATIONS On October 2, 1996, the Company acquired all of the outstanding stock of Heat-N-Glo Fireplace Products, Inc., located in Savage, Minnesota, for a combination of cash and debt totaling approximately $79 million. The Company merged Heat-N-Glo into Heatilator Inc., a wholly owned subsidiary, 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. The Company paid approximately $62.0 million in cash, a $5.0 million long- term note, and $12.0 million as a convertible debenture for Heat-N-Glo. In connection with the merger, the Company entered into a $34.0 million five-year term loan with LaSalle National Bank. This transaction has been accounted for under the purchase method. Accordingly, the accounts and transactions of the acquired company have been included in the consolidated financial statements from the date of acquisition. 29
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assuming the acquisition 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 for 1996 and 1995, respectively. Pro forma consolidated net income and net income per common share would not have been materially different than reported amounts. The net purchase price was preliminarily allocated as follows: (In thousands) <TABLE> <S> <C> Working capital, other than cash................................. $10,702 Property, plant, and equipment................................... 6,441 Other assets..................................................... 548 Patents.......................................................... 16,060 Goodwill......................................................... 52,051 Other liabilities................................................ (6,666) ------- Purchase price, net of cash received......................... $79,136 ======= </TABLE> 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 $0.07 per share) which was recorded in the first quarter of fiscal year 1996. INVENTORIES <TABLE> <CAPTION> 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> Finished products................................ $15,793 $11,265 $13,554 Materials and work in process.................... 27,757 25,336 29,705 ------- ------- ------- $43,550 $36,601 $43,259 ======= ======= ======= </TABLE> Current replacement cost exceeded the amount stated for inventories valued by the LIFO method by approximately $12,337,000; $13,594,000; and $12,983,000 as of year-end 1996, 1995, and 1994, respectively. PROPERTY, PLANT, AND EQUIPMENT <TABLE> <CAPTION> 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> Land and land improvements.................... $ 9,114 $ 9,701 $ 8,832 Buildings..................................... 92,509 95,310 84,801 Machinery and equipment....................... 231,780 208,707 185,421 Construction and equipment installation in progress..................................... 42,507 30,036 17,915 -------- -------- -------- 375,910 343,754 296,969 Less allowances for depreciation.............. 141,294 133,721 119,125 -------- -------- -------- $234,616 $210,033 $177,844 ======== ======== ======== </TABLE> 30
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ACCOUNTS PAYABLE AND ACCRUED EXPENSES <TABLE> <CAPTION> 1996 1995 1994 -------- -------- ------- (IN THOUSANDS) <S> <C> <C> <C> Trade accounts payable......................... $ 44,762 $ 47,617 $40,939 Compensation................................... 6,331 4,855 3,343 Profit sharing and retirement expense.......... 11,736 11,490 11,066 Vacation pay................................... 8,064 8,492 8,579 Marketing expenses............................. 36,550 23,930 17,443 Workers' compensation, general, and product liability expenses............................ 3,787 4,032 4,700 Other accrued expenses......................... 16,680 16,857 13,828 -------- -------- ------- $127,910 $117,273 $99,898 ======== ======== ======= </TABLE> LONG-TERM DEBT AND OTHER LIABILITIES <TABLE> <CAPTION> 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> Industrial development revenue bonds, various issues, payable through 2013 with interest at 4.50-8.50% per annum............................ $24,063 $24,542 $24,928 Note payable to bank, term loan payable in 2001 with interest at 7.11% per annum*............... 27,200 -- -- Note payable to bank, payable quarterly through 1997 with interest at a variable rate (6.03% at year-end 1996).................................. -- 7,750 9,700 Convertible debenture payable to individuals, due in 1999 with interest at 7.0% per annum......... 12,000 -- -- Accrued employee health care costs............... 7,901 6,503 4,230 Other notes and amounts.......................... 20,304 7,116 7,222 ------- ------- ------- $91,468 $45,911 $46,080 ======= ======= ======= </TABLE> - -------- * The Company has entered into an interest rate swap agreement on a notional amount of $34 million, which is equivalent to the amount of the term loan, to obtain a fixed rate of interest in lieu of a floating rate. The interest rate swap agreement matures at the time the related note matures. The Company is exposed to credit loss in the event of nonperformance by the bank making the loan who is the other party to the agreement. However, the Company does not anticipate nonperformance by the counterparty. Aggregate maturities of long-term debt are as follows (in thousands): <TABLE> <S> <C> 1997................................................ $15,107 1998................................................ 7,459 1999................................................ 19,486 2000................................................ 10,104 2001................................................ 10,026 Thereafter.......................................... 24,209 </TABLE> 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 business following the merger. The convertible debenture is convertible into shares of common stock of Hearth 31
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 require the maintenance of a minimum level of working capital, place restrictions on the payment of cash dividends, and limit the assumption of additional debt and lease obligations. Approximately $198,176,000 of retained earnings were unrestricted at the end of 1996. The fair value of the Company's outstanding long-term debt obligations at year-end 1996 approximates the recorded aggregate amount. Property, plant, and equipment, with net carrying values of approximately $33,451,000 at the end of 1996, are mortgaged. INCOME TAXES Significant components of the provision for income taxes are as follows: <TABLE> <CAPTION> 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> Current: Federal...................................... $27,958 $25,360 $27,504 State........................................ 3,932 3,011 3,587 ------- ------- ------- 31,890 28,371 31,091 Deferred....................................... 5,283 (3,952) 854 ------- ------- ------- $37,173 $24,419 $31,945 ======= ======= ======= A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows: <CAPTION> 1996 1995 1994 ------- ------- ------- <S> <C> <C> <C> Federal statutory tax rate..................... 35.0% 35.0% 35.0% State taxes, net of federal tax effect......... 2.7 2.6 2.8 Federal and state tax credits.................. (2.2) -- -- Other, net..................................... (.2) (.3) (.8) ------- ------- ------- Effective tax rate............................. 35.3% 37.3% 37.0% ======= ======= ======= </TABLE> The Company recognized one-time federal and state research and development and new jobs tax credits totaling $2.1 million, or $0.07 per share, in 1996 related to prior tax years. 32
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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: <TABLE> <CAPTION> 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> Net long-term deferred tax liabilities: Tax over book depreciation............... $(17,584) $(16,358) $(13,630) OPEB obligations......................... 2,947 2,048 1,301 Other--net............................... 3,911 3,553 235 -------- -------- -------- Total net long-term deferred tax liabilities........................... (10,726) (10,757) (12,094) -------- -------- -------- Net current deferred tax assets: Workers' compensation, general, and product liability accruals.............. 1,548 1,670 2,029 Vacation accrual......................... 1,855 3,167 3,180 Other--net............................... 5,643 9,343 6,356 -------- -------- -------- Total net current deferred tax assets.. 9,046 14,180 11,565 -------- -------- -------- Net deferred tax (liabilities) assets.. $ (1,680) $ 3,423 $ (529) ======== ======== ======== </TABLE> SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE <TABLE> <CAPTION> 1996 1995 1994 ----------- ----------- ----------- <S> <C> <C> <C> Common Stock, $1 Par Value Authorized........................ 100,000,000 100,000,000 100,000,000 Issued and outstanding............ 29,713,265 30,394,337 30,674,603 Preferred Stock Authorized........................ 1,000,000 1,000,000 1,000,000 Issued and outstanding............ -- -- -- </TABLE> The Company purchased 753,800; 367,317; and 1,078,835 shares of its common stock during 1996, 1995, and 1994, respectively. Cash dividends declared and paid per share for each year are: <TABLE> <CAPTION> 1996 1995 1994 ---- ---- ---- <S> <C> <C> <C> Common shares.............................................. $.50 $.48 $.44 </TABLE> 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. Shares of common stock were issued in 1996, 1995, and 1994 pursuant to a members' stock purchase plan as follows: <TABLE> <CAPTION> 1996 1995 1994 ------ ------ ------ <S> <C> <C> <C> Shares issued........................................ 61,370 86,049 77,302 Average price per share.............................. $24.90 $22.39 $23.25 </TABLE> The Company uses the par value method of accounting for common stock repurchases. The excess of the cost of shares acquired over their par value is allocated to Paid-In Capital to the extent appropriate, with the excess charged to Retained Earnings. 33
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) During 1994, shareholders approved the 1994 Members' Stock Purchase Plan. Under the new plan, 500,000 shares of common stock were registered for issuance to participating members. Beginning on July 3, 1994, rights to purchase stock are granted on a quarterly basis to all members who have one year of employment eligibility and work a minimum of 20 hours per week. 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 2,000 shares, with a maximum fair market value of $25,000 in any calendar year. An additional 275,279 shares were available for issuance under the plan at December 28, 1996. 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. The Company has granted restricted stock awards aggregating 75,500 shares of common stock to officers. The officers were entitled to dividends and had voting rights on all shares awarded. Unearned compensation expense, 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 years 1995 and 1994. 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 two- hundredth of a share of a new series of preferred stock at an exercise price of $75.00. Each one two-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. 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. 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 $11,118,000; $10,955,000; and $10,849,000 in 1996, 1995, and 1994, 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 $146,000; $256,000; and $228,000 for 1996, 1995, and 1994, respectively. The actuarial present value of benefit obligations, less related plan assets at fair value, is not significant. 34
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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: <TABLE> <CAPTION> 1996 1995 1994 ------- ------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) <S> <C> <C> <C> Company contribution to ESOP........................... $ 3,348 $ 3,302 $ 2,977 Dividend income of ESOP................................ 446 436 403 Company interest expense on ESOP loan.................. 555 749 656 Shares of common stock allocated to ESOP participant accounts.............................................. 152,733 149,749 133,945 Shares held in suspense (unallocated) by ESOP as of year-end.............................................. 223,939 376,672 526,421 Fair value of shares held in suspense by ESOP as of year-end.............................................. $ 7,264 $ 8,758 $14,082 Closing market price of common stock as of year-end.... $ 32.44 $ 23.25 $ 26.75 </TABLE> In 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of adoption was to reduce net income by $237,000 after tax, or $.01 a share. 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: <TABLE> <CAPTION> 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> Accumulated postretirement benefit obligation (APBO): Retirees...................................... $ 6,535 $ 8,138 $ 6,947 Fully eligible active plan participants....... 3,916 5,612 3,816 Other active plan participants................ 4,808 7,809 6,397 Unrecognized net (loss)/gain.................... 6,919 (933) (713) Unrecognized prior service cost................. (2,776) (2,922) -- Unrecognized transition obligation.............. (11,501) (12,214) (12,932) -------- -------- -------- Accrued postretirement benefit cost............. $ 7,901 $ 5,490 $ 3,515 ======== ======== ======== Net periodic postretirement benefits costs include: Service cost.................................... $ 810 $ 685 $ 687 Interest cost................................... 1,629 1,344 1,242 Amortization of transition obligation over 20 years.......................................... 713 718 718 Amortization of prior service cost.............. 146 -- -- -------- -------- -------- Net periodic postretirement benefits cost....... $ 3,298 $ 2,747 $ 2,647 ======== ======== ======== </TABLE> The discount rates at fiscal year-end 1996, 1995, and 1994 were 7.5%, 7.75%, and 8.0%, respectively. The pre-65 1997 gross trend rates begin at 11.0% for the medical and prescription drug coverages and grade down to 35
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5.0% in 2006 and remain at this level for all future years. The post-64 gross trend rates begin at 9.0% for the medical coverage and decrease until the maximum Company subsidy (cap) is reached in 2003. For the prescription drug coverage, the 1997 gross trend rates begin at 11.0% 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 December 28, 1996, would increase by $493,520; and, the sum of the service and interest cost components of the net periodic postretirement benefit cost for fiscal year 1996 would increase by $45,000. 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 1996 are as follows: <TABLE> <CAPTION> CAPITALIZED OPERATING LEASES LEASES ----------- --------- (IN THOUSANDS) <S> <C> <C> <C> 1997.......................................... $ 2,024 $ 5,532 1998.......................................... 2,024 4,941 1999.......................................... 2,024 3,975 2000.......................................... 2,024 2,897 2001.......................................... 664 2,113 Thereafter.................................... 2,069 883 ------- ------- Total minimum lease payments.................. 10,829 $20,341 ======= Less amount representing interest............. 3,377 ------- Present value of net minimum lease payments, including current maturities of $1,133,000... $ 7,452 ======= </TABLE> Property, plant, and equipment at year-end include the following amounts for capitalized leases: <TABLE> <CAPTION> 1996 1995 1994 ------ ------ ------ (IN THOUSANDS) <S> <C> <C> <C> Buildings........................................... $3,299 $3,299 $3,709 Machinery and equipment............................. 8,419 8,419 8,419 ------ ------ ------ 11,718 11,718 12,128 Less allowances for depreciation.................... 4,854 3,569 2,507 ------ ------ ------ $6,864 $8,149 $9,621 ====== ====== ====== </TABLE> Rent expense for the years 1996, 1995, and 1994 amounted to approximately $6,788,000; $7,439,000; and $6,572,000, 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 $353,000; $608,000; and $525,000 for the years 1996, 1995, and 1994, respectively. CONTINGENCIES The Company is involved in various legal actions arising in the course of business. Although management cannot predict the ultimate outcome of these matters with certainty, it believes, after taking into consideration 36
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) legal counsel's evaluation of such actions, 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. 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. 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. 37
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Reportable segment data reconciled to the consolidated financial statements for the years ended 1996, 1995, and 1994 is as follows: <TABLE> <CAPTION> 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> Net sales: Office furniture.......................... $887,299 $818,907 $772,299 Hearth products........................... 110,836 74,212 73,699 -------- -------- -------- $998,135 $893,119 $845,998 ======== ======== ======== Operating profit: Office furniture.......................... $106,824 $ 79,085 $ 96,813 Hearth products........................... 14,155 6,395 6,373 -------- -------- -------- Total operating profit.................. 120,979 85,480 103,186 Unallocated corporate expenses.............. (15,712) (19,963) (16,848) -------- -------- -------- Income before income taxes.............. $105,267 $ 65,517 $ 86,338 ======== ======== ======== Identifiable assets: Office furniture.......................... $330,575 $308,783 $288,436 Hearth products........................... 122,037 25,811 25,791 General corporate......................... 60,902 74,924 58,341 -------- -------- -------- $513,514 $409,518 $372,568 ======== ======== ======== Depreciation and amortization expense: Office furniture.......................... $ 21,140 $ 18,328 $ 16,264 Hearth products........................... 2,813 1,424 1,191 General corporate......................... 1,299 1,664 1,587 -------- -------- -------- $ 25,252 $ 21,416 $ 19,042 ======== ======== ======== Capital expenditures, net: Office furniture.......................... $ 41,186 $ 50,816 $ 29,987 Hearth products........................... 4,060 2,857 3,763 General corporate......................... (562) 206 1,255 -------- -------- -------- $ 44,684 $ 53,879 $ 35,005 ======== ======== ======== </TABLE> One office furniture customer accounted for approximately 12%, 13%, and 13% of consolidated net sales in 1996, 1995, and 1994, respectively. 38
HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS <TABLE> <CAPTION> FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> Year-End 1996:* Net sales..................... $233,477 $219,260 $255,254 $290,144 $998,135 Gross profit.................. 73,471 69,033 78,851 97,284 318,639 Income before income taxes.... 26,706 19,518 25,337 33,706 105,267 Income taxes.................. 9,881 7,222 7,430 12,640 37,173 Net income**.................. 16,825 12,296 17,907 21,066 68,094 Net income per common share**. .55 .41 .60 .70 2.26 Year-End 1995: Net sales..................... $216,498 $206,604 $228,195 $241,822 $893,119 Gross profit.................. 68,942 60,358 67,876 71,243 268,419 Income before income taxes.... 20,119 12,366 19,448 13,584 65,517 Income taxes.................. 7,544 4,638 7,209 5,028 24,419 Net income***................. 12,575 7,728 12,239 8,556 41,098 Net income per common share***..................... .41 .25 .41 .28 1.35 Year-End 1994: Net sales..................... $200,693 $193,045 $222,112 $230,148 $845,998 Gross profit.................. 63,374 59,713 71,005 78,514 272,606 Income before income taxes.... 18,458 14,637 24,659 28,584 86,338 Income taxes.................. 6,830 5,415 9,124 10,576 31,945 Income before cumulative effect of accounting change.. 11,628 9,222 15,535 18,008 54,393 Cumulative effect of accounting change............ (237) -- -- -- (237) Net income.................... 11,391 9,222 15,535 18,008 54,156 Net income per common share: Income before cumulative effect of accounting change.. .37 .30 .49 .58 1.74 Cumulative effect of accounting change............ (.01) -- -- -- (.01) Net income per common share... .36 .30 .49 .58 1.73 </TABLE> - -------- * Includes the results of operation of Heat-N-Glo Fireplace Products, Inc., acquired October 2, 1996. **First quarter 1996 includes a $3,200,000 pretax gain on the sale of Ring King Visibles, Inc., a wholly owned subsidiary (after-tax gain of $2,000,000, or $.07 per share), and third quarter includes one-time federal and state income tax credits of $2,100,000, or $.07 per share. ***Fourth quarter 1995 includes various pretax charges totaling $5,575,000 (after-tax effect of $3,512,000, or $.12 per share) for nonrecurring costs primarily associated with closing several leased facilities and severance arrangements from eliminating certain administrative positions. 39
HON INDUSTRIES INC. AND SUBSIDIARIES INVESTOR INFORMATION COMMON STOCK MARKET PRICES AND DIVIDENDS (UNAUDITED) QUARTERLY 1996-1995 <TABLE> <CAPTION> DIVIDENDS 1996 BY QUARTER HIGH LOW PER SHARE --------------- ------- ------- --------- <S> <C> <C> <C> 1st............................................. $24 1/4 $18 1/2 $.12 2nd............................................. 30 1/2 22 .12 3rd............................................. 40 3/4 27 3/4 .12 4th............................................. 42 3/4 30 1/2 .14 ---- Total Dividends Paid........................ $.50 ==== </TABLE> <TABLE> <CAPTION> DIVIDENDS 1995 BY QUARTER HIGH LOW PER SHARE --------------- ------- ------- --------- <S> <C> <C> <C> 1st............................................. $30 1/2 $23 $.12 2nd............................................. 30 25 3/4 .12 3rd............................................. 31 1/4 25 1/2 .12 4th............................................. 29 3/4 23 1/4 .12 ---- Total Dividends Paid........................ $.48 ==== </TABLE> COMMON STOCK MARKET PRICE AND PRICE/ EARNINGS RATIO (UNAUDITED) FISCAL YEARS 1996-1986 <TABLE> <CAPTION> PRICE/EARNINGS MARKET PRICE* EARNINGS RATIO --------------- PER ---------------- YEAR HIGH LOW SHARE* HIGH LOW ---- ------- ------- -------- ------- ------- <S> <C> <C> <C> <C> <C> 1996........................... $42 3/4 $18 1/2 $2.26 19 8 1995........................... 31 1/4 23 1.35 23 17 1994........................... 34 24 1.73 20 14 1993........................... 29 1/4 21 1/2 1.41 21 15 1992........................... 23 1/2 16 1/2 1.18 20 14 1991........................... 20 1/2 13 1/4 1.02 20 13 1990........................... 23 13 1/2 1.30 18 10 1989........................... 19 7/8 8 3/4 .79 25 11 1988........................... 10 1/4 7 7/8 .94 11 8 1987........................... 11 1/2 8 1/8 .62 19 13 1986........................... 9 7/8 7 .71 14 10 ------- ------- Eleven-Year Average............ 19 12 ======= ======= </TABLE> - -------- * Adjusted for the effect of stock splits 40
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 financial statements taken as a whole. The valuation and qualifying accounts as of and for the fiscal year ended 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 audit 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 January 30, 1997 41
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS HON INDUSTRIES INC. AND SUBSIDIARIES DECEMBER 28, 1996 <TABLE> <CAPTION> COL. A COL. B COL. C COL. D COL. E ------ ---------- --------------------------- ------------ --------- ADDITIONS --------------------------- (1) (2) BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER ACCOUNTS-- DEDUCTIONS-- AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ----------- ---------- ---------- ---------------- ------------ --------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> Reserves deducted in the consolidated balance sheet from the assets to which they apply: 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 ====== ====== === ====== ====== Year ended December 31, 1994: Allowance for doubtful accounts... $1,917 $ 594 $ 857(A) $1,654 ====== ====== === ====== ====== </TABLE> - -------- Note A--Excess of accounts written off over recoveries. 42
ITEM 14(A)(3)--INDEX OF EXHIBITS. <TABLE> <CAPTION> EXHIBITS PAGE -------- ---- <C> <S> <C> (3ii) By-Laws of the Registrant....................................... 44 (21) Subsidiaries of the Registrant.................................. 81 (23A) Consent of Independent Public Accountants....................... 82 (23B) Consent of Independent Auditors................................. 83 (27) Financial Data Schedule......................................... 84 (99A) Executive Bonus Plan of the Registrant.......................... 85 (99B) Executive Deferred Compensation Plan............................ 89 </TABLE> 43