-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TvNwKUaHNlSS6VOBD9ZE3+71gYkm/Fi2bATv8bIMG6LFHTvRPRHjJ5cCGWMhZPiS cBr+H+fk6xfbp6aBqNGKUw== 0000912057-01-008394.txt : 20010328 0000912057-01-008394.hdr.sgml : 20010328 ACCESSION NUMBER: 0000912057-01-008394 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HON INDUSTRIES INC CENTRAL INDEX KEY: 0000048287 STANDARD INDUSTRIAL CLASSIFICATION: OFFICE FURNITURE (NO WOOD) [2522] IRS NUMBER: 420617510 STATE OF INCORPORATION: IA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14225 FILM NUMBER: 1579652 BUSINESS ADDRESS: STREET 1: 414 EAST THIRD STREET - PO BOX 1109 CITY: MUSCATINE STATE: IA ZIP: 52761-7109 BUSINESS PHONE: 3192647400 MAIL ADDRESS: STREET 1: 414 EAST THIRD STREET STREET 2: P O BOX 1109 CITY: MUSCATINE STATE: IA ZIP: 52761 FORMER COMPANY: FORMER CONFORMED NAME: HOME O NIZE CO DATE OF NAME CHANGE: 19681001 10-K 1 a2042271z10-k.txt 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE - ---------- SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - ---------- SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-2648 HON INDUSTRIES INC. An Iowa Corporation IRS Employer No. 42-0617510 414 East Third Street P. O. Box 1109 Muscatine, IA 52761-0071 319/264-7400 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, with par value of $1.00 per share. Preferred Share Purchase Rights to purchase shares of Series A Junior Participating Preferred Stock, with par value of $1.00 per share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ____ The aggregate market value of the voting stock held by nonaffiliates of the registrant, as of March 1, 2001, was: $1,099,041,437, assuming all 5% holders are affiliates. The number of shares outstanding of the registrant's common stock, as of March 1, 2001, was: 59,426,775. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement dated March 27, 2001, for the May 7, 2001, Annual Meeting of Shareholders are incorporated by reference into Part III. Index of Exhibits is located on Page 57. -1- ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I
Page ---- Item 1. Business............................................................................. 3 Item 2. Properties........................................................................... 11 Item 3. Legal Proceedings.................................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders.................................. 13 Table I - Executive Officers of the Registrant....................................... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 16 Item 6. Selected Financial Data -- Eleven-Year Summary....................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition And Results of Operations............................................................ 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 25 Item 8. Financial Statements and Supplementary Data.......................................... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................. 25 PART III Item 10. Directors and Executive Officers of the Registrant................................... 26 Item 11. Executive Compensation............................................................... 26 Item 12. Securities Ownership of Certain Beneficial Owners and Management..................... 26 Item 13. Certain Relationships and Related Transactions....................................... 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 27 Signatures ..................................................................................... 30 Financial Statements............................................................................... 33 Financial Statement Schedules...................................................................... 56 Index of Exhibits.................................................................................. 57
-2- ANNUAL REPORT ON FORM 10-K PART I ITEM 1. BUSINESS GENERAL HON INDUSTRIES Inc. ("HON" or the "Company") is an Iowa corporation incorporated in 1944. The Company is a national manufacturer and marketer of office furniture and hearth products. Approximately 81% of fiscal year 2000 net sales were in office furniture and 19% in hearth products. A broad office furniture product offering is sold through a national system of dealers, wholesalers, warehouse clubs, retail superstores, and to end-user customers, and federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, large regional contractors, and Company-owned retail outlets. In fiscal 2000, the Company had net sales of $2.0 billion, of which approximately $1.6 billion was attributable to office furniture products and $.4 billion was attributable to hearth products. Please refer to Operating Segment Information in the Notes to Consolidated Financial Statements for further information about operating segments. The Company is organized into a corporate headquarters and operating units with offices, manufacturing plants, distribution centers, and sales showrooms in the United States, Canada, and Mexico. See Item 2. Properties for additional related discussion. Five operating units, marketing under various brand names, participate in the office furniture industry. These operating units include: The HON Company, Allsteel Inc., BPI Inc., The Gunlocke Company, and Holga Inc. Each of these operating units manufactures and markets products which are sold through various channels of distribution and segments of the industry. Hearth Technologies Inc. was created in October 1996 with the acquisition of Heat-N-Glo Fireplace Products, Inc. and its subsequent integration with the Company's Heatilator operation. On February 20, 1998, the Company acquired Aladdin Steel Products, Inc., a manufacturer of wood-, pellet-, and gas-burning stoves and inserts, for a purchase price of $10.2 million. This acquisition is also being operated by Hearth Technologies Inc. On February 29, 2000, the Company completed the acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied) for a total purchase price of approximately $135 million. AFC and Allied sell, install, and service a broad range of gas- and wood-burning fireplaces as well as fireplace mantels, surrounds, facings, and other accessories. HON International Inc. markets select products manufactured by the other various HON INDUSTRIES operating units outside the United States and Canada. Since its inception, the Company has been committed to improvement in manufacturing and in 1992 introduced its process improvement approach known as Rapid Continuous Improvement ("RCI") which focuses on streamlining design, manufacturing, and administrative processes. The Company's RCI program, in which most members participate, has contributed to increased productivity, lower manufacturing costs, and improved product quality and workplace safety. In addition, the Company's RCI efforts enable it to offer short average lead times, from receipt of order to shipment, for most of its products. The Company distributes its products through an extensive network of independent office furniture dealers, office products dealers, wholesalers and retailers. The Company is a supplier of office furniture to each of the largest nationwide chains of office products dealer, or "mega-dealers," which are Boise Cascade Corporation; U.S. Office Products Company; Corporate Express Inc., A Buhrmann Company; Office Depot Business Services Group; and Staples Commercial Advantage, and to the Office Depot, Staples, and Office Max superstores. -3- The Company's product development efforts are focused on reducing the cost to manufacture existing products, and on designing new products that provide additional features and top quality. Over 40% of the Company's 2000 net sales were from products introduced in the past three years. An important element of the Company's success has been its ability to attract, develop and retain skilled, experienced and efficient members. Each of the Company's eligible members owns stock in the Company through a number of stock-based plans, including a member stock purchase plan and a profit-sharing plan. In addition, most production members are eligible for incentive bonuses. For further financial-related information with respect to acquisitions, dispositions, and Company operations in general, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and the following captions included in the Notes to Consolidated Financial Statements, which are filed as part of this report: Nature of Operations, Business Combinations, and Operating Segment Information. Statements in this report that are not strictly historical, including statements as to plans, objectives, and future financial performance, are "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks include, among others, competition within the office furniture and fireplace industries; the relationship between supply and demand for value-priced office products, as well as direct vent gas- and wood-burning fireplaces; the effects of economic conditions; issues associated with the acquisition and integration of acquisitions; operating risks; the ability of the Company to realize cost savings and productivity improvements; the ability of the Company's distributors to successfully market and sell the Company's products; and the availability and cost of capital to finance planned growth; as well as the other risks, uncertainties, and factors described from time to time in the Company's filings with the Securities and Exchange Commission. INDUSTRY According to the Business and Institutional Furniture Manufacturer's Association ("BIFMA"), U.S. office furniture industry shipments are estimated to be approximately $13,285,000,000 in 2000, an increase of 8.5% over 1999. The Company believes that the increase was due in part to pent-up demand resulting from companies funneling capital resources into computer-related solutions during 1999 in fear of potential Year 2000 problems. The U.S. office furniture market consists of two primary segments--the project segment and the transactional segment. The project segment has traditionally been characterized by sales of large quantities of office furniture to large corporations, such as for new office facilities, relocations, or department or office redesigns, which are frequently customized to meet specific client and designer preferences. Project furniture is generally purchased through office furniture dealers who typically prepare a custom-designed office layout emphasizing image and design. The process is often lengthy and generally has several manufacturers competing for the same projects. Overhead and support associated with the sales and customization efforts in this segment are major reasons why the prices for project office furniture have traditionally been relatively high. The transactional segment of the market, in which the Company is a leader, primarily represents smaller orders of office furniture purchased by businesses and home office users on the basis of price, quality, selection and quick delivery. Office products dealers, wholesalers and retailers, such as office products superstores, are the primary distribution channels in this market segment. Office products dealers (many of whom also participate in the project segment of the market) publish periodic catalogs that display office furniture and products from various manufacturers. GROWTH STRATEGY The Company's strategy is to build on its position as a leading manufacturer of value-priced office furniture and hearth products in North America. The components of this growth strategy are to introduce new value-priced products, continually improve productivity, leverage the distribution network, and pursue complementary strategic acquisitions. -4- EMPLOYEES/MEMBERS As of December 30, 2000, the Company employed approximately 11,500 persons, 11,000 of whom were members and 500 of whom were temporary personnel. Of the approximately 11,500 persons employed by the Company, 6,400 were in the Company's manufacturing operations. The Company employed approximately 400 members who were members of unions. The Company believes that its labor relations are good. PRODUCTS OFFICE FURNITURE The Company designs, manufactures, and markets a broad range of office furniture in four basic categories: (i) filing, including vertical files, lateral files, pedestals, and high density filing; (ii) seating, including task chairs, executive desk chairs, and side chairs; (iii) office systems (typically modular and moveable workspaces with integrated work surfaces, space dividers, and lighting); and (iv) desks and related products, including tables, bookcases, and credenzas. The Company's products are sold through the Company's wholly owned subsidiaries - The HON Company, Allsteel Inc., BPI Inc., The Gunlocke Company, and Holga Inc. The Company's office furniture products are generally available in contemporary as well as traditional styles and are priced to sell in all channels of distribution. The Company's products are offered in many models, sizes, designs, and finishes and are constructed from both wood and nonwood materials. The following is a description of the Company's major product categories and product lines: FILING CABINETS The Company offers a variety of filing options designed either to be integrated into and support the Company's office systems products or to function as freestanding furniture in commercial and home offices. The Company believes it is the largest manufacturer and marketer of mid-priced steel filing cabinets in the United States. The Company sells most of its freestanding files through independent office products and office furniture dealers, nationwide chains of office products dealers, wholesalers, office products superstores, warehouse clubs, and mail order distributors. Higher priced files are sold through project-oriented office furniture dealers. SEATING The Company's seating line includes task chairs designed for different kinds of office work, such as secretarial, computer, clerical, laboratory and executive, guest chairs, conference and reception room seating, and stackable chairs. The chairs are available in a variety of frame colors, a multitude of fabrics, and a wide range of price points. Key customer criteria in seating includes superior ergonomics, aesthetics, comfort and quality. OFFICE SYSTEMS The Company offers a complete line of office panel systems products in order to meet the needs of a variety of organizations. Systems may be used for team worksettings, private offices and open floor plans, and are typically modular and movable workspaces composed of adjustable partitions, work surfaces, desk extensions, storage cabinets and electrical lighting systems which can be moved, reconfigured and reused within the office. Panel systems offer a cost-effective and flexible alternative to traditional drywall office construction. The Company has experienced increased demand for furniture systems able to accommodate new work arrangements such as team workspaces and workspaces shared by several employees who are frequently out of the office. A typical installation of office panels often includes associated sales of seating, casegoods, files, and accessories. -5- The Company offers whole office solutions, movable panels, storage units, and work surfaces that can be installed easily and reconfigured to accommodate growth and change in organizations. The Company also offers consultative selling and design services for certain of its office system products. The compelling value of the Company's systems lines is that these products are styled and featured similar to those of premium-priced contract systems manufacturers but are offered at competitive prices, with short lead times and superior service. DESKS AND RELATED PRODUCTS The Company's collection of desks and related products include stand-alone steel and wood furniture items, such as desks, bookshelves and credenzas, and are available in a range of designs and price points. The Company offers these products in both contemporary and traditional styles. The Company's desks and related products are sold to a wide variety of customers from those designing large office configurations to small retail and home office purchasers. The Company offers a variety of contemporary and traditional tables designed for use in conference rooms, private offices, training areas, team worksettings and open floor plans. Tables are produced in wood veneer and laminate and are available in numerous sizes, shapes and base styles. HEARTH PRODUCTS The Company is the largest U.S. manufacturer and marketer of metal prefabricated fireplace and related products, primarily for the home, which it sells under the widely recognized Heatilator, Heat-N-Glo, Dovre, and Quadra-Fire brand names. Products bearing these brands are marketed by the Company's three hearth products companies, Heatilator, Heat-N-Glo, and Aladdin. The Company's line of hearth products includes wood- and gas-burning fireplaces and stoves, fireplace inserts, chimney systems, and related accessories. Heatilator and Heat-N-Glo are leaders in the two largest segments of the home fireplace market: vented-gas and wood fireplaces. Heat-N-Glo is the leader in "direct vent" fireplaces, which replace the chimney-venting system used in traditional fireplaces with a less expensive vent through an outer wall. See Business - Intellectual Property. MANUFACTURING The HON Company manufactures office furniture in Alabama, California, Georgia, Iowa, Kentucky, North Carolina, Pennsylvania, Virginia, and Monterrey, Mexico. Allsteel Inc. manufactures office furniture in Iowa, Mississippi, Pennsylvania, and Tennessee. Holga Inc. manufactures office furniture in California. The Gunlocke Company manufactures office furniture in New York. BPI Inc. manufactures office furniture in California, North Carolina, and Washington. Hearth Technologies Inc. manufactures hearth products in Iowa, Maryland, Minnesota, Washington, and Calgary, Canada. The Company purchases raw materials and components from a variety of vendors, and generally most items are available from multiple sources. Major raw materials and components include coil steel, bar stock, castings, lumber, veneer, particle board, fabric, paint, lacquer, hardware, rubber products, plastic products, and shipping cartons. Since its inception, the Company has focused on making its manufacturing facilities and processes more flexible while at the same time reducing costs and improving product quality. In 1992, the Company adopted the principles of RCI, which focus on developing flexible and efficient design, manufacturing and administrative processes that remove excess cost. To achieve flexibility and attain efficiency goals, the Company has adopted a variety of production techniques including cell manufacturing, focused factories, just-in-time inventory management and value engineering. The application of the RCI process has increased productivity by reducing set-up and processing times, square footage, inventory levels, product costs and delivery times, while improving quality and enhancing member safety. The Company's RCI process involves production and administrative employees, management, customers and suppliers. The Company has facilitators, coaches and consultants dedicated to the RCI process and strives to involve all members in the RCI process. In addition, the Company has organized a group that designs, fabricates, tests and installs proprietary manufacturing equipment. Manufacturing also plays a key role in the Company's concurrent product development process that primarily seeks to design new products for ease of manufacturability. -6- PRODUCT DEVELOPMENT The Company's product development efforts are primarily focused on reducing the cost to manufacture existing products and designing new products that provide additional features and quality. The Company accomplishes this through improving existing products, extending product lines, applying ergonomic research, improving manufacturing processes, applying alternative materials and providing engineering support and training to its operating units. The Company conducts its product development efforts at both the corporate and operating unit level. At the corporate level, the staff at the Company's Stanley M. Howe Technical Center, working in conjunction with operating staff, seeks breakthrough developments in product design, manufacturability and materials usage. At the operating unit level, development efforts are focused on achieving incremental improvements in product features and manufacturing processes. The Company invested approximately $18.9 million, $17.1 million, and $15.7 million in product development during fiscal 2000, 1999, and 1998, respectively, and has budgeted in excess of $23 million for product development in fiscal 2001. INTELLECTUAL PROPERTY As of December 30, 2000, the Company owned 198 U.S. and 128 foreign patents and had applications pending for 41 U.S. and 83 foreign patents. In addition, the Company holds registrations for 113 U.S. and 179 foreign trademarks and has applications pending for 64 U.S. and 70 foreign trademarks. The Company's principal office furniture products do not require frequent technical changes. The majority of the Company's patents are design patents which expire at various times depending on the patent's date of issuance. The Company believes that neither any individual patent nor the Company's patents in the aggregate are material to the Company's business as a whole. When Hearth Technologies Inc. acquired Heat-N-Glo in October 1996, it also acquired its patent for the design of a zero-clearance direct vent gas fireplace (the "direct vent patent"). The Company currently offers numerous product designs that would not be possible without the direct vent technology. Although the Company believes that the protection afforded by the direct vent patent is not vital to sustaining Hearth Technologies' gross profit margins on its direct vent gas fireplaces, the technology that underlies the patent is a significant distinguishing feature for the Company's products. The Company applies for patent protection when it believes the expense of doing so is justified, and believes that the duration of its registered patents is adequate to protect these rights. The Company also pays royalties in certain instances for the use of patents on products and processes owned by others. The Company actively protects its trademarks that it believes have significant goodwill value. SALES AND DISTRIBUTION: CUSTOMERS Over the last ten years, the office products and office furniture industries have experienced substantial consolidation as larger dealers have acquired smaller local and regional dealers. Consolidation permits large dealers to benefit from economies of scale, increased purchasing power, and the elimination of redundant management and overhead expenses. Larger dealers have also been able to take advantage of more sophisticated management techniques designed to enhance customer service, lower costs and increase operating efficiency. At the same time, office products superstores have emerged and replaced local retail office supply stores. The Company believes that these trends may continue to result in fewer, larger dealers and retailers as customers for the Company's products. In 2000, the Company's ten largest customers represented approximately 38% of its consolidated net sales. The substantial purchasing power exercised by large customers may adversely affect the prices at which the Company can successfully offer its products. As a result of this consolidation, changes in the purchase patterns or the loss of a single customer may have a greater impact on the Company's financial results than such events would have had prior to such consolidation. In addition, there can be no assurance that the Company will be able to maintain its customer relationships as consolidation of its customers occur. -7- As a result of these trends, the Company today sells its products through five principal distribution channels. The first channel, independent, local office furniture and office products dealers, specialize in the sale of a broad range of office furniture and office furniture systems, mostly to small- and medium-sized businesses, branch offices of large corporations, and home office owners. The second distribution channel comprises nationwide chains of office products dealers, or "mega-dealers," including Boise Cascade Corporation; U.S. Office Products Company; Corporate Express Inc., A Buhrmann Company; Office Depot Business Services Group; and Staples Commercial Advantage. Many of the independent dealers and mega-dealer locations assist their customers with the evaluation of office space requirements, systems layout and product selection, and design and office solution services provided by professional designers. The third distribution channel, wholesalers, serve as distributors of the Company's products to independent dealers, mega-dealers and superstores. The Company sells to the nation's largest wholesalers, United Stationers and S.P. Richards, as well as to regional wholesalers. Wholesalers maintain stocks of standard product lines for resale to the various retailers. They also special order products from the Company in customer-selected models and colors. The Company's wholesalers maintain warehouse locations throughout the United States, which enable the Company to make its products available for rapid delivery to retailers anywhere in the country. One customer, United Stationers, accounted for approximately 14%, 13%, and 12% of the Company's consolidated net sales in 2000, 1999, and 1998, respectively. The fourth distribution channel is retail stores, which include office products superstores such as Office Depot, Office Max, and Staples and warehouse clubs like Costco. The fifth distribution channel consists of government-focused dealers that sell the Company's products to federal, state and local government offices. As of December 30, 2000, the Company's office furniture sales force consisted of 29 regional sales managers supervising 156 salespersons, plus approximately 39 firms of independent manufacturers' representatives who collectively provided national sales coverage. Sales managers and salespersons are compensated by a combination of salary and incentive bonus. Office products dealers, national wholesalers and retailers market their products over the world-wide web and through catalogs published periodically and distributed to existing and potential customers. The Company's marketing objective is to gain share in its distributors' media. The Company believes that the inclusion of the Company's product lines in customer catalogs offers strong potential for increased sales of the listed product items due to the exposure provided by these publications. The Company also makes export sales through HON International Inc. to approximately 150 office furniture dealers and wholesale distributors serving select foreign markets. Distributors are principally located in Latin America and the Caribbean. The Company has an international field sales organization consisting of a Vice President of Sales and Marketing and four regional managers. Sales outside of the United States and Canada represented approximately 1% of net sales in fiscal 2000. Limited quantities of select finished goods inventories are maintained at the Company's principal manufacturing plants and at its various distribution centers. Hearth Technologies Inc. sells its fireplace and stove products through approximately 3,000 dealers and 520 distributors. The Company has a field sales organization of 34 regional sales managers supervising 117 salespersons and 7 firms of independent manufacturers' representatives. As of December 30, 2000, the Company has an order backlog of approximately $111.2 million which will be filled in the ordinary course of business within the current fiscal year. This compares with $131.2 million as of January 1, 2000, and $97.8 million as of January 2, 1999. Backlog, in terms of percentage of net sales, was 5.4%, 7.3%, and 5.8% for fiscal years 2000, 1999, and 1998, respectively. The Company's products are manufactured and shipped within a few weeks following receipt of order. The dollar amount of the Company's order backlog is therefore not considered by management to be a leading indicator of the Company's expected sales in any particular fiscal period. For a discussion of the seasonal nature of the Company's sales, see Operating Segment Information in the Notes to Consolidated Financial Statements. -8- COMPETITION The office furniture industry is highly competitive, with a significant number of competitors offering similar products. The Company competes by emphasizing its ability to deliver compelling value products. In executing this strategy, the Company has two significant classes of competitors. First, the Company competes with numerous small- and medium-sized office furniture manufacturers that focus on more limited product lines and/or end-user segments and include Global Furniture Inc.; National Office Furniture, a division of Kimball Office Furniture Co.; Chromcraft; Paoli; and High Point Furniture Industries, Inc. Second, the Company competes with a small number of large office furniture manufacturers which control a substantial portion of the market share in the project-oriented office furniture market, such as Steelcase Inc.; Haworth, Inc.; Herman Miller, Inc.; and Knoll, Inc. Some of these large competitors have substantially greater assets, resources and capabilities in the traditional project market than the Company. Products and brands offered by these project-oriented office furniture market participants have strong acceptance in the market place and have developed, and may continue to develop, value-priced product designs to compete with the Company. The Company also faces significant price competition from its competitors and may encounter competition from new market entrants. There can be no assurance that the Company will be able to compete successfully in its markets in the future. Hearth products, consisting of prefabricated metal fireplaces and related products, are manufactured by a number of national and regional competitors. A limited number of manufacturers, however, are predominant in this industry. The Company competes primarily against the other large manufacturers which include CFM Majestic Inc. (a Canadian company), Lennox Industries Inc. (Superior and Marco brands), Martin Industries Inc., and Fireplace Manufacturers Inc. (FMI). Both office furniture and hearth products compete on the basis of price, product performance, product quality, complete and on-time delivery to the customer, and customer service and support. The Company believes that it competes principally by providing compelling value products designed to be among the best in their price range for product quality and performance, superior customer service, and short lead-times. This is made possible, in part, by the Company's significant on-going investment in product development, highly efficient and low cost manufacturing operations, and an extensive distribution network. The Company is one of the largest office furniture manufacturers in the United States, and believes that it is the largest manufacturer of value-priced furniture. The Company is also the largest manufacturer and marketer of fireplaces in the United States. For further discussion of the Company's competitive situation, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. EFFECTS OF INFLATION Certain business costs may, from time to time, increase at a rate exceeding the general rate of inflation. The Company's objective is to offset the effect of inflation on its costs primarily through productivity increases in combination with certain adjustments to the selling price of its products as competitive market and general economic conditions permit. Investments are routinely made in modern plants, equipment, support systems, and for Rapid Continuous Improvement programs. These investments collectively focus on increasing productivity which helps to offset the effect of rising material and labor costs. Ongoing cost control disciplines are also routinely employed. In addition, the last-in, first-out (LIFO) valuation method is used for most of the Company's inventories, which ensures the changing material and labor costs are recognized in reported income; and more importantly, these costs are recognized in pricing decisions. -9- ENVIRONMENTAL The Company is subject to a variety of environmental laws and regulations governing discharges of air and water; the handling, storage, and disposal of hazardous or solid waste materials; and the remediation of contamination associated with releases of hazardous substances. Although the Company believes it is in material compliance with all of the various regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur material costs to comply with such regulations. The Company has trained staff responsible for monitoring compliance with environmental, health, and safety requirements. The Company's environmental professionals work with responsible personnel at each manufacturing facility, the Company's environmental legal counsel, and consultants on the management of environmental, health and safety issues. The Company's ultimate goal is to reduce and, when practical, eliminate the creation of hazardous waste in its manufacturing processes. Compliance with federal, state, and local environmental regulations has not had a material effect on the capital expenditures, earnings, or competitive position of the Company to date. The Company does not anticipate that financially material capital expenditures will be required during fiscal year 2001 for environmental control facilities. It is management's judgment that compliance with current regulations should not have a material effect on the Company's financial condition or results of operations. However, the uncertainty of new environmental legislation and technology in this area makes it impossible to know with confidence. For additional information about the Company's environmental matters, refer to Item 3. Legal Proceedings and the Contingencies note in the Notes to Consolidated Financial Statements. BUSINESS DEVELOPMENT The development of the Company's business during the fiscal years ended December 30, 2000, January 1, 2000, and January 2, 1999, is discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. -10- ITEM 2. PROPERTIES The Company maintains its corporate headquarters in Muscatine, Iowa, and conducts its operations at locations throughout the United States, Canada, and Mexico which house manufacturing, distribution, and retail operations and offices totaling an aggregate of approximately 9.2 million square feet. Of this total, approximately 2.3 million square feet are leased, including approximately 0.3 million square feet under a capital lease. Although the plants are of varying ages, the Company believes they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. The Company has sufficient capacity to increase output at most locations by increasing the use of overtime and/or number of production shifts employed. The Company's principal manufacturing and distribution facilities (100,000 square feet in size or larger) are as follows:
Approximate Owned or Description Location Square Feet Leased of Use -------- ----------- ------ ------ Cedartown, Georgia 547,014 Owned Manufacturing wood/nonwood casegoods office furniture (1) Chester, Virginia 382,082 Owned/ Manufacturing nonwood casegoods Leased(2) office furniture (1) Colville, Washington 125,000 Owned Manufacturing stoves Florence, Alabama 308,763 Owned Manufacturing wood casegoods office furniture Jackson, Tennessee 155,000 Leased Manufacturing nonwood office seating Kent, Washington 189,062 Leased Manufacturing systems office furniture Lake City, Minnesota 235,000 Leased Manufacturing metal prefabricated fireplaces (1) Louisburg, North Carolina 176,354 Owned Manufacturing wood casegoods office furniture Milan, Tennessee 358,000 Leased Manufacturing systems office furniture Monterrey, Mexico 105,000 Owned Manufacturing nonwood office seating Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal prefabricated fireplaces (1) Muscatine, Iowa 286,000 Owned Manufacturing nonwood casegoods office furniture Muscatine, Iowa 578,284 Owned Warehousing office furniture (1) Muscatine, Iowa 236,100 Owned Manufacturing wood casegoods office furniture Muscatine, Iowa 142,850 Owned Manufacturing systems office furniture Muscatine, Iowa 342,850 Owned Manufacturing systems office furniture Muscatine, Iowa 237,800 Owned Manufacturing nonwood office seating Muscatine, Iowa 210,000 Owned Warehousing office furniture Muscatine, Iowa 127,400 Owned Manufacturing wood casegoods office furniture Owensboro, Kentucky 311,575 Owned Manufacturing wood office seating Salisbury, North Carolina 129,000 Owned Manufacturing systems office furniture South Gate, California 520,270 Owned Manufacturing nonwood casegoods and seating office furniture (1) Wayland, New York 716,484 Owned Manufacturing wood casegoods and seating office furniture (1) West Hazleton, Pennsylvania 268,800 Owned Manufacturing nonwood casegoods office furniture Williamsport, Pennsylvania 147,265 Owned Manufacturing wood office seating and casegoods Verona, Mississippi 257,000 Owned Manufacturing systems office furniture - ----
(1) Also includes a regional warehouse/distribution center (2) A capital lease Other Company facilities, under 100,000 square feet in size, are located in various communities throughout the United States and Canada. These facilities total approximately 1,758,000 square feet with approximately 850,000 square feet used for the manufacture and distribution of office furniture and approximately 908,000 square feet for hearth products. Of this total, approximately 994,000 square feet are leased. One of these facilities has been vacated and is in the process of being marketed for sale. The Company also leases sales showroom space in office furniture market centers in several major metropolitan areas. The Company has a 40,000 square foot leased plant in Savage, Minnesota, which is subleased. There are no major encumbrances on Company-owned properties other than outstanding mortgages on certain properties, the amount of which is disclosed in the Long-Term Debt note in the Notes to Consolidated Financial Statements, filed as a part of this report. Refer to the Property, Plant, and Equipment note in the Notes to Consolidated Financial Statements for related cost, accumulated depreciation, and net book value data. -12- ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain continuing activities in Pennsylvania to clean-up environmental contamination at one site formerly owned by a subsidiary of the Company. The Pennsylvania environmental authorities are supervising this activity. The costs associated with this site are primarily related to the operation of a groundwater remediation system. These costs have not had a material effect on the financial condition or results of operations of the Company. Due to such factors as the wide discretion of regulatory authorities regarding clean-up levels and uncertain allocation of liability at multiple party sites, estimates made prior to the approval of a formal plan of action represent management's best judgment as to estimates of reasonably foreseeable expenses based upon average remediation costs at comparable sites. The Company, therefore, has accrued liabilities reflecting management's current, best estimate of the eventual future cost of the Company's anticipated share of remediation costs. For additional information on legal proceedings involving the Company, refer to the Contingencies note included in the Notes to Consolidated Financial Statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -13- PART I, TABLE I EXECUTIVE OFFICERS OF THE REGISTRANT DECEMBER 30, 2000
Family Position Other Business Experience Name Age Relationship Position Held Since During Past Five Years ---- --- ------------ -------- ---------- ---------------------- Jack D. Michaels 63 None Chairman of the Board 1996 President 1990 Chief Executive Officer 1991 Director 1990 Jerald K. Dittmer 43 None Vice President, Finance 2000 Group Vice President, Seating and Wood (1999-00), Vice President, Strategic Planning (1999), Vice President and General Manager, Oak Steel and Mt. Pleasant Plants (1998-99), Vice President, Information Technology (1997-98), The HON Company; Vice President and Controller (1995-97), The Gunlocke Company Jeffrey D. Fick 39 None Vice President, 1997 Secretary and Acting General Counsel (1997); Member and Community Relations Senior Counsel (1994-97) Malcolm C. Fields 39 None Vice President and Chief 2000 Vice President, Information Technology Information Officer (1998-00), The HON Company; Manager, Technical Support Services (1997-98), Manager, Process Systems (1996-97), Manager, Engineering Systems (1995-96), HON INDUSTRIES Inc. Robert D. Hayes 57 None Vice President, Internal Audit 1999 Vice President and Controller (1997-99), and Controller (1991-97), The HON Company James I. Johnson 52 None Vice President, General Counsel 1997 General Counsel and Secretary, Norand and Secretary Corporation, a portable data computing company (1990-97) Gordon R. Marshall 56 None Vice President, Marketing 2000 Vice President, Marketing (1991-00), The HON Company Phillip M. Martineau 53 None Executive Vice President 2000 President and Chief Executive Officer (1996-99), Arcsmith, Inc. (Illinois Tool Works); President (1994-96), Ansell-Edmont Industrial Inc. (Pacific Dunlop Ltd.) John S. McGlinn 60 None Sr. Vice President, Operations 1997 Vice President and General Manager, LA-South Improvement Gate Plant (1981-97), The HON Company Melvin L. McMains 59 None Vice President and Controller 1998 Controller (1980-1998) Thomas K. Miller 62 None Vice President, International 2000 Vice President, Marketing and International + President, HON International Inc. 1996 (1996-00), Vice President, Marketing and Distribution (1996), Vice President, Strategic Development-Office Depot (1995-96), HON INDUSTRIES Inc.; President, Ring King Visibles, Inc. (1991-96) William F. Snydacker 55 None Treasurer 1980 David C. Stuebe 60 None Vice President and Chief Financial 1994 Officer
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed for trading on the New York Stock Exchange (NYSE), trading symbol HNI. The Company moved to the NYSE, effective July 2, 1998, from the Nasdaq National Market System where the stock had traded under the symbol HONI. As of year-end 2000, the Company had 6,563 stockholders of record. Computershare Investor Services, L.L.C., Chicago, Illinois, serves as the Company's transfer agent and registrar of its common stock. Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, L.L.C., P.O. Box 1689, Chicago, IL 60690-1689 or telephone 312/588-4991. Common Stock Market Prices and Dividends (Unaudited) and Common Stock Market Price and Price/Earnings Ratio (Unaudited) are presented in the Investor Information section which follows the Notes to Consolidated Financial Statements filed as part of this report. The Company expects to continue its policy of paying regular cash dividends on the first business day of March, June, September, and December. Dividends have been paid each quarter since the Company paid its first dividend in 1955. The average dividend payout percentage for the most recent three-year period has been 25% of prior year earnings. Future dividends are dependent on future earnings, capital requirements, and the Company's financial condition. -16- HON INDUSTRIES INC. AND SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA -- ELEVEN-YEAR SUMMARY
2000(a) 1999(a) 1998(a) - --------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Income before Cumulative Effect of Accounting Changes $ 1.77 $ 1.44 $ 1.72 Cumulative Effect of Accounting Changes - - - Net Income 1.77 1.44 1.72 Cash Dividends . 44 .38 .32 Book Value 9.59 8.33 7.54 Net Working Capital 1.09 1.52 1.19 - --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS (THOUSANDS OF DOLLARS) Net Sales $2,046,286 $1,800,931 $1,706,628 Cost of Products Sold 1,380,404 1,236,612 1,172,997 Gross Profit 665,882 564,319 533,631 Interest Expense 14,015 9,712 10,658 Income before Income Taxes 165,964 137,575 170,109 Income before Income Taxes as a % of Net Sales 8.11% 7.64% 9.97% Federal and State Income Taxes $ 59,747 $ 50,215 $ 63,796 Effective Tax Rate 36.0% 36.5% 37.50% Income before Cumulative Effect of Accounting Changes $ 106,217 $ 87,360 $ 106,313 Net Income 106,217 87,360 106,313 Net Income as a % of Net Sales 5.19% 4.85% 6.23% Cash Dividends and Share Purchase Rights Redeemed $ 26,455 $ 23,112 $ 19,730 Addition to (Reduction of) Retained Earnings 79,762 64,248 86,583 Net Income Applicable to Common Stock 106,217 87,360 106,313 % Return on Average Shareholders' Equity 19.77% 18.14% 25.20% Depreciation and Amortization $ 79,046 $ 65,453 $ 52,999 - --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTION OF NET INCOME % Paid to Shareholders 24.91% 26.46% 18.56% % Reinvested In Business 75.09% 73.54% 81.44% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION (THOUSANDS OF DOLLARS) Current Assets $ 330,141 $ 316,556 $ 290,329 Current Liabilities 264,868 225,123 217,438 Working Capital 65,273 91,433 72,891 Net Property, Plant, and Equipment 454,312 455,591 444,177 Total Assets 1,022,470 906,723 864,469 % Return on Beginning Assets Employed 19.63% 16.94% 23.74% Long-Term Debt and Capital Lease Obligations $ 128,285 $ 124,173 $ 135,563 Shareholders' Equity 573,342 501,271 462,022 Retained Earnings 495,796 416,034 351,786 Current Ratio 1.25 1.41 1.34 - --------------------------------------------------------------------------------------------------------------------------- CURRENT SHARE DATA Number of Shares Outstanding at Year-End 59,796,891 60,171,753 61,289,618 Weighted-Average Shares Outstanding During Year 60,140,302 60,854,579 61,649,531 Number of Shareholders of Record at Year-End 6,563 6,737 5,877 - --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATIONAL DATA Capital Expenditures-- Net (Thousands of Dollars) $ 59,840 $ 71,474 $ 149,717 Members (Employees) at Year-End 11,543(b) 10,095 9,824(b) - --------------------------------------------------------------------------------------------------------------------------- -18- 1997 1996 1995 1994 PER COMMON SHARE DATA Income before Cumulative Effect of Accounting Changes $ 1.45 $ 1.13 $ .67 $ .87 Cumulative Effect of Accounting Changes - - - - Net Income 1.45 1.13 .67 .87 Cash Dividends .28 .25 .24 .22 Book Value 6.19 4.25 3.56 3.17 Net Working Capital 1.53 .89 1.07 1.27 - --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS (THOUSANDS OF DOLLARS) Net Sales $1,362,713 $998,135 $893,119 $845,998 Cost of Products Sold 933,157 679,496 624,700 573,392 Gross Profit 429,556 318,639 268,419 272,606 Interest Expense 8,179 4,173 3,569 3,248 Income before Income Taxes 139,128 105,267 65,517 86,338 Income before Income Taxes as a % of Net Sales 10.21% 10.55% 7.34% 10.21% Federal and State Income Taxes $ 52,173 $ 37,173 $ 24,419 $ 31,945 Effective Tax Rate 37.50% 35.31% 37.27% 37.00% Income before Cumulative Effect of Accounting Changes $ 86,955 $ 68,094 $ 41,098 $ 54,393 Net Income 86,955 68,094 41,098 54,156 Net Income as a % of Net Sales 6.38% 6.82% 4.60% 6.43% Cash Dividends and Share Purchase Rights Redeemed $ 16,736 $ 14,970 $ 14,536 $ 13,601 Addition to (Reduction of) Retained Earnings 37,838 33,860 18,863 13,563 Net Income Applicable to Common Stock 86,955 68,094 41,098 54,156 % Return on Average Shareholders' Equity 27.43% 29.06% 20.00% 28.95% Depreciation and Amortization $ 35,610 $ 25,252 $ 21,416 $ 19,042 - --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTION OF NET INCOME % Paid to Shareholders 19.25% 21.98% 35.37% 25.11% % Reinvested In Business 80.75% 78.02% 64.63% 74.89% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION (THOUSANDS OF DOLLARS) Current Assets $ 295,150 $205,527 $194,183 $188,810 Current Liabilities 200,759 152,553 128,915 111,093 Working Capital 94,391 52,974 65,268 77,717 Net Property, Plant, and Equipment 341,030 234,616 210,033 177,844 Total Assets 754,673 513,514 409,518 372,568 % Return on Beginning Assets Employed 28.27% 25.93% 17.91% 24.72% Long-Term Debt and Capital Lease Obligations $ 134,511 $ 77,605 $ 42,581 $ 45,877 Shareholders' Equity 381,662 252,397 216,235 194,640 Retained Earnings 265,203 227,365 193,505 174,642 Current Ratio 1.47 1.35 1.51 1.70 - --------------------------------------------------------------------------------------------------------------------------- CURRENT SHARE DATA Number of Shares Outstanding at Year-End 61,659,316 59,426,530 60,788,674 61,349,206 Weighted-Average Shares Outstanding During Year 59,779,508 60,228,590 60,991,284 62,435,450 Number of Shareholders of Record at Year-End 5,399 5,319 5,479 5,556 - --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATIONAL DATA Capital Expenditures-- Net (Thousands of Dollars) $ 85,491 $ 44,684 $ 53,879 $ 35,005 Members (Employees) at Year-End 9,390(b) 6,502(b) 5,933 6,131 - --------------------------------------------------------------------------------------------------------------------------- 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE DATA Income before Cumulative Effect of Accounting Changes $ .69 $ .59 $ .51 $ .65 Cumulative Effect of Accounting Changes .01 - - - Net Income .70 .59 .51 .65 Cash Dividends .20 .19 .18 .15 Book Value 2.83 2.52 2.32 2.03 Net Working Capital 1.23 1.23 1.07 .82 - --------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS (THOUSANDS OF DOLLARS) Net Sales $780,326 $706,550 $607,710 $663,896 Cost of Products Sold 537,828 479,179 411,168 458,522 Gross Profit 242,498 227,371 196,542 205,374 Interest Expense 3,120 3,441 3,533 3,611 Income before Income Taxes 70,854 61,893 52,653 69,085 Income before Income Taxes as a % of Net Sales 9.08% 8.76% 8.66% 10.41% Federal and State Income Taxes $ 26,216 $ 23,210 $ 19,745 $ 25,907 Effective Tax Rate 37.00% 37.50% 37.50% 37.50% Income before Cumulative Effect of Accounting Changes $ 44,638 $ 38,683 $ 32,908 $ 43,178 Net Income 45,127 38,683 32,908 43,178 Net Income as a % of Net Sales 5.78% 5.47% 5.42% 6.50% Cash Dividends and Share Purchase Rights Redeemed $ 12,587 $ 12,114 $ 11,656 $ 9,931 Addition to (Reduction of) Retained Earnings 17,338 26,569 18,182 (11,952) Net Income Applicable to Common Stock 45,127 38,683 32,908 43,178 % Return on Average Shareholders' Equity 26.35% 24.75% 23.41% 33.24% Depreciation and Amortization $ 16,631 $ 15,478 $ 14,084 $ 13,973 - --------------------------------------------------------------------------------------------------------------------------- DISTRIBUTION OF NET INCOME % Paid to Shareholders 27.89% 31.32% 35.42% 23.00% % Reinvested In Business 72.11% 68.68% 64.58% 77.00% - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL POSITION (THOUSANDS OF DOLLARS) Current Assets $188,419 $171,309 $150,901 $146,591 Current Liabilities 110,759 91,780 82,275 93,465 Working Capital 77,660 79,529 68,626 53,126 Net Property, Plant, and Equipment 157,770 145,849 125,465 124,603 Total Assets 352,405 322,746 280,893 276,984 % Return on Beginning Assets Employed 22.14% 22.18% 19.66% 24.00% Long-Term Debt and Capital Lease Obligations $ 45,916 $ 50,961 $ 32,734 $ 37,250 Shareholders' Equity 179,553 163,009 149,575 131,612 Retained Earnings 161,079 143,741 117,172 98,990 Current Ratio 1.70 1.87 1.83 1.57 - --------------------------------------------------------------------------------------------------------------------------- CURRENT SHARE DATA Number of Shares Outstanding at Year-End 63,351,692 64,737,912 64,417,370 64,769,794 Weighted-Average Shares Outstanding During Year 64,181,088 65,517,990 64,742,976 66,220,810 Number of Shareholders of Record at Year-End 4,653 4,534 4,466 4,331 - --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATIONAL DATA Capital Expenditures-- Net (Thousands of Dollars) $ 27,541 $ 26,626 $ 13,907 $ 20,709 Members (Employees) at Year-End 6,257 5,926 5,599 6,073 - ---------------------------------------------------------------------------------------------------------------------------
(a) Data has been restated to include shipping and handling costs billed to customers as revenue per EITF Issue No. 00-10. Restatement of prior years are immaterial. (b) Includes acquisitions completed during year. -19- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the Company's historical results of operations and of its liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements of the Company and related notes. RESULTS OF OPERATIONS The following table sets forth the percentage of consolidated net sales represented by certain items reflected in the Company's statements of income for the periods indicated.
Fiscal 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of products sold 67.5 68.7 68.7 - ------------------------------------------------------------------------------------------------------------------- Gross profit 32.5 31.3 31.3 Selling and administrative expenses 23.8 22.1 20.8 Provision for closing facilities and reorganization expense - 1.1 - - ------------------------------------------------------------------------------------------------------------------- Operating income 8.7 8.1 10.5 Interest expense (net) .6 .5 .5 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 8.1 7.6 10.0 Income taxes 2.9 2.8 3.7 Net income 5.2% 4.9% 6.2% - -------------------------------------------------------------------------------------------------------------------
The Company has two reportable core operating segments: office furniture and hearth products. The "Operating Segment Information" note included in the notes to consolidated financial statements provides more detailed financial data with respect to these two segments. FISCAL YEAR ENDED DECEMBER 30, 2000, COMPARED TO FISCAL YEAR ENDED JANUARY 1, 2000 NET SALES Net sales, on a consolidated basis, increased by 14% to $2.0 billion in 2000 from $1.8 billion in 1999. Office furniture net sales increased 9% in 2000 to $1.65 billion from $1.51 billion in 1999. Net sales of hearth products increased 39% to $396.3 million in 2000 from $285.9 million in 1999 due mainly to the Company's acquisition of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), which were joined to form Hearth Services Inc., a subsidiary of Hearth Technologies Inc. The office furniture industry reported an increase in shipments of 9% in 2000 compared to 1999. The Company's most recent five-year compounded annual growth rate in net sales is 18%. GROSS PROFIT Gross profit dollars increased 18% to $665.9 million in 2000 from $564.3 million in the prior year. Gross margin increased to 32.5% for 2000 from 31.3% in 1999. The improvement reflects the combination of improved price realization and productivity from rapid continuous improvement programs. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 23% to $487.8 million in 2000 from $398.2 million in the prior year. Selling and administrative expenses, as a percent of net sales, increased to 23.8% in 2000 from 22.1% in 1999. The largest contributor to this increase was the acquisition of Hearth Services Inc.,which is a retail distributor. Retail distribution is a different business model that has proportionally higher selling and administrative costs than manufacturing. The Company is applying rapid continuous improvement philosophies to reduce these costs. -20- The Company also continued to experience increased investment in sales and marketing expenses associated with refocusing the Company and developing branding programs in the office furniture segment. The Company was able to reduce freight expense as a percent of net sales despite increased fuel and carrier costs. Selling and administrative expenses include freight expense to the customer, product development costs, and amortization expenses of intangible assets. The "Selling and Administrative Expenses" note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income increased by 7% to $178.0 million in 2000 from $166.1 million (excluding a one-time pre-tax charge for closing facilities and reorganization expense of $19.7 million) in 1999. The increase is due mainly to increased sales and gross margins. NET INCOME Net income increased by 6% to $106.2 million in 2000 from $99.9 million, excluding the $12.5 million nonrecurring after-tax charge for the closing of facilities and reorganization expenses in the prior year. This increase is attributable primarily to increased sales and gross margins. Net income was favorably impacted by a decrease in the Company's effective tax rate from 36.5% in 1999 to 36.0% in 2000 resulting from favorable state income tax initiatives. Net income per common share increased by 8% to $1.77 in 2000 from $1.64 (excluding a nonrecurring after-tax charge of $0.20 per share) in 1999. The Company's net income per share performance for 2000 also benefited from the Company's common stock repurchase program. FISCAL YEAR ENDED JANUARY 1, 2000, COMPARED TO FISCAL YEAR ENDED JANUARY 2, 1999 NET SALES Net sales, on a consolidated basis, increased by 6% to $1.8 billion in 1999 from $1.7 billion in 1998. The Company increased sales in both core operating segments due to the continued focus on superior customer service and rapid introduction of new innovative and compelling value products. Office furniture net sales increased 4% in 1999 to $1.51 billion from $1.46 billion in 1998. Net sales of hearth products increased 16% to $285.9 million in 1999 from $246.0 million in 1998. The office furniture industry reported a decline in shipments of 1% in 1999 compared to 1998. The hearth products industry annual growth rate is estimated at 6% to 7%. The Company's most recent five-year compounded annual growth rate in net sales is 16%. GROSS PROFIT Gross profit dollars increased 6% to $564.3 million in 1999 from $533.6 million in the prior year. Gross margin held steady at 31.3% for 1999 and 1998. The Company is continuing to focus on improving gross margins. A tight labor market made it more difficult than anticipated to staff facilities, causing an increase in backlog and additional overtime, training, and expenses associated with moving production to alternate plant locations. The Company was able to fill positions in the fourth quarter and implemented plans to ensure workers are in place to meet order demands. Gross profit also included start-up costs associated with the Monterrey, Mexico, production facility. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 12% to $398.2 million in 1999 from $354.5 million in the prior year. Selling and administrative expenses, as a percentage of net sales, increased to 22.1% in 1999 from 20.8% in 1998. The Company has implemented a number of internal initiatives to better serve customers through providing complete, on-time, and undamaged orders quickly. These initiatives have resulted in increased freight costs. The Company has contracted with distribution experts and is currently implementing a new logistical management system to lower freight costs while still providing excellent service execution to customers. -21- The Company also launched a strategic initiative during the fourth quarter to strengthen its office furniture market focus. Allsteel Inc, which was purchased in 1997, and The HON Company had been operating as one business unit. During the fourth quarter, the two operations were split into two separate business units. The HON Company serves the open-line, middle-market segment, and Allsteel Inc. serves the project-oriented contract market. The Company incurred additional costs related to this initiative in the near-term, but these investments will be leveraged as the companies increase sales and grow their market shares. Both business units continue to be reported under the Company's office furniture segment reported in the Operating Segment Information note included in the Notes to Consolidated Financial Statements. Selling and administrative expenses for 1999 were significantly influenced by increased freight expense to the customer, product development costs, and amortization expenses of intangible assets. The Selling and Administrative Expenses note, included in the Notes to the Consolidated Financial Statements, provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income decreased by 7.3% to $166.1 million (excluding a one-time pre-tax charge for closing facilities and reorganization expense of $19.7 million) in 1999 from $179.2 million in 1998. The decrease is due principally to increased selling and administrative expenses. NET INCOME Net income, excluding the $12.5 million nonrecurring after-tax charge for the closing of facilities and reorganization expenses, decreased by 6.1% to $99.9 million in 1999 from $106.3 million in the prior year. This decrease is attributable primarily to increased selling and administrative expenses. Net income was favorably impacted by a decrease in the Company's effective tax rate from 37.5% in 1998 to 36.5% in 1999 resulting from favorable state income tax initiatives. Net income per common share decreased by 4.7% to $1.64 (excluding a nonrecurring after-tax charge of $0.20 per share) in 1999 from $1.72 for 1998. The Company's net income per share performance for 1999 also benefited from the Company's common stock repurchase program. FISCAL YEAR ENDED JANUARY 2, 1999, COMPARED TO FISCAL YEAR ENDED JANUARY 3, 1998 NET SALES Net sales, on a consolidated basis, increased by 25% to $1.71 billion in 1998 from $1.36 billion in the prior year even though fiscal year 1998 was a normal 52-week year compared to 1997 being a 53-week year. The Company increased sales in both core operating segments due to the continued focus on superior customer service, rapid introduction of new innovative and compelling value products, and acquisitions. Office furniture net sales increased 26% in 1998 to $1.5 billion from $1.16 billion in 1997. Net sales of hearth products increased 20% to $246.0 million in 1998 from $204.5 million in 1997. Both core operating segments experienced another year of strong growth during 1998. The office products industry reported an annual growth rate of 7.8%, and hearth products an estimated 10%. The Company's most recent five-year compounded annual growth rate is 17% in net sales. GROSS PROFIT Gross profit increased 24% to $533.6 million in 1998 from $429.6 million in the prior year. Gross margin decreased to 31.3% for 1998 compared to 31.5% for 1997. This decrease was due to selling price reductions on select products to increase sales volume, which were only partially offset by productivity gains, and the adverse impact of the Allsteel acquisition not achieving the Company's margin standards as rapidly as projected. -22- SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by 25% to $354.5 million from $284.4 million in the prior year. Selling and administrative expenses, as a percentage of net sales, decreased to 20.8% in 1998 from 20.9% in 1997. Management places major emphasis on controlling and reducing selling and administrative expenses. The Company expects to leverage these costs as sales grow; however, increased costs to meet competitive conditions offset a portion of the efficiency and leveraging gains. Selling and administrative expenses include freight expense to the customer, product development costs, and amortization expenses of intangible assets. The "Selling and Administrative Expenses" note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items. OPERATING INCOME Operating income increased by 23% to $179.2 million in 1998 from $145.2 million in 1997. The increase is due to increased sales and lower selling and administrative expenses as a percent of sales. NET INCOME Net income increased by 22% to $106.3 million in 1998 from $87.0 million in 1997. This increase is a result of the higher operating income being partially offset by an increase in interest expense associated with acquisition and capital expenditures. Net income per common share increased by 19% to $1.72 in 1998 from $1.45 in 1997. Average shares outstanding increased to 61.6 million in 1998 from 59.8 million in 1997 as a result of the weighting of the October 1997 primary stock offering. LIQUIDITY AND CAPITAL RESOURCES During 2000, cash from operations was $204.9 million, which provided the funds necessary to meet working capital needs, help finance acquisitions, invest in capital improvements, repay long-term debt, repurchase common stock, and pay increased dividends. CASH MANAGEMENT Cash, cash equivalents, and short-term investments totaled $3.2 million compared to $22.2 million at the end of 1999 and $17.7 million at the end of 1998. These funds, coupled with cash from future operations and additional long-term debt, if needed, are expected to be adequate to finance operations, planned improvement, and internal growth. The Company places special emphasis on the management and reduction of its working capital with a particular focus on trade receivables and inventory levels. The success achieved in managing receivables is in large part a result of doing business with quality customers and maintaining close communications with them. Trade receivable days outstanding have averaged about 37 days over the past three years. Inventory levels and turns continue to improve as a function of reducing production cycle times. Inventory turns have been in the 17 to 18 range over the past three years. CAPITAL EXPENDITURE INVESTMENTS Capital expenditures, net of disposals, were $59.8 million in 2000, $71.5 million in 1999, and $149.7 million in 1998. Expenditures during 2000, 1999, and 1998 have been consistently focused on machinery and equipment and facility expansion needed to support new products, process improvements, cost-savings initiatives, and creating additional and more efficient production and warehousing capacity. ACQUISITIONS On February 29, 2000, the Company completed the acquisition of its Hearth Services Inc. division, which consists of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry, for a purchase price of approximately $135 million. -23- In February 1998, the Company completed the acquisition of Aladdin Steel Products, Inc., a manufacturer of decorative gas- and wood-burning stoves, for a purchase price of approximately $10.2 million. This acquisition allowed the Company to strengthen its position in the hearth products market. LONG-TERM DEBT Long-term debt, including capital lease obligations, was 18% of total capitalization at December 30, 2000, 20% at January 1, 2000, and 23% at January 2, 1999. The Company does not expect future capital resources to be a constraint on planned growth. Significant additional borrowing capacity is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future needs. CASH DIVIDENDS Cash dividends were $0.44 per common share for 2000, $0.38 for 1999, and $0.32 for 1998. Further, the Board of Directors announced a 9.1% increase in the quarterly dividend from $0.11 to $0.12 per common share effective with the March 1, 2001, dividend payment. The previous quarterly dividend increase was from $0.095 to $0.11, effective with the March 1, 2000, dividend payment. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. The average dividend payout percentage for the most recent three-year period has been 25% of prior year earnings. STOCK SPLIT On February 11, 1998, the Board of Directors announced a two-for-one stock split in the form of a 100 percent stock dividend that was paid on March 27, 1998, to shareholders of record on March 6, 1998. Shareholders received one share of common stock for each share held on record date. COMMON SHARE REPURCHASES During 2000, the Company repurchased 837,552 shares of its common stock at a cost of approximately $18.0 million, or an average price of $21.46. As of December 30, 2000, approximately $13.6 million of the $70.0 million authorized by the Board of Directors for repurchases remained unspent. On February 14, 2001, the Board authorized an additional $100 million for the Company's share repurchase program. During 1999, the Company repurchased 1,408,624 shares at a cost of approximately $30.9 million, or an average price of $21.91. During 1998, the Company repurchased 529,284 shares at a cost of approximately $12.2 million, or an average price of $23.04. LITIGATION AND UNCERTAINTIES The Company is involved in various legal actions arising in the course of business. These uncertainties are referenced in the Contingencies note included in the Notes to Consolidated Financial Statements. LOOKING AHEAD The Company believes the softness in the economy may have an adverse effect on net sales and operating income in the first half of 2001. However, the Company is cautiously optimistic about the results for the second half of the year based on economic improvement, new product introductions, and improved price realization. -24- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no material financial exposure to the various financial instrument market risks covered under this rule. Currently, the Company has no derivative financial instruments or off-balance sheet financing arrangements. For information related to the Company's long-term debt, refer to the Long-Term Debt disclosure in the Notes to Consolidated Financial Statements filed as part of this report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements listed under Item 14 (a)(1) and (2) are filed as part of this report. The Summary of Unaudited Quarterly Results of Operations follows the Notes to Consolidated Financial Statements filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -25- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Election of Directors" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. For information with respect to executive officers of the Company, see Part I, Table I "Executive Officers of the Registrant." The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Election of Directors" and "Executive Compensation" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Election of Directors" and "Beneficial Owners of Common Stock" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, is incorporated herein by reference. The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2001, 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 7, 2001, is incorporated herein by reference. -26- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The following consolidated financial statements of HON INDUSTRIES Inc. and Subsidiaries included in the Company's 2000 Annual Report to Shareholders are filed as a part of this report pursuant to Item 8:
Page ---- Report of Independent Public Accountants ........................................ 33 Consolidated Statements of Income for the Years Ended December 30, 2000; January 1, 2000; and January 2, 1999 ......................... 34 Consolidated Balance Sheets -- December 30, 2000; January 1, 2000; and January 2, 1999 ............................................................. 35 Consolidated Statements of Shareholders' Equity for the Years Ended December 30, 2000; January 1, 2000; and January 2, 1999 ......................... 36 Consolidated Statements of Cash Flows for the Years Ended December 30, 2000; January 1, 2000; and January 2, 1999 ......................... 37 Notes to Consolidated Financial Statements ...................................... 38 Investor Information ............................................................ 54 (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 30, 2000; January 1, 2000; and January 2, 1999 ......... 56 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (b) REPORTS ON FORM 8-K There are no reports on Form 8-K filed during the last quarter of the period covered by this report.
-27- (c) EXHIBITS An exhibit index of all exhibits incorporated by reference into, or filed with, this Form 10-K appears on Page 57. The following exhibits are filed herewith: Exhibit ------- (3ii) By-Laws (10i) 1995 Stock-Based Compensation Plan (10xv) HON INDUSTRIES Inc. Long-Term Performance Plan (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (99B) Executive Deferred Compensation Plan (d) Financial Statement Schedules See Item 14(a)(2). -28- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. HON INDUSTRIES Inc. Date: March 27, 2001 By: /s/ Jack D. Michaels ----------------------------- Jack D. Michaels Chairman, President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each Director whose signature appears below authorizes and appoints Jack D. Michaels as his or her attorney-in-fact to sign and file on his or her behalf any and all amendments and post-effective amendments to this report.
Signature Title Date --------- ----- ---- /s/ Jack D. Michaels Chairman, President and CEO, 3/27/01 - -------------------------------------------- Principal Executive Officer, Jack D. Michaels and Director /s/ Jerald K. Dittmer Vice President, Finance and 3/27/01 - -------------------------------------------- Controller, and Principal Jerald K. Dittmer Accounting Officer /s/ David C. Stuebe Vice President and 3/27/01 - -------------------------------------------- Chief Financial Officer David C. Stuebe /s/ Gary M. Christensen Director 3/27/01 - -------------------------------------------- Gary M. Christensen /s/ Robert W. Cox Director 3/27/01 - -------------------------------------------- Robert W. Cox /s/ Cheryl A. Francis Director 3/27/01 - -------------------------------------------- Cheryl A. Francis /s/ W August Hillenbrand Director 3/27/01 - -------------------------------------------- W August Hillenbrand /s/ Robert L. Katz Director 3/27/01 - -------------------------------------------- Robert L. Katz /s/ Dennis J. Martin Director 3/27/01 - -------------------------------------------- Dennis J. Martin /s/ Abbie J. Smith Director 3/27/01 - -------------------------------------------- Abbie J. Smith /s/ Richard H. Stanley - -------------------------------------------- Richard H. Stanley Director 3/27/01 /s/ Brian E. Stern Director 3/27/01 - -------------------------------------------- Brian E. Stern /s/ Lorne R. Waxlax Director 3/27/01 - -------------------------------------------- Lorne R. Waxlax
-31- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders HON INDUSTRIES Inc. We have audited the accompanying consolidated balance sheets of HON Industries Inc. and subsidiaries as of December 30, 2000, January 1, 2000, and January 2, 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the fiscal years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HON INDUSTRIES Inc. and subsidiaries as of December 30, 2000, January 1, 2000, and January 2, 1999, and the results of its operations and its cash flows for each of the three fiscal years then ended, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois February 5, 2001 -33- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except for per share data) FOR THE YEARS 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Net sales $2,046,286 $1,800,931 $1,706,628 Cost of products sold 1,380,404 1,236,612 1,172,997 - ------------------------------------------------------------------------------------------------------------------- Gross Profit 665,882 564,319 533,631 Selling and administrative expenses 487,848 398,197 354,454 Provision for closing facilities and reorganization expenses - 19,679 - - ------------------------------------------------------------------------------------------------------------------- Operating Income 178,034 146,443 179,177 - ------------------------------------------------------------------------------------------------------------------- Interest income 1,945 844 1,590 Interest expense 14,015 9,712 10,658 - ------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes 165,964 137,575 170,109 Income taxes 59,747 50,215 63,796 - ------------------------------------------------------------------------------------------------------------------- Net Income $ 106,217 $ 87,360 $ 106,313 - ------------------------------------------------------------------------------------------------------------------- Net Income Per Common Share - Basic & Diluted $1.77 $1.44 $1.72 - -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -34- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Amounts in thousands) AS OF YEAR-END 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 3,181 $ 22,168 $17,500 Short-term investments - - 169 Receivables 211,243 196,730 183,576 Inventories 84,360 74,937 67,225 Deferred income taxes 19,516 13,471 12,477 Prepaid expenses and other current assets 11,841 9,250 9,382 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 330,141 316,556 290,329 Property, Plant, and Equipment 454,312 455,591 444,177 Goodwill 216,371 113,116 108,586 Other Assets 21,646 21,460 21,377 - ------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,022,470 $906,723 $864,469 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable and accrued expenses $ 240,540 $217,110 $198,520 Income taxes 12,067 - 1,921 Note payable and current maturities of long-term debt 10,408 6,106 15,769 Current maturities of other long-term obligations 1,853 1,907 1,228 - ------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 264,868 225,123 217,438 LONG-TERM DEBT 126,093 119,860 128,069 CAPITAL LEASE OBLIGATIONS 2,192 4,313 7,494 OTHER LONG-TERM LIABILITIES 18,749 18,015 18,067 DEFERRED INCOME TAXES 37,226 38,141 31,379 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock 59,797 60,172 61,290 Paid-in capital 17,339 24,981 48,348 Retained earnings 495,796 416,034 351,786 Accumulated other comprehensive income 410 84 598 - ------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 573,342 501,271 462,022 - ------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,022,470 $906,723 $864,469 - -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -35- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands) ACCUMULATED ADDITIONAL RECEIVABLE OTHER TOTAL COMMON PAID-IN FROM CO. RETAINED COMPREHENSIVE SHAREHOLDERS' STOCK CAPITAL ESOP EARNINGS INCOME EQUITY - ---------------------------------------------------------------------------------------------------------------------- Balance, January 3, 1998 $61,659 $55,906 $(1,099) $265,203 $(7) $381,662 Comprehensive Income: Net income 106,313 106,313 Other comprehensive income 605 605 Comprehensive income 106,918 Cash dividends (19,730) (19,730) Common shares -- treasury: Shares purchased (529) (11,672) (12,201) Shares issued under Members Stock Purchase Plan and stock awards 160 4,114 4,274 Principal repaid by HON Members Company Ownership 1,099 1,099 - ---------------------------------------------------------------------------------------------------------------------- Balance, January 2, 1999 61,290 48,348 - 351,786 598 462,022 Comprehensive income: Net income 87,360 87,360 Other comprehensive income (514) (514) Comprehensive income 86,846 Cash dividends (23,112) (23,112) Common shares -- treasury: Shares purchased (1,409) (29,457) (30,866) Shares issued under Members Stock Purchase Plan and stock awards 291 6,090 6,381 - ---------------------------------------------------------------------------------------------------------------------- Balance, January 1, 2000 60,172 24,981 - 416,034 84 501,271 Comprehensive income: Net income 106,217 106,217 Other comprehensive income 326 326 Comprehensive income 106,543 Cash dividends (26,455) (26,455) Common shares -- treasury: Shares purchased (838) (17,135) (17,973) Shares issued under Members Stock Purchase Plan and stock awards 463 9,493 9,956 - ---------------------------------------------------------------------------------------------------------------------- Balance, December 30, 2000 $59,797 $17,339 - $495,796 $410 $573,342
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -36- HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands) FOR THE YEARS 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net income $ 106,217 $ 87,360 $106,313 Noncash items included in net income: Depreciation and amortization 79,046 65,453 52,999 Other postretirement and postemployment benefits 1,572 2,329 1,529 Deferred income taxes (7,213) 6,033 13,816 Other -- net 90 (121) 8 Changes in working capital, excluding acquisition and disposition: Receivables 3,961 (13,154) (24,238) Inventories 6,410 (7,712) (4,286) Prepaid expenses and other current assets (1,616) 391 6,517 Accounts payable and accrued expenses 5,483 19,838 3,959 Income taxes 11,808 (2,178) (7,419) Increase in other liabilities (838) (2,054) (2,406) - ------------------------------------------------------------------------------------------------------------------- Net cash flows from (to) operating activities 204,920 156,185 146,792 - ------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM (TO) INVESTING ACTIVITIES: Capital expenditures -- net (59,840) (71,474) (149,717) Capitalized software (2,192) (3,530) - Acquisition spending, net of cash acquired (134,696) (8,932) (11,470) Principal repaid by HON Members Company Ownership Plan - - 1,099 Short-term investments -- net - 169 91 Other -- net (3) (290) 80 - ------------------------------------------------------------------------------------------------------------------- Net cash flows from (to) investing activities (196,731) (84,057) (159,917) - ------------------------------------------------------------------------------------------------------------------- NET CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Purchase of HON INDUSTRIES common stock (17,973) (30,866) (12,206) Proceeds from long-term debt 155,181 147,055 73,237 Payments of note and long-term debt (147,458) (167,052) (60,079) Proceeds from sale of HON INDUSTRIES common stock to members 9,529 6,515 3,323 Dividends paid (26,455) (23,112) (19,730) - ------------------------------------------------------------------------------------------------------------------- Net cash flows from (to) financing activities (27,176) (67,460) (15,455) - ------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,987) 4,668 (28,580) - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,168 17,500 46,080 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $3,181 $22,168 $17,500 - ------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $13,395 $9,803 $10,867 Income taxes $54,634 $46,822 $56,787 - -------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. -37- HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS HON INDUSTRIES Inc., with its subsidiaries (the Company), is a national manufacturer and marketer of office furniture and hearth products. Both industries are reportable segments; however, the Company's office furniture business is its principal line of business. Refer to the "Operating Segment Information" note for further information. Office furniture products are sold through a national system of dealers, wholesalers, warehouse clubs, retail superstores, and to end-user customers, and federal and state governments. Dealer, wholesaler, and retail superstores are the major channels based on sales. Hearth products include wood-, pellet-, and gas-burning factory-built fireplaces, fireplace inserts, stoves, and gas logs. These products are sold through a national system of dealers, wholesalers, large regional contractors, and Company-owned retail outlets. The Company's products are marketed predominantly in the United States and Canada. The Company exports select products to a limited number of markets outside North America, principally Latin America and the Caribbean, through its export subsidiary; however, based on sales, these activities are not significant. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND FISCAL YEAR-END The consolidated financial statements include the accounts and transactions of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company's fiscal year ends on the Saturday nearest December 31. Fiscal year 2000 ended on December 30, 2000; 1999 ended on January 1, 2000; and 1998 ended on January 2, 1999. CASH AND CASH EQUIVALENTS Cash and cash equivalents generally consist of cash and commercial paper. These securities have original maturity dates not exceeding three months from date of purchase. SHORT-TERM INVESTMENTS Short-term investments are classified as available-for-sale and are highly liquid debt and equity securities. RECEIVABLES Accounts receivables are presented net of an allowance for doubtful accounts of $11,237,000, $3,568,000, and $2,816,000 for 2000, 1999, and 1998, 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. -38- GOODWILL AND PATENTS Goodwill represents the excess of cost over the fair value of net identifiable assets of acquired companies. Goodwill is being amortized on a straight-line basis over 20-40 years. Patents are being amortized on a straight-line basis over their estimated useful lives, which range from 7 to 16 years. Patents are reported by the Company as "Other Assets." 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 30, 2000.
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Goodwill $233,348 $121,846 $113,812 Patents 16,450 16,450 16,450 Less accumulated amortization 23,342 13,585 8,570 --------------------------------------------- $226,456 $124,711 $121,692 - -------------------------------------------------------------------------------------------------------------------
REVENUE RECOGNITION Revenue is recognized upon shipment of goods to customers. PRODUCT DEVELOPMENT COSTS Product development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amounts charged against income were $18,911,000 in 2000, $17,117,000 in 1999, and $15,707,000 in 1998. STOCK-BASED COMPENSATION The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results in no charge to earnings when options are issued at fair market value. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The more significant areas requiring the use of management estimates relate to allowance for receivables, accruals for self-insured medical, workers compensation, and general liability insurance, and useful lives for depreciation and amortization. Actual results could differ from those estimates. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES In 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs," that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent revenues earned for the goods provided and should be classified as revenue. The Company implemented the above EITF consensus effective with the fourth quarter 2000 and has restated prior periods to reflect the change. The adoption of this consensus did not have a material impact on the Company's financial statements. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company intends to adopt this Statement in January 2001 as required by the Statement. Adoption of this Statement is not expected to have a material impact on the Company's financial statements. -39- RECLASSIFICATIONS Certain prior year information has been reclassified to conform to the current year presentation. PROVISION FOR FACILITIES CLOSING AND REORGANIZATION EXPENSES On February 11, 1999, the Company adopted a plan to close three of its office furniture facilities located in Winnsboro, South Carolina; Sulphur Springs, Texas; and Mt. Pleasant, Iowa. A pre-tax charge of $19.7 million or $0.20 per diluted share was recorded during the first quarter of 1999. The charge includes $12.5 million for write-offs of plant and equipment, $2.6 million for severance arising from the elimination of approximately 360 positions, $2.1 million for other employee-related costs, and $2.4 million for certain other expenses associated with the closing of the facilities. The primary costs not yet incurred relate to costs associated with the closed buildings. Management believes the remaining reserve for facilities closing and reorganization expenses to be adequate to cover these obligations. BUSINESS COMBINATIONS On February 29, 2000, the Company completed the acquisition of its Hearth Services division, which consists of two leading hearth products distributors, American Fireplace Company (AFC) and the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry. The Company acquired AFC and Allied for approximately $135 million in cash and debt including acquisition costs. The acquisition has been accounted for using the purchase method, and the results of AFC and Allied have been included in the Company's financial statements since the date of acquisition. The excess of the consideration paid over the fair value of the business of $23 million was recorded as goodwill and is being amortized on a straight-line basis over 20 years. As a result of the acquisition, the Company is in the process of finalizing its integration plan related to incremental exit costs and consolidation activities for acquired locations and activities. These costs which are not associated with the generation of future revenues and have no future economic benefits will be reflected as assumed liabilities in the allocation of purchase price to the net assets acquired. Management expects these amounts to be finalized in the first quarter of 2001. The Company acquired Aladdin Steel Products, Inc. on February 20, 1998, for approximately $10.2 million. Aladdin is a manufacturer of wood-, pellet-, and gas-burning stoves and inserts. Aladdin is being operated by Hearth Technologies Inc., the Company's hearth products subsidiary. The transaction was accounted for under the purchase method. Assuming the acquisition of American Fireplace Company, Allied Group, and Aladdin Steel Products, Inc. had occurred on January 4, 1998, the beginning of the Company's 1998 fiscal year, instead of the actual dates reported above, the Company's pro forma consolidated net sales would have been approximately $2.1 billion, $1.9 billion, and $1.8 billion for 2000, 1999, and 1998, respectively. Pro forma consolidated net income and net income per share for 2000, 1999, and 1998 would not have been materially different than the reported amounts. INVENTORIES
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Finished products $48,990 $29,663 $24,955 Materials and work in process 46,497 55,737 53,320 LIFO allowance (11,127) (10,463) (11,050) ------------------------------------------- $84,360 $74,937 $67,225 - -------------------------------------------------------------------------------------------------------------------
-40- PROPERTY, PLANT, AND EQUIPMENT
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Land and land improvements $18,808 $17,114 $12,156 Buildings 202,189 181,080 144,559 Machinery and equipment 514,293 469,268 411,238 Construction and equipment installation in progress 27,547 37,819 85,782 ------------------------------------------- 762,837 705,281 653,735 Less allowances for depreciation 308,525 249,690 209,558 ------------------------------------------ $454,312 $455,591 $444,177 - ------------------------------------------------------------------------------------------------------------------- ACCOUNTS PAYABLE AND ACCRUED EXPENSES (In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Trade accounts payable $67,540 $77,907 $75,895 Compensation 15,781 10,820 11,450 Profit sharing and retirement expense 25,041 22,705 20,355 Vacation pay 14,560 12,093 11,751 Marketing expenses 65,931 58,832 45,833 Casualty self-insurance expense 12,216 7,428 6,271 Other accrued expenses 39,471 27,325 26,965 -------------------------------------------- $240,540 $217,110 $198,520 - ------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT (In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Industrial development revenue bonds, various issues, payable through 2018 with interest at 3.96-8.125% per annum $23,977 $24,608 $25,293 Note payable to bank, revolving credit agreement with interest at a variable rate (6.6875-6.9625% at year-end 2000)* 46,000 85,000 95,000 Convertible debenture payable to individuals, due in 2003 with interest at 5.5% per annum 53,000 5,074 -- Other notes and amounts 3,116 5,178 7,776 -------------------------------------------- $126,093 $119,860 $128,069 - -------------------------------------------------------------------------------------------------------------------
* THE REVOLVING BANK CREDIT AGREEMENT IS PAYABLE IN THE YEAR 2002 WITH A MAXIMUM BORROWING LIMIT OF $200,000,000. -41- Aggregate maturities of long-term debt are as follows (in thousands): - ------------------------------------------------------------------------------------------------------------------- 2001 $8,287 2002 46,773 2003 53,866 2004 553 2005 558 Thereafter 24,343 - -------------------------------------------------------------------------------------------------------------------
The convertible debenture payable to individuals at the end of 2000 is payable to the former owners of businesses acquired by the Company in 2000. These individuals continue as employees of a subsidiary of the business following the merger. The convertible debenture is convertible into cash. Certain of the above borrowing arrangements include covenants which limit the assumption of additional debt and lease obligations. The Company has been and currently is in compliance with the covenants related to these debt agreements. The fair value of the Company's outstanding long-term debt obligations at year-end 2000 approximates the recorded aggregate amount. Property, plant, and equipment, with net carrying values of approximately $58,940,000 at the end of 2000, are mortgaged. SELLING AND ADMINISTRATIVE EXPENSES
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Freight expense to customer* $137,197 $131,085 $106,453 Amortization of intangible assets 10,679 5,362 4,789 Product development costs 18,911 17,117 15,707 General selling and administrative expense 321,061 244,633 227,505 ------------------------------------------- $487,848 $398,197 $354,454 - -------------------------------------------------------------------------------------------------------------------
* FREIGHT EXPENSE HAS BEEN RESTATED PER EITF ISSUE NO. 00-10. INCOME TAXES Significant components of the provision for income taxes are as follows:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Current: Federal $62,172 $40,744 $44,525 State 3,931 3,046 5,363 ------------------------------------------ 66,103 43,790 49,888 Deferred (6,356) 6,425 13,908 ------------------------------------------ $59,747 $50,215 $63,796 - -------------------------------------------------------------------------------------------------------------------
-42- A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Federal statutory tax rate 35.0% 35.0% 35.0% State taxes, net of federal tax effect 1.5 1.7 2.6 Federal tax credits - - (.1) Other-- net (.5) (.2) - ------------------------------------------- Effective tax rate 36.0% 36.5% 37.5% - -------------------------------------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Net long-term deferred tax liabilities: Tax over book depreciation $(37,509) $(38,133) $(33,118) OPEB obligations 3,157 3,430 3,305 Goodwill (4,183) (2,959) (1,805) Other-- net 1,309 (479) (239) --------------------------------------------- Total net long-term deferred tax liabilities (37,226) (38,141) (31,379) - ------------------------------------------------------------------------------------------------------------------- Net current deferred tax assets: Workers' compensation, general, and product liability accruals 4,183 2,984 2,315 Vacation accrual 4,632 3,492 2,531 Integration accruals (3,205) (3,263) (2,235) Inventory obsolescence reserve 2,404 1,287 1,026 Other-- net 11,502 8,971 8,840 ----------------------------------------- Total net current deferred tax assets 19,516 13,471 12,477 ------------------------------------------- Net deferred tax (liabilities) assets $(17,710) $(24,671) $(18,902) - ------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Common Stock, $1 Par Value Authorized 200,000,000 200,000,000 200,000,000 Issued and outstanding 59,796,891 60,171,753 61,289,618 Preferred Stock, $1 Par Value Authorized 1,000,000 1,000,000 1,000,000 Issued and outstanding - - - - -------------------------------------------------------------------------------------------------------------------
-43- On February 11, 1998, the Company's Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend paid on March 27, 1998, to shareholders of record on the close of business on March 6, 1998. In May 1998, shareholders authorized an increase of capital stock of the Company from 101,000,000 shares to 201,000,000 shares, consisting of 200,000,000 shares of common stock, $1.00 par value, and 1,000,000 shares of preferred stock, $1.00 par value. The Company purchased 837,552, 1,408,624, and 529,284 shares of its common stock during 2000, 1999, and 1998, respectively. The par value method of accounting is used for common stock repurchases. The excess of the cost of shares acquired over their par value is allocated to Paid-In Capital with the excess charged to Retained Earnings. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," as of January 4, 1998, the beginning of its 1998 fiscal year. The Company has changed the format of its consolidated statements of shareholders' equity to present comprehensive income. Components of other comprehensive income (loss) consist of the following:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Foreign currency translation adjustments - net of tax $118 $(79) $42 Change in unrealized gains on marketable securities - net of tax 208 (435) 563 Other comprehensive income (loss) $326 $(514) $605 - -------------------------------------------------------------------------------------------------------------------
In May 1997, the Company registered 400,000 shares of its common stock under its 1997 Equity Plan for Non-Employee Directors, which was approved by shareholders at the May 1997 annual shareholders' meeting. This plan permits the Company to issue to its non-employee directors options to purchase shares of Company common stock, restricted stock of the Company, and awards of Company stock. The plan also permits non-employee directors to elect to receive all or a portion of their annual retainers and other compensation in the form of shares of Company common stock. During 2000, 1999, and 1998, 6,948, 12,758, and 10,664 shares of Company common stock were issued under the plan, respectively. Cash dividends declared and paid per share for each year are:
(In dollars) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Common shares $.44 $.38 $.32 - -------------------------------------------------------------------------------------------------------------------
Pursuant to the 1994 Members Stock Purchase Plan, 1,000,000 shares of the Company's common stock were registered for issuance to participating members. Members who have one year of employment eligibility and work a minimum of 20 hours per week have rights to purchase stock on a quarterly basis. The price of the stock purchased under the plan is 85% of the closing price on the applicable purchase date. No member may purchase stock under the plan in an amount which exceeds the lesser of 20% of his or her gross earnings or 4,000 shares, with a maximum fair market value of $25,000 in any calendar year. An additional 214,047 shares were available for issuance under the plan at December 30, 2000. The effect of the application of adopting Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," was not material to the Company. Shares of common stock were issued in 2000, 1999, and 1998 pursuant to a members stock purchase plan as follows:
2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Shares issued 90,059 115,354 101,108 Average price per share $21.10 $19.16 $23.58 - -------------------------------------------------------------------------------------------------------------------
-44- The Company has a shareholders rights plan which will expire August 20, 2008. The plan becomes operative if certain events occur involving the acquisition of 20% or more of the Company's common stock by any person or group in a transaction not approved by the Company's Board of Directors. Upon the occurrence of such an event, each right entitles its holder to purchase an amount of common stock of the Company with a market value of $400 for $200, unless the Board authorizes the rights be redeemed. The rights may be redeemed for $0.01 per right at any time before the rights become exercisable. In certain instances, the right to purchase applies to the capital stock of the acquirer instead of the common stock of the Company. The Company has reserved preferred shares necessary for issuance should the rights be exercised. The Company has entered into change in control employment agreements with corporate officers and certain other key employees. According to the agreements, a change in control occurs when a third person or entity becomes the beneficial owner of 20% or more of the Company's common stock or when more than one-third of the Company's Board of Directors is composed of persons not recommended by at least three-fourths of the incumbent Board of Directors. Upon a change in control, a key employee is deemed to have a two-year employment with the Company, and all his or her benefits are vested under Company plans. If, at any time within two years of the change in control, his or her position, salary, bonus, place of work, or Company-provided benefits are modified, or employment is terminated by the Company for any reason other than cause or by the key employee for good reason, as such terms are defined in the agreement, then the key employee is entitled to receive a severance payment equal to two times annual salary and the average of the prior two years' bonuses. STOCK OPTIONS Under the Company's 1995 Stock-Based Compensation Plan, as amended and restated effective November 10, 2000, the Company may award options to purchase shares of the Company's common stock and grant other stock awards to executives, managers, and key personnel. The Plan is administered by the Human Resources and Compensation Committee of the Board of Directors. Stock options awarded under the Plan must be at exercise prices equal to or exceeding the fair market value of the Company's common stock on the date of grant. Stock options are generally subject to four-year cliff vesting and must be exercised within 10 years from the date of grant. The Company accounts for executive stock options issued under this Plan using Accounting Principles Board Opinion No. 25, which results in no charge to earnings when options are issued at fair market value. The Company has elected the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." If compensation costs had been determined based on the fair value at the grant dates for awards under this Plan, consistent with SFAS No.123, the impact on net earnings and earnings per share would be less than one cent per share. The weighted-average fair value of options granted during 2000, 1999, and 1998 estimated on the date of grant using the Black-Scholes option-pricing model was $9.25, $10.01, and $15.51, respectively. The fair value of 2000, 1999, and 1998 options granted is estimated on the date of grant using the following assumptions: dividend yield of 0.90% to 1.97%, expected volatility of 31.04% to 35.89%, risk-free interest rate of 4.90% to 6.56%, and an expected life of 10 to 12 years depending on grant date. -45- The status of the Company's stock option plans is summarized below:
Number of Weighted-Average Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------- Outstanding at January 3, 1998 156,000 $24.74 Granted 20,000 32.50 Exercised - - Forfeited - - - ------------------------------------------------------------------------------------------------------------------- Outstanding at January 2, 1999 176,000 $25.62 Granted 328,750 23.47 Exercised - - Forfeited (97,000) 23.86 - ------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 2000 407,750 $24.30 Granted 532,500 20.13 Exercised (22,000) 23.80 Forfeited - - - ------------------------------------------------------------------------------------------------------------------- Outstanding at December 30, 2000 918,250 $21.90 Options exercisable at: December 30, 2000 - - January 1, 2000 - - January 2, 1999 - - - -------------------------------------------------------------------------------------------------------------------
The following table summarizes information about fixed stock options outstanding at December 30, 2000:
Options Options Outstanding Exercisable ------------------- ------------ Weighted- Number Average Weighted- Exercisable Range of Number Remaining Average at December 30, Exercise Prices Outstanding Contractual Life Exercise Price 2000 - ------------------------------------------------------------------------------------------------------------------- $24.50-$28.25 112,000 6.5 years $24.83 0 $32.50 20,000 7.1 years $32.50 0 $23.31-$23.47 253,750 8.1 years $23.47 0 $18.31-$26.69 532,500 9.6 years $20.13 0 - -------------------------------------------------------------------------------------------------------------------
RETIREMENT BENEFITS The Company has defined contribution profit-sharing plans covering substantially all employees who are not participants in certain defined benefit plans. The Company's annual contribution to the defined contribution plans is based on employee eligible earnings and results of operations and amounted to $24,400,000, $21,297,000, and $20,101,000 in 2000, 1999, and 1998, respectively. -46- The Company sponsors defined benefit plans which include a limited number of salaried and hourly employees at certain subsidiaries. The Company's funding policy is generally to contribute annually the minimum actuarially computed amount. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits," as of January 4, 1998, the beginning of its 1998 fiscal year. Net pension costs relating to these plans were $-0-, $-0-, and $-0- for 2000, 1999, and 1998, respectively. The actuarial present value of obligations, less related plan assets at fair value, is not significant. The Company also participates in a multiemployer plan, which provides defined benefits to certain of the Company's union employees. Pension expense for this plan amounted to $308,500, $329,000, and $306,000 in 2000, 1999, and 1998, respectively. In 1992, the Company established a trust to administer a leveraged employee stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company contributions based on employee eligible earnings and dividends on the shares are used to make loan interest and principal payments. As the loan is repaid, shares are distributed to the ESOP trust for allocation to participants. During 1998, the final shares in the Plan were allocated to participants, and the Plan was subsequently merged into the Company's defined contribution profit-sharing plan. Selected financial data pertaining to the ESOP is as follows:
(In thousands, except share data) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Company contribution to ESOP - - $656 Dividend income of ESOP - - 533 Shares of common stock allocated to ESOP participant accounts - - 96,304 Closing market price of common stock as of year-end - - $23.94 - -------------------------------------------------------------------------------------------------------------------
POSTRETIREMENT HEALTH CARE The Company adopted Statement of Financial Accounting Standards (SFAS) No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," as of January 4, 1998. The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," as of January 3, 1993, and recorded the cumulative effect of the accounting change on the deferred recognition basis. -47- The following table sets forth the funded status of the plan, reconciled to the accrued postretirement benefits cost recognized in the Company's balance sheet at:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Reconciliation of benefit obligation Obligation at beginning of year $20,237 $17,341 $15,409 Service cost 182 529 419 Interest cost 882 1,137 1,045 Benefit payments (981) (1,013) (974) Actuarial (gains) losses (5,888) 2,243 1,442 Current year prior service cost (2,203) - - Obligation at end of year $12,229 $20,237 $17,341 - ------------------------------------------------------------------------------------------------------------------- Funded status Funded status at end of year $12,229 $20,237 $17,341 Unrecognized transition obligation (7,103) (9,362) (10,075) Unrecognized prior-service cost (1,813) (2,338) (2,484) Unrecognized gain (loss) 5,457 862 4,031 Net amount recognized $8,770 $9,399 $8,813 - ------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost include: Service cost $182 $529 $419 Interest cost 882 1,137 1,045 Amortization of transition obligation over 20 years 581 713 713 Amortization of prior service cost - 146 146 Amortization of (gains) and losses (539) (629) (767) Net periodic postretirement benefit cost $1,106 $1,896 $1,556 - -------------------------------------------------------------------------------------------------------------------
The discount rates at fiscal year-end 2000, 1999, and 1998 were 8.0%, 7.5%, and 6.75%, respectively. The pre-65 2001 gross trend rates begin at 8.0% for the medical and prescription drug coverages and grade down to 5.0% in six years and remain at this level for all future years. The post-64 gross trend rates begin at 7.25% for the medical coverage and decrease until the maximum Company subsidy (cap) is reached in 2006. For the prescription drug coverage, the 2001 gross trend rates begin at 8.0% and decrease until the cap is reached in 2006. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
(In thousands) 1% Increase 1% Decrease - ------------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components of net periodic postretirement health care benefit cost $54 $(22) Effect on the health care component of the accumulated postretirement benefit obligation $519 $(325) - -------------------------------------------------------------------------------------------------------------------
-48- LEASES The Company leases certain warehouse, plant facilities and equipment. Commitments for minimum rentals under noncancelable leases at the end of 2000 are as follows:
Capitalized Operating (In thousands) Leases Leases - ------------------------------------------------------------------------------------ 2001 $2,398 $13,318 2002 1,078 11,316 2003 211 9,509 2004 211 7,818 2005 211 4,893 Thereafter 1,224 10,584 ---------------------- Total minimum lease payments 5,333 $57,438 ======= Less amount representing interest 1,020 ----- Present value of net minimum lease payments, including current maturities of $2,121,000 $4,313 - --------------------------------------------------------------------------------------
Property, plant, and equipment at year-end include the following amounts for capitalized leases:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Buildings $3,299 $3,299 $3,299 Machinery and equipment 15,805 15,805 15,805 ----------------------------------------- 19,104 19,104 19,104 Less allowances for depreciation 14,655 11,816 8,978 ----------------------------------------- $4,449 $7,288 $10,126 - -------------------------------------------------------------------------------------------------------------------
Rent expense for the years 2000, 1999, and 1998 amounted to approximately $15,428,000, $10,403,000, and $10,150,000, respectively. The Company has operating leases for office and production facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. These individuals continue as officers of a subsidiary of the Company following the merger. Contingent rent expense under both capitalized and operating leases (generally based on mileage of transportation equipment) amounted to $941,000, $755,000, and $596,000 for the years 2000, 1999, and 1998, respectively. CONTINGENCIES The Company is involved in various legal actions which have arisen in the course of business. Management believes the outcome of these matters will not have a material effect on the financial condition or results of operations of the Company. OPERATING SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective with its 1998 fiscal year beginning January 4, 1998. This segment disclosure is essentially unchanged from the format used by the Company historically in complying with SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," and SFAS No. 30, "Disclosures of Information about Major Customers." That is, management views the Company as being in two operating segments: office furniture and hearth products, with the former being the principal segment. -49- The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes file cabinets, desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding office partitions and panel systems, and other related products. The hearth products segment manufactures and markets a broad line of manufactured gas-, pellet-, and wood-burning fireplaces and stoves, fireplace inserts, gas logs, and chimney systems principally for the home. The Company's two operating segments are somewhat seasonal with the third (July-September) and fourth (October-December) fiscal quarters historically having higher sales than the prior quarters. In fiscal 2000, 51% of the Company's consolidated net sales of office furniture were generated in the third and fourth quarters and 54% of consolidated net sales of hearth products were generated in the third and fourth quarters. For purposes of segment reporting, intercompany sales transfers between segments are not material, and operating profit is income before income taxes exclusive of certain unallocated corporate expenses. These unallocated corporate expenses include the net costs of the Company's corporate operations, interest income, and interest expense. Management views interest income and expense as corporate financing costs and not as an operating segment cost. In addition, management applies an effective income tax rate to its consolidated income before income taxes so income taxes are not reported or viewed internally on a segment basis. Identifiable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, and corporate office real estate and related equipment. No geographic information for revenues from external customers or for long-lived assets is disclosed since as the Company's primary market and capital investments are concentrated in the United States. Reportable segment data reconciled to the consolidated financial statements for the years ended 2000, 1999, and 1998 is as follows:
(In thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Net sales: Office furniture $1,649,937 $1,514,991 $1,460,668 Hearth products 396,349 285,940 245,960 ---------------------------------------------- $2,046,286 $1,800,931 $1,706,628 - ------------------------------------------------------------------------------------------------------------------- Operating profit: Office furniture* $171,647 $131,607 $165,314 Hearth products 30,232 34,588 31,478 -------------------------------------------- Total operating profit 201,879 166,195 196,792 Unallocated corporate expenses (35,915) (28,620) (26,683) ------------------------------------------- Income before income taxes $165,964 $137,575 $170,109 - ------------------------------------------------------------------------------------------------------------------- Identifiable assets: Office furniture $638,075 $678,503 $660,626 Hearth products 327,528 174,386 154,817 General corporate 56,867 53,834 49,026 ---------------------------------------------- $1,022,470 $906,723 $864,469 - ------------------------------------------------------------------------------------------------------------------- Depreciation and amortization expense: Office furniture $58,926 $52,483 $42,562 Hearth products 18,109 11,065 9,120 General corporate 2,011 1,905 1,317 ------------------------------------------- $79,046 $65,453 $52,999 - ------------------------------------------------------------------------------------------------------------------- -50- Capital expenditures -- net: Office furniture $39,361 $48,565 $128,482 Hearth products 17,643 16,489 18,162 General corporate 2,836 6,420 3,073 ------------------------------------------ $59,840 $71,474 $149,717 - -------------------------------------------------------------------------------------------------------------------
*1999 INCLUDES A ONE-TIME PRE-TAX CHARGE OF $19.7 MILLION FOR THE CLOSING OF FACILITIES AND REORGANIZATION EXPENSES. One office furniture customer accounted for approximately 14%, 13%, and 12% of consolidated net sales in 2000, 1999, and 1998, respectively. -51- SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following table presents certain unaudited quarterly financial information for each of the past 12 quarters. In the opinion of the Company's management, this information has been prepared on the same basis as the consolidated financial statements appearing elsewhere in this report and includes all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial results set forth herein. Results of operations for any previous quarter are not necessarily indicative of results for any future period.
First Second Third Fourth (In thousands, except per share data) Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------- YEAR-END 2000 (a)(b): Net sales $481,523 $509,649 $535,322 $519,792 Cost of products sold 329,416 343,842 354,367 352,779 --------------------------------------------------- Gross profit 152,107 165,807 180,955 167,013 Selling and administrative expenses 111,214 125,513 124,197 126,924 --------------------------------------------------- Operating income 40,893 40,294 56,758 40,089 Interest income (expense)-- net (2,550) (3,688) (3,303) (2,529) ---------------------------------------------------- Income before income taxes 38,343 36,606 53,455 37,560 Income taxes 13,803 13,188 19,234 13,522 --------------------------------------------------- Net income $24,540 $23,418 $34,221 $24,038 ================================================== Net income per common share $.41 $.39 $.57 $.40 Weighted-average common shares outstanding 60,186 60,145 60,162 60,069 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 31.6 32.5 33.8 32.1 Selling and administrative expenses 23.1 24.6 23.2 24.4 Operating income 8.5 7.9 10.6 7.7 Income taxes 2.9 2.6 3.6 2.6 Net income 5.1 4.6 6.4 4.6 YEAR-END 1999 (a): Net sales $427,660 $422,377 $478,609 $472,285 Cost of products sold 295,222 292,077 327,243 322,070 --------------------------------------------------- Gross profit 132,438 130,300 151,366 150,215 Selling and administrative expenses 92,465 92,454 104,105 109,173 Provision for closing facilities and reorganization expenses 19,679 - - - ---------------------------------------------------- Operating income 20,294 37,846 47,261 41,042 Interest income (expense)-- net (2,045) (2,399) (2,160) (2,264) --------------------------------------------------- Income before income taxes 18,249 35,447 45,101 38,778 Income taxes 6,661 12,938 16,462 14,154 --------------------------------------------------- Net income $11,588 $22,509 $28,639 $24,624 ================================================== Net income per common share $.19 $.37 $.47 $.41 Weighted-average common shares outstanding 61,154 61,169 60,921 60,159 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 31.0 30.8 31.6 31.8 Selling and administrative expenses 21.6 21.9 21.8 23.1 Provision for closing facilities and reorganization expenses 4.6 - - - Operating income 4.7 9.0 9.9 8.7 Income taxes 1.6 3.1 3.5 3.0 Net income 2.7 5.3 6.0 5.2
-52-
YEAR-END 1998 (a)(c): Net sales $420,791 $403,809 $451,320 $430,708 Cost of products sold 291,571 278,107 309,080 294,239 --------------------------------------------------- Gross profit 129,220 125,702 142,240 136,469 Selling and administrative expenses 91,091 85,605 90,803 86,955 ---------------------------------------------------- Operating income 38,129 40,097 51,437 49,514 Interest income (expense)-- net (2,172) (2,691) (2,025) (2,180) ---------------------------------------------------- Income before income taxes 35,957 37,406 49,412 47,334 Income taxes 13,484 14,027 18,530 17,755 --------------------------------------------------- Net income $22,473 $23,379 $30,882 $29,579 ================================================== Net income per common share $.36 $.38 $.50 $.48 Weighted-average common shares outstanding 61,648 61,663 61,691 61,596 AS A PERCENTAGE OF NET SALES Net sales 100.0% 100.0% 100.0% 100.0% Gross profit 30.7 31.1 31.5 31.7 Selling and administrative expenses 21.6 21.2 20.1 20.2 Operating income 9.1 9.9 11.4 11.5 Income taxes 3.2 3.5 4.1 4.1 Net income 5.4 5.8 6.8 6.9
(a) DATA HAS BEEN RESTATED TO INCLUDE SHIPPING AND HANDLING COSTS BILLED TO CUSTOMERS AS REVENUE PER EITF ISSUE NO. 00-10. (b) FIRST QUARTER 2000 INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF AMERICAN FIREPLACE COMPANY AND THE ALLIED GROUP ACQUISITIONS ACQUIRED FEBRUARY 29, 2000. (c) FIRST QUARTER 1998 INCLUDES PARTIAL QUARTERLY RESULTS OF OPERATION OF ALADDIN STEEL PRODUCTS, INC. ACQUISITION ACQUIRED FEBRUARY 20, 1998. -53- INVESTOR INFORMATION COMMON STOCK MARKET PRICES AND DIVIDENDS (UNAUDITED) QUARTERLY 2000 - 1999
2000 by Dividends Quarter High Low per Share - ------------------------------------------------------------------------------------------------------------------- 1st $25 3/4 $15 9/16 $.11 2nd 27 7/8 23 .11 3rd 27 7/8 23 3/16 .11 4th 27 1/8 21 .11 --- Total Dividends Paid $.44 ===
1999 by Dividends Quarter High Low per Share - ------------------------------------------------------------------------------------------------------------------- 1st $24 1/2 $19 3/4 $.095 2nd 29 7/8 21 5/8 .095 3rd 28 1/8 19 1/16 .095 4th 23 3/4 18 3/4 .095 ---- Total Dividends Paid $ .38 =====
COMMON STOCK MARKET PRICE AND PRICE/EARNINGS RATIO (UNAUDITED) FISCAL YEARS 2000 - 1990
Market Price* Price/earnings Ratio ------------------------- -------------------------- Earnings per Year High Low Share* High Low - ---- ---- --- ------ ---- --- 2000 27 7/8 15 9/16 1.77 16 9 1999 29 7/8 18 3/4 1.44 21 13 1998 37 3/16 20 1.72 22 12 1997 32 1/8 15 7/8 1.45 22 11 1996 21 3/8 9 1/4 1.13 19 8 1995 15 5/8 11 1/2 .67 23 17 1994 17 12 .87 20 14 1993 14 5/8 10 3/4 .70 21 15 1992 11 3/4 8 1/4 .59 20 14 1991 10 1/4 6 5/8 .51 20 13 1990 11 1/2 6 3/4 .65 18 10 -- -- Eleven-Year Average 20 12 - -------------------------------------------------------------------------------------------------------------------
*ADJUSTED FOR THE EFFECT OF STOCK SPLITS -54- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders HON INDUSTRIES Inc. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The valuation and qualifying accounts as of and for the three fiscal years ended December 30, 2000; January 1, 2000; and January 2, 1999, are presented for the purpose of additional analysis and are not a required part of the consolidated financial statements of HON INDUSTRIES Inc. Such information has been subjected to the auditing procedures applied in our audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois February 5, 2001 -55- SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS HON INDUSTRIES INC. AND SUBSIDIARIES DECEMBER 30, 2000
- ---------------------------------------------------------------- -------------------------------------------- ---------------------- COL. A COL. B COL. C COL. D COL. E - ---------------------------------------------------------------- -------------------------------------------- ---------------------- ADDITIONS - ---------------------------------------------------------------- ---------------------- --------------------- ---------------------- DESCRIPTION BALANCE AT (1) (2) DEDUCTIONS BALANCE AT BEGINNING OF CHARGED TO CHARGED TO (DESCRIBE) END OF PERIOD PERIOD COSTS AND OTHER EXPENSES ACCOUNTS (DESCRIBE) - ---------------------------------------------------------------- ---------------------- --------------------------------- -------- (In thousands) Reserves deducted in the consolidated balance sheet from the assets to which they apply: Year ended December 30, 2000: Allowance for doubtful accounts $3,568 $8,726 $1,057 (A) $11,237 ====== ====== ====== ======= Year ended January 1, 2000: Allowance for doubtful accounts $2,816 $2,114 $1,362 (A) $3,568 ====== ====== ====== ====== Year ended January 2, 1999: Allowance for doubtful accounts $3,277 $1,288 $1,749 (A) $2,816 ====== ====== ====== ======
Note A: Excess of accounts written off over recoveries ITEM 14(a)(3) - INDEX OF EXHIBITS EXHIBIT NUMBER DESCRIPTION OF DOCUMENT (3i) Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3(i) to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 (3ii) By-Laws of the Registrant, incorporated by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-K for the year ended December 30, 2000 (4i) Rights Agreement dated as of August 13, 1998, by and between the Registrant and Harris Trust and Savings Bank, as Rights Agent, incorporated by reference to Exhibit 4.1 to Registration Statement on Form 8-A filed August 14, 1998, as amended by Form 8-A/A filed September 14, 1998, incorporated by reference to Exhibit 4.1 on Form 8-K filed August 10, 1998 (10i) 1995 Stock-Based Compensation Plan, as amended effective November 10, 2000, incorporated by reference to Exhibit 10(i) to the Registrant's Annual Report on Form 10-K for the year ended December 30, 2000 (10ii) 1997 Equity Plan for Non-Employee Directors, incorporated by reference to Exhibit B to the Registrant's proxy statement dated March 28, 1997, related to the Registrant's Annual Meeting of Shareholders held on May 13, 1997 (10iii) Form of Registrant's Change in Control Agreement, incorporated by reference to Exhibit 10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 (10iv) Executive Long-Term Incentive Compensation Plan of the Registrant, incorporated by reference to Exhibit 99B to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995 (10v) ERISA Supplemental Retirement Plan of the Registrant, incorporated by reference to Exhibit 99C to the Registrant's Annual Report on Form 10-K for the year ended December 30, 1995 (10vi) 1994 Members Stock Purchase Plan of the Registrant, incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement No. 33-54163 on Form S-8 filed June 16, 1994 (10vii) Agreement as Consultant and Director, dated November 15, 1995, between the Registrant and Robert L. Katz, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10viii) Form of Director and Officer Indemnification Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10ix) Form of Common Stock Grant Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10x) Form of HON INDUSTRIES Inc. Stock-Based Compensation Plan Stock Option Award Agreement of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 28, 1996 (10xi) Stock Purchase Agreement of the Registrant, dated September 18, 1985, as amended by amendment dated February 11, 1991, between the Registrant and Stanley M. Howe, incorporated by reference to Exhibit 10(xi) to the Registrant's Annual Report on Form 10-K for the year ended January 3, 1998 (10xii) Real Estate Contract of the Registrant, dated November 15, 1997, between the Registrant and Terrence L. and Loretta B. Mealy, incorporated by reference to Exhibit 10(xii) to the Registrant's Annual Report on Form 10-K for the year ended January 3, 1998 (10xiii) $200,000,000 Credit Agreement, dated June 11, 1997; First Amendment to Credit Agreement and Waiver, dated October 20, 1997; and Second Amendment to Credit Agreement, dated January 18, 2000, by and between the Registrant and Bankers Trust Company, as Syndication Agent and Administrative Agent, and various lending institutions, incorporated by reference to Exhibit 10(xiii) to the Registrant's Annual Report on Form 10-K for the year ended January 1, 2000 (10xiv) HON INDUSTRIES Inc. Profit-Sharing Retirement Plan of the Registrant incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement No. 333-31366 on Form S-8 filed February 29, 2000 (10xv) HON INDUSTRIES Inc. Long-Term Performance Plan of the Registrant, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (16) Letter of Former Accountant, incorporated by reference to the Registrant's Report on Form 8-K dated May 14, 1996 (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (99A) Executive Bonus Plan of the Registrant as amended and restated on May 1, 2000, incorporated by reference to the same numbered exhibit filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 1, 2000 (99B) Executive Deferred Compensation Plan of the Registrant as amended and restated on November 10, 2000, incorporated by reference to the same numbered exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 -58- EX-3.II 2 a2042271zex-3_ii.txt EX-3II EXHIBIT 3ii BY-LAWS OF HON INDUSTRIES Inc. Adopted on September 7, 1960. Amended on April 23, 1964, April 28, 1966, August 13, 1969, April 15, 1970, February 12, 1976, July 23, 1976, January 11, 1977, February 13, 1977, April 18, 1977, July 28, 1977, July 29, 1977, October 27, 1977, February 27, 1978, February 19, 1979, August 1, 1979, March 3, 1980, April 30, 1980, October 29, 1980, August 3, 1982, January 31, 1983, October 31, 1983, October 30, 1984, February 5, 1985, May 6, 1985, February 4, 1986, August 5, 1986, February 15, 1988, July 7, 1988, March 13, 1990, February 11, 1991, April 29, 1991, July 29, 1991, May 5, 1992, November 2, 1992, May 11, 1993, February 14, 1994, May 10, 1994, November 13, 1995, May 14, 1996, May 12, 1997, March 4, 1998, July 29, 1998 and November 10, 2000. ARTICLE 1. OFFICES AND PLACES OF BUSINESS SECTION 1.01. PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Corporation shall be located in such place, within or without the State of Iowa, as shall be fixed by or pursuant to authority granted by the Board of Directors from time to time. SECTION 1.02. REGISTERED OFFICE. The registered office of the Corporation required by the Iowa Business Corporation Act to be maintained in the State of Iowa may be, but need not be, the same as its principal place of business. The registered office may be changed from time to time by the Board of Directors as provided by law. SECTION 1.03. OTHER PLACES. The Corporation may conduct its business, carry on its operations, have offices, carry out any or all of its purposes, and exercise any or all of its powers anywhere in the world, within or without the State of Iowa. ARTICLE 2. SHAREHOLDERS SECTION 2.01. ANNUAL MEETING. The annual meeting of the shareholders shall be held in each year at such time and place as shall be fixed by the Board of Directors or by the Chairman of the Board of Directors; provided, however, that the annual meeting shall not be scheduled on a legal holiday in the state where held. Any previously scheduled annual meeting may be postponed by resolution of the Board of Directors and on public notice given prior to the date previously scheduled for such annual meeting. At the annual meeting, the shareholders shall elect Directors as provided in Section 3.02 and may conduct any other business properly brought before the meeting. (As amended 4/23/64, 8/1/79, 10/31/83, and 4/29/91.) SECTION 2.02. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes, may be called, and the time and place thereof fixed by the Board of Directors or by the holders of not less than one-tenth of the outstanding shares entitled to vote at the meeting. Business conducted at any special meeting of shareholders shall be limited to the purposes stated in the notice of the meeting. Any previously scheduled special meeting of shareholders may be postponed by resolution of the Board of Directors and public notice given prior to the date previously scheduled for such special meeting of shareholders. (As amended 4/23/64, 8/1/79, and 4/29/91.) SECTION 2.03. PLACE OF SHAREHOLDERS' MEETINGS. Any annual meeting or special meeting of shareholders may be held at any place, either within or without the State of Iowa. The place of each meeting of shareholders shall be fixed as provided in these By-laws, or by a waiver or waivers of notice fixing the place of such meeting and signed by all shareholders entitled to vote at such meeting. If no designation is made of the place of a meeting of shareholders, the place of meeting shall be the registered office of the Corporation in the State of Iowa. SECTION 2.04. NOTICE OF SHAREHOLDERS' MEETINGS. Written or printed notice stating the place, day, and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten days (unless a longer period shall be required by law) nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. (As amended 4/29/91.) SECTION 2.05. CLOSING OF TRANSFER BOOKS; FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, seventy days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least fifteen days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than seventy days and, in case of a meeting of shareholders, not less than fifteen days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the Board of Directors does not provide that the stock transfer books shall be closed and does not fix a record date for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the record date for such determination of shareholders shall be seventy days prior to the date fixed for such meeting or seventy days prior to the date of payment of such dividend, as the case may be. When any record date is fixed for any determination of shareholders such determination of shareholders shall be made as of the close of business on the record date. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof. (As amended 4/30/80, 8/3/82 and 4/29/91.) SECTION 2.06. VOTING LIST. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least ten days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten days prior to such meeting shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. Failure to comply with the requirements of this Section shall not affect the validity of any action taken at such meeting. (As amended 4/29/91.) SECTION 2.07. QUORUM OF SHAREHOLDERS. Except as otherwise expressly provided by the Articles of Incorporation or these By-laws, a majority of the outstanding common shares entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. SECTION 2.08. ADJOURNED MEETINGS. Any meeting of shareholders may be adjourned from time to time and to any place, without further notice, by the chairman of the meeting or by the affirmative vote of the holders of a majority of the outstanding common shares entitled to vote and represented at the meeting, even if less than a quorum. At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. (As amended 4/29/91.) SECTION 2.09. VOTE REQUIRED FOR ACTION. The vote required for the adoption of any motion or resolution or the taking of any action at any meeting of shareholders shall be as provided in the Articles of Incorporation. However, action may be taken on the following procedural matters by the affirmative vote of the holders of a majority of the outstanding common shares entitled to vote and represented at the meeting, even if less than a quorum: election or appointment of a Chairman or temporary Secretary of the meeting (if necessary), or adoption of any motion to adjourn or recess the meeting or any proper amendment of any such motion. Whenever the minutes of any meeting of shareholders shall state that any motion or resolution was adopted or that any action was taken at such meeting of shareholders, such minutes shall be prima facie evidence that such motion or resolution was duly adopted or that such action was duly taken by the required vote, and such minutes need not state the number of shares voted for and against such motion, resolution, or action. SECTION 2.10. PROXIES. At all meetings of shareholders, a shareholder entitled to vote may vote either in person or by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Each such proxy shall be filed with the Secretary of the Corporation or the person acting as Secretary of the meeting, before or during the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. SECTION 2.11. SHAREHOLDERS' VOTING RIGHTS. Each outstanding share entitled to vote shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except as otherwise provided in the Articles of Incorporation. Voting rights for the election of Directors shall be as provided in Section 3.02 and in the Articles of Incorporation. (As amended 2/12/76.) SECTION 2.12. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent, or proxy as the By-laws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so be contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Treasury shares shall not be voted at any meeting or counted in determining the total number of outstanding shares at any given time. SECTION 2.13. ORGANIZATION. The Chairman of the Board of Directors or the Vice-Chairman or the President or a Vice-President, as provided in these By-laws, shall preside at each meeting of shareholders; but if the Chairman of the Board of Directors, the Vice-Chairman, the President, and each Vice-President shall be absent or refuse to act, the shareholders may elect or appoint a Chairman to preside at the meeting. The Secretary or an Assistant Secretary, as provided in these By-laws, shall act as Secretary of each meeting of shareholders; but if the Secretary and each Assistant Secretary shall be absent or refuse to act, the shareholders may elect or appoint a temporary Secretary to act as Secretary of the meeting. (As amended 4/23/64 and 8/1/79.) SECTION 2.14. WAIVER OF NOTICE BY SHAREHOLDERS. Whenever any notice whatsoever is required to be given to any shareholder of the Corporation under any provision of law or the Articles of Incorporation or these By-laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether signed before or after the time of the meeting or event of which notice is required, shall be deemed equivalent to the giving of such notice. Neither the business to be conducted at, nor the purpose of, any annual or special meeting of shareholders need be specified in any waiver of notice of such meeting. The attendance of any shareholder, in person or by proxy, at any meeting of shareholders shall constitute a waiver by such shareholder of any notice of such meeting to which such shareholder would otherwise be entitled, and shall constitute consent by such shareholder to the place, day, and hour of such meeting and all business which may be conducted at such meeting, unless such shareholder attends such meeting and objects at such meeting to any business conducted because the meeting is not lawfully called or convened. (As amended 4/29/91.) SECTION 2.15. POSTPONEMENT OF SHAREHOLDERS' MEETINGS. Any meeting of the shareholders may be postponed prior to the record date by the Board of Directors or by the Chairman. Written or printed notice of the postponement shall be delivered not less than 10 days nor more than 60 days before the date set for the meeting, either personally or by mail to each shareholder of record entitled to vote. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his or her address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. (As adopted 2/11/91.) SECTION 2.16. NOTICE OF SHAREHOLDER BUSINESS AND NOMINATIONS. (a) ANNUAL MEETING OF SHAREHOLDERS. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors, or (iii) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this By-law, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this By-law. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to Subsection 2.15(a)(1)(iii), the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than sixty days nor more than ninety days prior to the first anniversary of the preceding year's annual meeting of shareholders; provided, however, that, if the date of the annual meeting is advanced by more than thirty days or delayed by more than sixty days from such anniversary date, notice by the shareholder, to be timely, must be so delivered not earlier than ninety days prior to such annual meeting and not later than the close of business on the later of the sixtieth day prior to such annual meeting or the tenth day following the date on which public announcement of the date of such meeting is first made. Such shareholder's notice shall set forth: (i) as to each person whom the shareholder proposes to nominate for election or reelection as a Director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected; (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest of such shareholder in such business and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, the name and address of such shareholder and of such beneficial owner as they appear on the Corporation's books, and the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of Subsection 2.15(a)(2) to the contrary, if the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all the nominees for Director or specifying the size of the increased Board of Directors at least seventy days prior to the first anniversary of the preceding year's annual meeting of shareholders, a shareholder's notice required by this By-law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the date on which such public announcement is first made by the Corporation. (b) SPECIAL MEETINGS OF SHAREHOLDERS. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which Directors are to be elected pursuant to the Corporation's notice of meeting (1) by or at the direction of the Board of Directors or (2) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this By-law, who is entitled to vote at the meeting, and who complies with the notice procedures set forth in this By-law. Nominations by shareholders of persons for election to the Board of Directors may be made at such a special meeting of shareholders if the shareholder's notice required by Subsection 2.15(a)(2) is delivered to the Secretary at the principal executive offices of the Corporation no earlier than ninety days prior to such special meeting and not later than the close of business on the later of the sixtieth day prior to such special meeting or the tenth day following the date on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) GENERAL. (1) Only persons who are nominated in accordance with the procedures set forth in this By-law shall be eligible to serve as Directors, and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in these By-laws. Except as otherwise provided by law, the Articles of Incorporation, or the By-laws of the Corporation, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in these By-laws and, if any proposed nomination or business is not in compliance with these By-laws, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-law, "public announcement" means disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-law. Nothing in this By-law shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. (As adopted 4/19/91.) ARTICLE 3. BOARD OF DIRECTORS SECTION 3.01. GENERAL POWERS. The business and affairs of the Corporation shall be managed by its Board of Directors. The Board of Directors may exercise all such powers of the Corporation and may do all such lawful acts and things as are not by law or the Articles of Incorporation or these By-laws expressly required to be exercised or done by the shareholders. SECTION 3.02. ELECTION OF DIRECTORS. Subject to the Articles of Incorporation, the common shareholders shall elect one class of Directors at each annual meeting of shareholders. At each election of Directors, each common shareholder entitled to vote shall have the right to vote, in person or by proxy, the number of common shares owned by him and entitled to vote, for as many persons as the number of the class to be elected. Cumulative voting shall not be permitted. The election of Directors may be conducted by written ballot, but need not be conducted by written ballot unless required by a rule or motion adopted by the shareholders. (As amended 2/12/76.) SECTION 3.03. NUMBER, TERMS, CLASSIFICATION, AND QUALIFICATIONS. Subject to the Articles of Incorporation: (a) The number of Directors shall be eleven. (As amended 10/29/80, 1/31/83, 2/5/85, 8/5/86, 3/13/90, 5/5/92, 11/2/92, 5/11/93, 2/14/94, 5/10/94, 11/13/95, 5/14/96, 3/4/98 and 7/29/98.) (b) The Directors shall be divided into three classes, each of which shall be as nearly equal in number as possible. The term of office of one class shall expire in each year. At each annual meeting of the shareholders a number of Directors equal to the number of the class whose term expires at the annual meeting shall be elected for a term ending when Directors are elected at the third succeeding annual meeting. Section 6.03 of the Articles of Incorporation shall apply if there is a failure in any one or more years to elect one or more Directors or to elect any class of Directors. (As amended 2/4/86.) (c) The number of Directors may be increased or decreased from time to time by amendment of this Section, but no decrease shall have the effect of shortening the term of any incumbent Director. Any new Directorships shall be assigned to classes, and any decrease in the number of Directors shall be scheduled, in such a manner that the three classes of Directors shall be as nearly equal in number as possible. (d) The term of each Director shall begin at the time of his election. Unless sooner removed as provided in the Articles of Incorporation or elected to fill a vacancy with a shorter unexpired term pursuant to Section 3.04, each Director shall serve for a term ending when Directors are elected at the third succeeding annual meeting of shareholders. However, any Director may resign at any time by delivering his written resignation to the Chairman, Vice-Chairman, President, or Secretary of the Corporation. The resignation shall take effect immediately upon delivery, unless it states a later effective date. (As amended 8/1/79.) (e) Directors need not be residents of the State of Iowa or shareholders of the Corporation. (As amended 4/23/64, 4/15/70, 2/12/76, 7/23/76, 1/11/77, 4/18/77, 7/28/77, 7/29/77, 2/27/78, and 2/4/86.) SECTION 3.04. VACANCIES IN BOARD. Any vacancy occurring in the Board of Directors for any reason, and any Directorship to be filled by reason of an increase in the number of Directors, may be filled by the affirmative vote of a majority of the Directors then in office even if less than a quorum (notwithstanding Sections 3.09 and 3.11). Except as otherwise provided in Section 6.03 of the Articles of Incorporation, a Director elected as provided in this Section shall be elected for the unexpired term of his predecessor in office or the unexpired term of the class of Directors to which his new Directorship is assigned. However, if a Director is elected to fill a vacancy caused by the resignation of a predecessor whose resignation has not yet become effective, the new Director's term shall begin when his predecessor's resignation becomes effective. (As amended 4/23/64 and 2/12/76.) SECTION 3.05. REGULAR MEETINGS. A regular meeting of the Board of Directors may be held without notice other than this Section, promptly after and at the same place as each annual meeting of shareholders. Other regular meetings of the Board of Directors may be held at such time and at such places as shall be fixed by (or pursuant to authority granted by) resolution or motion adopted by the Board of Directors from time to time, without notice other than such resolution or motion. However, unless both the time and place of a regular meeting shall be fixed by the Board of Directors, notice of such meeting shall be given as provided in Section 3.08. SECTION 3.06. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called, and the time and place thereof fixed, by the Chairman of the Board of Directors or the Vice-Chairman or the President or the Secretary or by a majority of the Directors then in office. (As amended 4/23/64 and 8/1/79.) SECTION 3.07. PLACE OF MEETINGS. Any regular meeting or special meeting of the Board of Directors may be held at any place, either within or without the State of Iowa. The place of each meeting of the Board of Directors shall be fixed as provided in these By-laws, or by waiver or waivers of notice fixing the place of such meeting and signed by all Directors then in office. If no designation is made of the place of a meeting of the Board of Directors, the place of meeting shall be the registered office of the Corporation in the State of Iowa. SECTION 3.08. NOTICE OF SPECIAL MEETINGS. Written or printed notice stating the place, day, and hour of a special meeting of the Board of Directors shall be delivered before the time of the meeting, either personally or by mail or by telegram, by or at the direction of the President, the Secretary, or the officer or persons calling the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the Director at his address as it appears on the records of the Corporation, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company, addressed to the Director at his address as it appears on the records of the Corporation. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice of such meeting. (As amended 7/7/88.) SECTION 3.09. QUORUM. Except as otherwise expressly provided by the Articles of Incorporation or these By-laws, a majority of the number of Directors fixed by these By-laws shall constitute a quorum at any meeting of the Board of Directors. SECTION 3.10. ADJOURNED MEETINGS. Any meeting of the Board of Directors may be adjourned from time to time and to any place, without further notice, by the affirmative vote of a majority of the Directors present at the meeting, even if less than a quorum. At any adjourned meeting at which a quorum shall be present, any business may be conducted which might have been transacted at the meeting as originally notified. (As amended 4/29/91.) SECTION 3.11. VOTE REQUIRED FOR ACTION. Except as otherwise provided in these By-laws, the affirmative vote of a majority of the number of Directors fixed by these By-laws shall be required for and shall be sufficient for the adoption of any motion or resolution or the taking of any action at any meeting of the Board of Directors. However, the following actions may be taken by the affirmative vote of a majority of the Directors present at the meeting, even if less than a quorum: election or appointment of a Chairman or temporary Secretary of the meeting (if necessary), or adoption of any motion to adjourn or recess the meeting or any proper amendment of any such motion. Whenever the minutes of any meeting of the Board of Directors shall state that any motion or resolution was adopted or that any action was taken at such meeting of the Board of Directors, such minutes shall be prima facie evidence that such motion or resolution was duly adopted or that such action was duly taken by the required vote, and such minutes need not state the number of Directors voting for and against such motion, resolution, or action. SECTION 3.12. VOTING. Each Director (including, without limiting the generality of the foregoing, any Director who is also an officer of the Corporation and any Director presiding at a meeting) may vote on any question at any meeting of the Board of Directors, except as otherwise expressly provided in these By-laws. (As amended 4/23/64.) SECTION 3.13. ORGANIZATION. The Chairman of the Board of Directors or the Vice-Chairman or the President or a Vice-President, as provided in these By-laws, shall preside at each meeting of the Board of Directors; but if the Chairman of the Board of Directors, the Vice-Chairman, the President, and each Vice-President shall be absent or refuse to act, the Board of Directors may elect or appoint a Chairman to preside at the meeting. The Secretary or an Assistant Secretary, as provided in these By-laws, shall act as Secretary of each meeting of the Board of Directors; but if the Secretary and each Assistant Secretary shall be absent or refuse to act, the Board of Directors may elect or appoint a temporary Secretary to act as Secretary of the meeting. (As amended 4/23/64 and 8/1/79.) SECTION 3.14. RULES AND ORDER OF BUSINESS. The Board of Directors may adopt such rules and regulations, not inconsistent with applicable law or the Articles of Incorporation or these By-laws, as the Board of Directors deems advisable for the conduct of its meetings. Except as otherwise expressly required by law or the Articles of Incorporation or these By-laws or such rules or regulations, meetings of the Board of Directors shall be conducted in accordance with Robert's Rules of Order, Revised (as further revised from time to time). Unless otherwise determined by the Board of Directors, the order of business at the first meeting of the Board of Directors held after each annual meeting of shareholders, and at other meetings of the Board of Directors to the extent applicable, shall be as follows: (1) Roll call or other determination of attendance and quorum. (2) Proof of notice of meeting. (3) Reading and action upon minutes of preceding meeting and any other unapproved minutes. (4) Report of President. (5) Reports of other officers and committees. (6) Election of officers. (7) Unfinished business. (8) New business. (9) Adjournment. Failure to comply with the requirements of this Section shall not affect the validity of any action taken at any meeting unless (a) specific and timely objection is made at the meeting and (b) the person complaining thereto sustains direct and material damage by reason of such failure. SECTION 3.15. PRESUMPTION OF ASSENT. A Director of the Corporation who is present at a meeting of the Board of Directors or a committee thereof at which action on any corporate matter is taken, shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. SECTION 3.16. WAIVER OF NOTICE BY DIRECTORS. Whenever any notice whatsoever is required to be given to any Director of the Corporation under any provision of law or the Articles of Incorporation or these By-laws, a waiver thereof in writing signed by the Director or Directors entitled to such notice, whether signed before or after the time of the meeting or event of which notice is required, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in any waiver of notice of such meeting. The attendance of any Director at any meeting of the Board of Directors shall constitute a waiver by such Director of any notice of such meeting to which such Director would otherwise be entitled, and shall constitute consent by such Director to the place, day, and hour of such meeting and all business which may be conducted at such meeting, unless such Director attends such meeting and objects at such meeting to any business conducted because the meeting is not lawfully called or convened. (As amended 4/29/91.) SECTION 3.17. INFORMAL ACTION BY DIRECTORS. Any action required by law or the Articles of Incorporation or these By-laws to be taken by vote of or at a meeting of the Board of Directors, or any action which may or could be taken at a meeting of the Board of Directors (or of a committee of Directors), may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the Directors then in office (or all of the members of such committee, as the case may be). Such consent shall have the same force and effect as unanimous vote. The signing by each such Director (or by each member of such committee) of any one of several duplicate originals or copies of the instrument evidencing such consent shall be sufficient. The written instrument or instruments evidencing such consent shall be filed with the Secretary, and shall be kept by the Secretary as part of the minutes of the Corporation. Such action shall be deemed taken on the date of such written instrument or instruments as stated therein, or on the date of such filing with the Secretary, whichever of such two dates occurs first. (As amended 4/23/64.) SECTION 3.18. COMMITTEES. The Board of Directors, by resolution adopted by the affirmative vote of a majority of the number of Directors fixed by Section 3.03, may designate one or more committees (including, without limiting the generality of the foregoing, an Executive Committee). Each committee shall consist of two or more Directors elected or appointed by the Board of Directors. To the extent provided in such resolution as initially adopted and as thereafter supplemented or amended by further resolution adopted by a like vote, any such committee shall have and may exercise, when the Board of Directors is not in session, all the authority and powers of the Board of Directors. However, no committee shall have or exercise any authority prohibited by law. No member of any committee shall continue to be a member thereof after he ceases to be a Director of the Corporation. Unless otherwise ordered by the Board of Directors, the affirmative vote or consent in writing of all members of a committee shall be required for the adoption of any motion or resolution or the taking of any action by any such committee, except that an alternate member may take the place of any absent member to the extent hereinafter provided. The Board of Directors may elect or appoint one or more Directors as alternate members of any such committee. Any such alternate member may take the place of any absent member, upon request by the Chairman of the Board of Directors or the Vice-Chairman or the President or the Chairman of such committee. The vote or consent in writing of such alternate member in the absence of such member shall have the same effect as the vote or consent in writing of such member. (As amended 8/1/79.) The Board of Directors may at any time increase or decrease the number of members of any committee, fill vacancies therein, remove any member thereof, adopt rules and regulations therefor, or change the functions or terminate the existence thereof. The designation of any committee and the delegation thereto of authority shall not operate to relieve the Board of Directors or any Director of any responsibility imposed by law. (As amended 4/23/64.) SECTION 3.19. COMPENSATION. The Board of Directors may fix or provide for reasonable compensation of any or all Directors for services rendered to the Corporation as Directors, officers, or otherwise, including, without limiting the generality of the foregoing, payment of expenses of attendance at meetings of the Board of Directors or committees, payment of a fixed sum for attendance at each meeting of the Board of Directors or a committee, salaries, bonuses, pensions, pension plans, pension trusts, profit-sharing plans, stock bonus plans, stock option plans (subject to approval of the shareholders if required by law), and other incentive, insurance, and welfare plans, whether or not on account of prior services rendered to the Corporation. No such compensation shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE 4. OFFICERS SECTION 4.01. NUMBER AND DESIGNATION. The officers of the Corporation shall be a Chairman of the Board of Directors, a Vice-Chairman, a President, one or more Vice-Presidents, a Secretary, a Treasurer, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board of Directors deems advisable. (As amended 4/23/64 and 8/1/79.) SECTION 4.02. ELECTION OR APPOINTMENT OF OFFICERS. At the first meeting of the Board of Directors held after each annual meeting of shareholders, the Board of Directors shall elect the officers specifically referred to in Section 4.01, shall appoint certified public accountants to perform the annual audit, and shall elect or appoint such other officers and agents as the Board deems advisable. If in any year the election of officers does not take place at such meeting, such election shall be held as soon thereafter as may be convenient. In addition, the Board of Directors may from time to time elect, appoint, or authorize any officer to appoint such other officers and agents as the Board deems advisable. Any election may be conducted by ballot, but need not be conducted by ballot unless required by a rule, regulation, or motion adopted by the Board of Directors. (As amended 3/3/80.) SECTION 4.03. TENURE AND QUALIFICATIONS. Each officer, unless sooner removed as provided in Section 4.04, shall hold office until his successor shall be elected or appointed and shall qualify. However, any officer may resign at any time by filing his written resignation with the President or Secretary of the Corporation; and such resignation shall take effect immediately upon such filing, unless a later effective date is stated therein. Officers need not be residents of the State of Iowa or Directors or shareholders of the Corporation. Any two or more offices may be held by the same person. SECTION 4.04. REMOVAL. Any officer or agent of the Corporation may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. SECTION 4.05. VACANCIES. Any vacancy occurring in any office for any reason may be filled by the Board of Directors. SECTION 4.06. DUTIES AND POWERS OF OFFICERS. Except as otherwise expressly provided by law or the Articles of Incorporation or these By-laws, the duties and powers of all officers and agents of the Corporation shall be determined and defined from time to time by the Board of Directors. Unless otherwise determined by the Board of Directors, the officers referred to in the following Sections shall have the duties and powers set forth in the following Sections, in addition to all duties and powers of such officers prescribed by law or by the Articles of Incorporation or other provisions of these By-laws. However, the Board of Directors may from time to time alter, add to, limit, transfer to another officer or agent, or abolish any or all of the duties and powers of any officer or agent of the Corporation (including, without limiting the generality of the foregoing, the duties and powers set forth in the following Sections and in other provisions of these By-laws). Any person who holds two or more offices at the same time may perform or exercise any or all of the duties and powers of either or both of such offices in either or both of such capacities. SECTION 4.07. CHAIRMAN OF THE BOARD OF DIRECTORS; VICE-CHAIRMAN; PRESIDENT. (a) The Chairman of the Board of Directors shall preside at all meetings of Shareholders and of the Board of Directors. He shall be responsible for making recommendations concerning Board policies and committees, shall maintain Board liaison with the President, and, when required, because of the inability of the President to act or otherwise, shall have the same powers as the President on behalf of the Corporation. He may from time to time, unless otherwise ordered by the Board, authorize or direct the Vice-Chairman or President to perform any of the duties or exercise any of the powers of the Chairman. (As amended 10/27/77, 10/30/84, 2/15/88, and 7/29/91.) (b) The Vice-Chairman shall preside at meetings of the shareholders or of the Board in the absence of the Chairman. He shall also perform such other duties as the Chairman may authorize or direct. (As amended 7/29/91.) (c) The President shall be the chief executive officer of the Corporation and, subject to the control of the Board, shall supervise, control, and manage all of the business affairs of the Corporation. He shall report to the Chairman when the Board is not in session. In the absence of the Chairman and Vice-Chairman, the President shall preside at meetings of shareholders and of the Board. Unless otherwise ordered by the Board, the President (1) may employ, appoint and discharge such employees, agents, attorneys and accountants (except the certified public accountants appointed by the Board pursuant to Section 4.02) for the Corporation as he deems necessary or advisable, and shall prescribe their authority, duties, powers, and compensation, including, if appropriate, the authority to perform some or all of the duties or exercise some or all of the powers of the President; (2) may make and enter into on behalf of the Corporation all deeds, conveyances, mortgages, leases, contracts, agreements, bonds, reports, releases, and other documents or instruments which may in his judgment be necessary or advisable in the ordinary course of the Corporation's business or which shall be authorized by the Board; (3) shall see that all Corporation policies and all orders and resolutions of the Board are carried into effect; and (4) shall have all the usual duties and powers of the President of a corporation and such other duties and powers as may be prescribed from time to time by the Board. (As amended 7/29/91.) SECTION 4.08. VICE-PRESIDENTS. Two or more Vice Presidents, one or more of whom may also be designated as Executive Vice President or Senior Vice President, each of whom shall have such duties and powers as may be prescribed from time to time by the President or the Board of Directors. (As amended 4/23/64, 10/27/77 and 11/10/00.) SECTION 4.09. SECRETARY. The Secretary: (a) shall, when present, act as Secretary of each meeting of the shareholders and of the Board of Directors; (b) shall keep the minutes of the meetings of the shareholders and the Board of Directors in one or more books provided for that purpose; (c) shall see that all notices are duly given and that lists of shareholders are made and filed as required by law or the Articles of Incorporation or these By-laws; (d) shall be custodian of the corporate records and the seal of the Corporation and shall, when duly authorized, see that the seal is affixed to any instrument requiring it; (e) shall keep a record of the Directors, giving the names and addresses of all Directors; and (As amended 4/23/64 and 2/19/79.) (f) shall have all the usual duties and powers of the Secretary of a corporation and such duties and powers as may be prescribed from time to time by the President or the Board of Directors. (As amended 2/19/79.) SECTION 4.10. TREASURER. The Treasurer: (a) shall have charge and custody of and be responsible for all funds, securities, and Evidences of indebtedness belonging to the Corporation; (b) shall receive and give receipts for moneys due and payable to the Corporation from any source whatever; (c) shall see that all such moneys are deposited in the name of and to the credit of the Corporation in such depositories as shall be designated by or pursuant to authority granted by the Board of Directors; (d) shall cause the funds of the Corporation to be disbursed when and as duly authorized to do so; (e) shall see that correct and complete books of account and financial statements are kept and prepared in accordance with generally accepted accounting principles except to the extent such duties are assigned by the President to other officers or employees of the Corporation; (As amended 2/13/77.) (f) shall have all the usual duties and powers of the Treasurer of a corporation and such duties and powers as may be prescribed from time to time by the President or the Board of Directors; (As amended 2/13/77.) (g) shall keep at the registered office or principal place of business of the Corporation a record of its shareholders (which shall be part of the stock transfer books of the Corporation), giving the names and addresses of all shareholders and the number and class of the shares held by each; and (As amended 2/19/79.) (h) shall have charge of the stock transfer books of the Corporation, and shall record the issuance and transfer of shares, except to the extent that such duties shall be delegated by the Board of Directors to a transfer agent or registrar. (As amended 2/19/79.) SECTION 4.11. ASSISTANT SECRETARIES. In the absence of the Secretary or in the event of his death or inability or refusal to act, the Assistant Secretary (or, if there shall be more than one, the Assistant Secretaries in the order designated by the Board of Directors from time to time, or, in the absence of any such designation, in the order in which their names shall appear in the minutes showing their election) shall perform the duties and exercise the powers of the Secretary. Each Assistant Secretary shall also have such duties and powers as may be prescribed from time to time by the Secretary or the President or the Board of Directors. (As amended 4/23/64.) SECTION 4.12. ASSISTANT TREASURERS. In the absence of the Treasurer or in the event of his death or inability or refusal to act, the Assistant Treasurer (or, if there shall be more than one, the Assistant Treasurers in the order designated by the Board of Directors from time to time, or, in the absence of any such designation, in the order in which their names shall appear in the minutes showing their election) shall perform the duties and exercise the powers of the Treasurer. Each Assistant Treasurer shall also have such duties and powers as may be prescribed from time to time by the Treasurer or the President or the Board of Directors. (As amended 4/23/64.) SECTION 4.13. COMPENSATION. The Board of Directors may fix or provide for, or may authorize any officer to fix or provide for, reasonable compensation of any or all of the officers and agents of the Corporation, including, without limiting the generality of the foregoing, salaries, bonuses, payment of expenses, pensions, pension plans, pension trusts, profit-sharing plans, stock bonus plans, stock option plans (subject to approval of the shareholders if required by law), and other incentive, insurance, and welfare plans, whether or not on account of prior services rendered to the Corporation. (As amended 4/23/64.) SECTION 4.14. BOND. The Board of Directors may require an officer or agent to give a bond for the faithful performance of his duties, in such amount and with such surety or sureties as the Board of Directors deems advisable. ARTICLE 5. SHARES AND CERTIFICATES SECTION 5.01. ISSUANCE OF AND CONSIDERATION FOR SHARES. Shares and securities convertible into shares of the Corporation may be issued for such consideration as shall be fixed from time to time by the Board of Directors, and may be issued to such persons as may be designated from time to time by or pursuant to authority granted by the Board of Directors, except as otherwise required by law or the Articles of Incorporation or these By-laws. (As amended 5/12/97.) SECTION 5.02. RESTRICTIONS ON ISSUANCE OF SHARES AND CERTIFICATES. No share of the Corporation shall be issued until such share is fully paid as provided by law. (As amended 5/12/97.) No fractional share or certificate representing any fractional share shall be issued unless expressly authorized by the Board of Directors. No new certificate shall be issued in place of any certificate until the old certificate for a like number of shares shall have been surrendered and cancelled, except as otherwise provided in Section 5.04. SECTION 5.03. CERTIFICATES REPRESENTING SHARES. Each shareholder shall be entitled to a certificate or certificates representing the shares of the Corporation owned by him. Certificates representing shares of the Corporation shall be in such form as shall be determined by or pursuant to authority granted by the Board of Directors. Each certificate shall be signed by the President or a Vice-President and by the Secretary or an Assistant Secretary, and the corporate seal may be affixed thereto. All certificates shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, and the number and class of shares and date of issuance, shall be entered on the stock transfer books of the Corporation. SECTION 5.04. LOST, DESTROYED, STOLEN, OR MUTILATED CERTIFICATES. The Board of Directors may authorize a new certificate to be issued in place of any certificate alleged to have been lost, destroyed, or stolen, or which shall have been mutilated, upon production of such evidence and upon compliance with such conditions as the Board of Directors may prescribe. SECTION 5.05. TRANSFER OF SHARES. Shares of the Corporation shall be transferable only on the stock transfer books of the Corporation, by the holder of record thereof or by his duly authorized attorney or legal representative (who shall furnish such evidence of authority to transfer as the Corporation or its agent may reasonably require), upon surrender to the Corporation for cancellation of the certificate representing such shares, duly endorsed or with a proper written assignment or power of attorney duly executed and attached thereto, and with such proof of the authenticity of signatures as the Corporation or its agent may reasonably require. The Corporation shall cancel the old certificate, issue a new certificate to the person entitled thereto, and record the transaction on its stock transfer books. However, if the applicable law permits shares to be transferred in a different manner, then to the extent required to comply with such law all references in this Section to "shares" shall mean the rights against the Corporation inherent in or arising out of such shares. SECTION 5.06. SHAREHOLDERS OF RECORD; CHANGE OF NAME OR ADDRESS. The Corporation shall be entitled to recognize the exclusive right of a person shown on its stock transfer books as the holder of shares to receive notices and dividends, to vote as such holder, and to have and exercise all other rights deriving from such shares, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have actual or constructive notice thereof. Unless the context or another provision of these By-laws clearly indicates otherwise, all references in these By-laws to "shareholders" and "holders" shall mean the shareholders of record as shown on the stock transfer books of the Corporation. Each shareholder and each Director shall promptly notify the Secretary in writing of his correct address and any change in his name or address from time to time. If any shareholder or Director fails to give such notice, neither the Corporation nor any of its Directors, officers, agents, or employees shall be liable or responsible to such shareholder or Director for any error or loss which might have been prevented if such notice had been given. (As amended 4/23/64.) SECTION 5.07. REGULATIONS. The Board of Directors may adopt such rules and regulations, not inconsistent with applicable law or the Articles of Incorporation or these By-laws, as it deems advisable concerning the issuance, transfer, conversion, and registration of certificates representing shares of the Corporation. ARTICLE 6. GENERAL PROVISIONS SECTION 6.01. SEAL. The corporate seal shall be circular in form and shall have inscribed thereon the name of the Corporation and the words "Corporate Seal" and "Iowa". The seal may be affixed by causing it or a facsimile thereof to be impressed or reproduced or otherwise. SECTION 6.02. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by the Board of Directors from time to time. SECTION 6.03. DIVIDENDS. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on the outstanding shares in the manner and upon the terms and conditions provided by law and the Articles of Incorporation. SECTION 6.04. EXECUTION OF DOCUMENTS AND INSTRUMENTS. All deeds and conveyances of real estate, mortgages of real estate, and leases of real estate (for an initial term of five years or more) to be executed by the Corporation shall be signed in the name of the Corporation by the Chairman of the Board of Directors or the Vice-Chairman or the President or a Vice-President and signed or attested by the Secretary or an Assistant Secretary, and the corporate seal shall be affixed thereto. All other documents or instruments to be executed by the Corporation (including, without limiting the generality of the foregoing, contracts, agreements, bonds, reports, notices, releases, promissory notes, and evidences of indebtedness; and deeds, conveyances, mortgages, and leases other than those referred to in the preceding sentence) shall be signed in the name of the Corporation by any one or more of the officers of the Corporation, with or without the corporate seal. However, from time to time the Board of Directors or the Chairman of the Board of Directors or the Vice-Chairman or the President may alter, add to, limit, transfer to another officer or agent, or abolish the authority of any officer or officers to sign any or all documents or instruments, or may authorize the execution of any document or instrument by any person or persons, with or without the corporate seal, and such action may be either general or confined to specific instances. (As amended 4/23/64 and 8/1/79.) SECTION 6.05. LOANS. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by or pursuant to authority granted by the Board of Directors. Such authorization may be either general or confined to specific instances. SECTION 6.06. CHECKS AND DRAFTS. All checks and drafts issued in the name of the Corporation shall be signed by such person or persons and in such manner as shall be authorized by or pursuant to authority granted by the Board of Directors. SECTION 6.07. VOTING OF SHARES OWNED BY CORPORATION. Any shares or securities of any other corporation or company owned by this Corporation may be voted at any meeting of shareholders or security holders of such other corporation or company by the Chairman of the Board of Directors of this Corporation. Whenever in the judgment of the Chairman of the Board of Directors it shall be advisable for the Corporation to execute a proxy or waiver of notice or to give a consent with respect to any shares or securities of any other corporation or company owned by this Corporation, such proxy, waiver, or consent shall be executed in the name of this Corporation, as directed by the Chairman of the Board of Directors, without necessity of any authorization by the Board of Directors. Any person or persons so designated as the proxy or proxies of this Corporation shall have full right, power, and authority to vote such shares or securities on behalf of this Corporation. In the absence of the Chairman of the Board of Directors or in the event of his death or inability to act, the Vice-Chairman may perform the duties and exercise the powers of the Chairman of the Board of Directors under this Section. The provisions of this Section shall be subject to any specific directions by the Board of Directors. (As amended 4/23/64 and 8/1/79.) SECTION 6.08. INTEREST OF DIRECTORS IN TRANSACTIONS. In the absence of fraud, any contract or other transaction between the Corporation and any or all of its Directors (including, without limiting the generality of the foregoing, any authorization of or payment of compensation to any Director or officer of the Corporation), or between the Corporation and any person or party in which any or all of the Directors of the Corporation are interested or with which they are connected (whether as shareholders, directors, officers, owners, partners, members, employees, or otherwise) shall be valid for all purposes, notwithstanding the presence of such Director or Directors at the meeting of the Board of Directors which shall act upon or with respect to such contract or transaction, and notwithstanding his or their participation in and vote upon such action, if the fact of such interest shall be disclosed or otherwise known to the Board of Directors prior to or at the time of the taking of such action. Such interested Director or Directors are hereby expressly authorized to vote upon any action of the Board of Directors upon or with respect to such contract or transaction; may be counted in determining whether a quorum is present; and may be included in the majority necessary to take such action. Each Director of the Corporation is hereby expressly relieved, in the absence of fraud, from any liability which might otherwise exist or arise from contracting with the Corporation for the benefit of himself or any person or party in which he may be in any way interested or with which he may be in any way connected. Any contract, transaction, or action of the Corporation or of the Board of Directors which shall be ratified at any meeting of shareholders by the affirmative vote of the holders of a majority of the outstanding common shares entitled to vote, shall be as valid and as binding as though expressly authorized in writing by every shareholder of the Corporation. However, any failure of the shareholders to approve or ratify such contract, transaction, or action, when and if submitted, shall not be deemed in any way to render the same invalid or to deprive the Directors or officers of authority to proceed with such contract, transaction, or action. This Section shall not be construed to invalidate any contract or transaction which would otherwise be valid, nor as a limitation upon the powers of the Directors or officers, nor as a requirement that any contract or transaction of the Corporation be approved or ratified by the shareholders. SECTION 6.09. LIMITATION OF PERSONAL LIABILITY. The limitation of liability of Directors and officers shall be limited as follows: (a) No Director of the Corporation shall be liable to the Corporation or to any shareholder or shareholders except as provided in the Articles of Incorporation or applicable law. The liability of Directors shall be limited or removed to the maximum extent provided either by the Articles of Incorporation or by applicable law, and these provisions shall be liberally construed to carry out this purpose. For purposes of this Section, "Director" means any person who is or was a Director of the Corporation and any person who, while a Director of the Corporation, is or was serving at the request of the Corporation as a Director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan. Heirs, beneficiaries, and personal representatives of the Director are included. (b) No officer of the Corporation shall be liable to the Corporation or to any shareholder or shareholders for any act, omission, or negligence, except for loss directly resulting from his or her willful or reckless misconduct. This Section is in addition to all other limitations of liability contained in applicable law, the Articles of Incorporation, or other provisions of these By-laws. The liability of officers shall be limited or removed to the maximum extent provided by this Section, other provisions of these By-laws, the Articles of Incorporation, or applicable laws, and these By-laws shall be liberally construed to carry out this purpose. (As amended 5/12/97.) SECTION 6.10. INDEMNIFICATION. The Corporation may advance expenses and indemnify any Qualified Person. For purposes of this Section, "Qualified Person" means any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding (whether civil, criminal, administrative, or investigative including, without limitation, an action or suit by or in the right of the Corporation) (collectively, "Action") by reason of the fact that he or she is or was a Director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation, as a Director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan. The indemnification may be against expenses (including attorneys' fees), judgments, fines, and amounts paid or incurred in settlement which the Qualified Person actually and reasonably incurred in connection with the Action, in the manner and to the extent provided in this Section. (a) Indemnification may be made in the following independent and alternative methods: (1) In the manner and to the extent provided by Iowa law; (2) If and to the extent that the Board of Directors determines that the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation. This determination may be made (notwithstanding Sections 3.09 and 3.11) by: (i) a majority vote of a quorum consisting of Directors who are not at the time parties to the Action; (ii) if a quorum cannot be obtained under (i), a majority vote of a committee duly designated by the Board of Directors, in which designation Directors who are parties may participate, consisting solely of two or more Directors not at the time parties to the proceeding; (iii) special legal counsel, selected by the Board of Directors by a majority vote of a quorum consisting of Directors who are not parties at the time to the Action or, if the requisite quorum of the full Board cannot be obtained, by a majority vote of the full Board, in which Directors who are parties may participate; or (iv) the shareholders. (3) In accordance with any agreement authorized by the Board of Directors before the commencement of the Action; (4) If and to the extent authorized by action of the shareholders; or (5) In any other manner not prohibited by Iowa law. (b) Restrictions and presumptions required by law with regard to indemnification referred to in Subsection (a)(1) shall not apply to indemnification under Subsections (a)(2), (3), (4), or (5); provided, however, that indemnification shall not be provided in any case for: (1) A breach of a person's duty of loyalty to the Corporation or its shareholders; (2) Acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law; (3) A transaction from which the person derives an improper personal benefit; or (4) Acts arising under Iowa Code Section 490.858, as amended from time to time. (c) To the extent that a Qualified Person has been successful on the merits or otherwise in defense of any Action, or in defense of any claim, issue, or material therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with such Action. (d) Any indemnification of a Qualified Person may be both as to action in his or her official capacity and as to action in another capacity while holding such official capacity; shall continue as to a Qualified Person who has ceased to be a Director, officer, employee, or agent; and shall inure to the benefit of the heirs, beneficiaries, and personal representatives of the Qualified Person. (e) Indemnification may be made either by direct payment by the Corporation or by reimbursement to the Qualified Person. (As amended 2/15/88 and 5/12/97.) SECTION 6.11. RELIANCE ON DOCUMENTS. Each Director and officer shall, in the performance of his duties, be fully protected in relying and acting in good faith upon the books of account or other records of the Corporation, or reports made or financial statements presented by any officer of the Corporation or by an independent public or certified public accountant or firm of such accountants or by an appraiser selected with reasonable care by the Board of Directors or by any committee thereof; and each Director and officer is hereby expressly relieved from any liability which might otherwise exist or arise from or in connection with any such action. SECTION 6.12. EFFECT OF PARTIAL INVALIDITY. If a court of competent jurisdiction shall adjudge to be invalid any clause, sentence, paragraph, section, or part of the Articles of Incorporation or these By-laws, such judgment or decree shall not affect, impair, invalidate, or nullify the remainder of the Articles of Incorporation or these By-laws, but the effect thereof shall be confined to the clause, sentence, paragraph, section, or part so adjudged to be invalid. SECTION 6.13. DEFINITIONS. Any word or term which is defined in the Iowa Business Corporation Act shall have the same meaning wherever used in the Articles of Incorporation or in these By-laws, unless the context or another provision of the Articles of Incorporation or these By-laws clearly indicates otherwise. Wherever used in the Articles of Incorporation or in these By-laws, unless the context or another provision of the Articles of Incorporation or these By-laws clearly indicates otherwise, the use of the singular shall include the plural, and vice versa; and the use of any gender shall be applicable to any other gender. Wherever used in the Articles of Incorporation or in these By-laws, the word "written" shall mean written, typed, printed, duplicated, or reproduced by any process. (As amended 4/23/64.) SECTION 6.14. AUTHORITY TO CARRY OUT RESOLUTIONS AND MOTIONS. Each resolution or motion adopted by the shareholders or by the Board of Directors shall be deemed to include the following provision, unless the resolution or motion expressly negates this provision: The officers of the Corporation are severally authorized on behalf of the Corporation to do all acts and things which may be necessary or convenient to carry out this resolution (motion), including, without limitation, the authority to make, execute, seal, deliver, file, and perform all appropriate contracts, agreements, certificates, documents, and instruments. The foregoing provision shall automatically be a part of the resolution or motion even though not stated in the minutes; and any officer may state or certify that the foregoing provision is included in the resolution or motion. (Added entire section 8/3/82.) ARTICLE 7. AMENDMENTS SECTION 7.01. RESERVATION OF RIGHT TO AMEND. The Corporation expressly reserves the right from time to time to amend these By-laws, in the manner now or hereafter permitted by the provisions of the Articles of Incorporation and these By-laws, whether or not such amendment shall constitute or result in a fundamental change in the purposes or structures of the Corporation or in the rights or privileges of shareholders or others or in any or all of the foregoing. All rights and privileges of shareholders or others shall be subject to this reservation. Wherever used in these By-laws with respect to the By-laws, the word "amend," "amended," or "amendment" includes and applies to the amendment, alteration, or repeal of any or all provisions of the By-laws or the adoption of new By-laws. (As amended 4/28/66.) SECTION 7.02. PROCEDURE TO AMEND. Any amendment to these By-laws may be adopted at any meeting of the Board of Directors by the affirmative vote of a majority of the number of Directors fixed by Section 3.03. No notice of any proposed amendment to the By-laws shall be required. (As amended 4/28/66.) EX-10.I 3 a2042271zex-10_i.txt EX-10I EXHIBIT 10I HON INDUSTRIES INC. STOCK-BASED COMPENSATION PLAN (ADOPTED MAY 9, 1995. AMENDED AND RESTATED MAY 13, 1997. AMENDED FEBRUARY 10, 1999 AND NOVEMBER 10, 2000.) I. INTRODUCTION 1.1 PURPOSES. The purposes of the 1995 Stock-Based Compensation Plan (the "Plan") of HON INDUSTRIES Inc., (the "Company") and its subsidiaries from time to time (individually a "Subsidiary" and collectively the Subsidiaries") are (i) to align the interests of the Company's shareholders and the recipients of awards under this Plan by increasing the proprietary interest of such recipients in the Company's growth and success, (ii) to advance the interests of the Company by attracting and retaining officers and other key employees and well-qualified persons who are not officers or employees of the Company for service as directors of the Company and (iii) to motivate such employees and Non-Employee Directors to act in the long-term best interests of the Company's shareholders. For purposes of this Plan, references to employment by the Company shall also mean employment by a Subsidiary. 1.2 CERTAIN DEFINITIONS. "AGREEMENT" shall mean the written agreement evidencing an award hereunder between the Company and the recipient of such award. "BOARD" shall mean the Board of Directors of the Company. "BONUS STOCK" shall mean shares of Common Stock which are not subject to a Restriction Period or Performance Measures. "BONUS STOCK AWARD" shall mean an award of Bonus Stock under this Plan. "CHANGE IN CONTROL" shall have the meaning set forth in Section 6.8(b). "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMITTEE" shall mean the Committee designated by the Board, consisting of three or more members of the Board, each of whom shall be (i) a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act and (ii) an "outside director" within the meaning of Section 162(m) of the Code. "COMMON STOCK" shall mean the common stock, $1.00 par value, of the Company. "COMPANY" has the meaning specified in Section 1.1. "DEFERRAL PERIOD" shall mean the period of time during which Deferred Shares are subject to deferral limitations under Section 3.4 of this Plan. "DEFERRED SHARES" shall mean an award made pursuant of Section 3.4 of this Plan of the right to receive Common Shares at the end of a specified Deferral Period. "DEFERRED SHARE AWARD" shall mean an award of Deferred Shares under the Plan. "DISABILITY" shall mean the inability of the holder of an award to perform substantially such holder's duties and responsibilities for a continuous period of at least six months, as determined solely by the Committee. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" shall mean the average of the high and low transaction prices] of a share of Common Stock as reported in the National Association of Securities Dealers Automated Quotation National Market System on the date as of which such value is being determined, or, if there shall be no reported transactions for such date, on the next preceding date for which transactions were reported; provided, however, that if Fair Market Value for any date cannot be so determined, Fair Market Value shall be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate. "FREE-STANDING SAR" shall mean an SAR which is not issued in tandem with, or by reference to, an option, which entitles the holder thereof to receive, upon exercise, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of such SARs which are exercised. "IMMEDIATE FAMILY" shall mean any spouse, child, stepchild, or adopted child. "INCENTIVE STOCK OPTION" shall mean an option to purchase shares of Common Stock that meets the requirements of Section 422 of the Code, or any successor provision, which is intended by the Committee to constitute an incentive stock option. "INCUMBENT BOARD" shall have the meaning set forth in Section 6.8(b)(2) hereof. "NON-EMPLOYEE DIRECTOR" shall mean except as applied to the definition of Committee, any director of the Company who is not an officer or employee of the Company or any Subsidiary. "NON-STATUTORY STOCK OPTION" shall mean a stock option which is not an Incentive Stock Option. "PERFORMANCE MEASURES" shall mean, the criteria and objectives, established by the Committee, which shall be satisfied or met (i) as a condition to the exercisability of all or a portion of an option or SAR, (ii) as a condition to the grant of a Stock Award or (iii) during the applicable Restriction Period or Performance Period as a condition to the holder's receipt, in the case of a Restricted Stock Award, of the shares of Common Stock subject to such award, or, in the case of a Performance Share Award, of payment with respect to such award. Such criteria and objectives may include, but are not limited to, the attainment by a share of Common Stock of a specified Fair Market Value for a specified period of time, earnings per share, return to stockholders (including dividends), return on equity, earnings of the Company, revenues, market share, cash flow or cost reduction goals, or any combination of the foregoing and any other criteria and objectives established by the Committee. In the sole discretion of the Committee, the Committee may amend or adjust the Performance Measures or other terms and conditions of an outstanding award in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in law or accounting principles. "PERFORMANCE PERIOD" shall mean any period designated by the Committee during which the Performance Measures applicable to a Performance Share Award shall be measured. "PERFORMANCE SHARE" shall mean a right, contingent upon the attainment of specified Performance Measures within a specified Performance Period, to receive one share of Common Stock, which may be Restricted Stock, or in lieu of all or a portion thereof, the Fair Market Value of such Performance Share in cash. "PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares under this Plan. "RESTRICTED STOCK" shall mean shares of Common Stock which are subject to a Restriction Period. "RESTRICTED STOCK AWARD" shall mean an award of Restricted Stock under this Plan. "RESTRICTION PERIOD" shall mean any period designated by the Committee during which the Common Stock subject to a Restricted Stock Award may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, except as provided in this Plan or the Agreement relating to such award. "RETIREMENT" OR "RETIRES" shall mean a Participant's termination of employment with the Company on or after the date that such Participant could elect to commence a distribution under the HON INDUSTRIES Inc. Profit-Sharing Retirement Plan, as amended from time to time, which, as of January 1, 1999, is upon attainment of age 55. "SAR" shall mean a stock appreciation right which may be a Free-Standing SAR or a Tandem SAR. "STOCK AWARD" shall mean a Restricted Stock Award or a Bonus Stock Award. "TANDEM SAR" shall mean an SAR which is granted in tandem with, or by reference to, an option (including a Non-Statutory Stock Option granted prior to the date of grant of the SAR), which entitles the holder thereof to receive, upon exercise of such SAR and surrender for cancellation of all or a portion of such option, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of shares of Common Stock subject to such option, or portion thereof, which is surrendered. "TAX DATE" shall have the meaning set forth in Section 6.5. "TEN PERCENT HOLDER" shall have the meaning set forth in Section 2.1(a). 1.3 ADMINISTRATION. This Plan shall be administered by the Committee. Any one or a combination of the following awards may be made under this Plan to eligible officers and other key employees of the Company and its Subsidiaries: (i) options to purchase shares of Common Stock in the form of Incentive Stock Options or Non-Statutory Stock Options, (ii) SARs in the form of Tandem SARs or Free-Standing SARs, (iii) Stock Awards in the form of Restricted Stock or Bonus Stock and (iv) Performance Shares. The Committee shall, subject to the terms of this Plan, select eligible officers and other key employees for participation in this Plan and determine the form, amount and timing of each award to such persons and, if applicable, the number of shares of Common Stock, the number of SARs and the number of Performance Shares subject to such an award, the exercise price or base price associated with the award, the time and conditions of exercise or settlement of the award and all other terms and conditions of the award, including, without limitation, the form of the Agreement evidencing the award. The Committee shall, subject to the terms of this Plan, interpret this Plan and the application thereof, establish rules and regulations it deems necessary or desirable for the administration of this Plan and may impose, incidental to the grant of an award, conditions with respect to the award, such as limiting competitive employment or other activities. All such interpretations, rules, regulations and conditions shall be conclusive and binding on all parties. The Committee may delegate some or all of its power and authority hereunder to the President and Chief Executive Officer or other executive officer of the Company as the Committee deems appropriate; provided, however, that the Committee may not delegate its power and authority with regard to (i) the grant of an award under this Plan to any person who is a "covered employee" within the meaning of Section 162(m) of the Code or who, in the Committee's judgment, is likely to be a covered employee at any time during the period an award hereunder to such employee would be outstanding or (ii) the selection for participation in this Plan of an officer or other person subject to Section 16 of the Exchange Act or decisions concerning the timing, pricing or amount of an award to such an officer or other person. No member of the Board of Directors or Committee, and neither the President and Chief Executive Officer nor any other executive officer to whom the Committee delegates any of its power and authority hereunder, shall be liable for any act, omission, interpretation, construction or determination made in connection with this Plan in good faith, and the members of the Board of Directors and the Committee and the President and Chief Executive Officer or other executive officer shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorneys' fees) arising therefrom to the full extent permitted by law, except as otherwise may be provided in the Company's Articles of Incorporation, By-laws, and under any directors' and officers' liability insurance that may be in effect from time to time. A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by a majority of the members of the Committee without a meeting. 1.4 ELIGIBILITY. Participants in this Plan shall consist of such officers and other key employees of the Company and its Subsidiaries as the Committee in its sole discretion may select from time to time. The Committee's selection of a person to participate in this Plan at any time shall not require the Committee to select such person to participate in this Plan at any other time. Non-Employee Directors shall be eligible to participate in this Plan in accordance with Article V. 1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7, the total number of shares of Common Stock available for all grants of awards under this Plan on any calendar year, shall be eighty-three hundredths of one percent (0.83%) of the outstanding and issued Common Stock as of January 1 of such year beginning January 1, 1997, plus the number of shares of Common Stock which shall have become available for grants of awards under this Plan in any and all prior calendar years, but which shall not have become subject to any award granted in any prior year. Notwithstanding the foregoing, the maximum number of shares of Common Stock available for the grant of Incentive Stock Options shall be 2,000,000. The maximum number of shares of Common Stock with respect to which options or SARs or a combination thereof may be granted during any calendar year to any person shall be 250,000, subject to adjustment as provided in Section 6.7. II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS 2.1 STOCK OPTIONS. The Committee may, in its discretion, grant options to purchase shares of Common Stock to such eligible persons as may be selected by the Committee. Each option, or portion thereof, that is not an Incentive Stock Option, shall be a Non-Statutory Stock Option. Each Incentive Stock Option shall be granted within ten years of the effective date of this Plan. To the extent that the aggregate Fair Market Value (determined as of the date of grant) of shares of Common Stock with respect to which options designated as Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under this Plan or any other plan of the Company, or any parent or Subsidiary) exceeds the amount (currently $100,000) established by the Code, such options shall constitute Non-Statutory Stock Options. Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of Shares and Purchase Price. The number of shares of Common Stock subject to an option and the purchase price per share of Common Stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of Common Stock purchasable upon exercise of a Non-Statutory Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such option and the purchase price per share of Common Stock purchasable upon exercise of an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such option; provided further, that if an Incentive Stock Option shall be granted to any person who, at the time such option is granted, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any parent or Subsidiary) (a "Ten Percent Holder"), the purchase price per share of Common Stock shall be the price (currently 110% of Fair Market Value) required by the Code in order to constitute an Incentive Stock Option. (b) Option Period and Exercisability. The period during which an option may be exercised shall be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercised later than ten years after its date of grant; provided further, that if an Incentive Stock Option shall be granted to a Ten Percent Holder, such option shall not be exercised later than five years after its date of grant. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in cumulative or non-cumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of Common Stock. (c) Method of Exercise. An option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of Common Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) by delivery of previously owned whole shares of Common Stock (which the optionee has held for at least six months prior to delivery of such shares and for which the optionee has good title, free and clear of all liens and encumbrances) having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) by authorizing the Company to withhold a number of whole shares of Common Stock which would otherwise be delivered upon exercise of the option having a Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, provided that the optionee attests in a manner satisfactory to the Committee that the optionee at the time of such exercise holds and has held for at least six months prior to such exercise an equal number of whole shares of Common Stock and as to which the optionee has good title, free and clear of all liens and encumbrances, (D) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) a combination of (A), (B) and (C), in each case to the extent set forth in the Agreement relating to the option, (ii) if applicable, by surrendering to the Company any Tandem SARs which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. The Committee may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Common Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing Common Stock shall be delivered until the full purchase price therefor has been paid. 2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant SARs to such eligible persons as may be selected by the Committee. The Agreement relating to an SAR shall specify whether the SAR is a Tandem SAR or a Free-Standing SAR. SARs shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of SARs and Base Price. The number of SARs subject to an award shall be determined by the Committee. Any Tandem SAR related to an Incentive Stock Option shall be granted at the same time that such Incentive Stock Option is granted. The base price of a Tandem SAR shall be the purchase price per share of Common Stock of the related option. The base price of a Free-Standing SAR shall be determined by the Committee; provided, however, that such base price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such SAR. (b) Exercise Period and Exercisability. The Agreement relating to an award of SARs shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof. The period for the exercise of an SAR shall be determined by the Committee; provided, however, that no Tandem SAR shall be exercised later than the expiration, cancellation, forfeiture or other termination of the related option. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the grant of an SAR or to the exercisability of all or a portion of an SAR. The Committee shall determine whether an SAR may be exercised in cumulative or non-cumulative installments and in part or in full at any time. An exercisable SAR, or portion thereof, may be exercised, in the case of a Tandem SAR, only with respect to whole shares of Common Stock and, in the case of a Free-Standing SAR, only with respect to a whole number of SARs. If an SAR is exercised for shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the exercise of an SAR for shares of Common Stock, including Restricted Stock, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such SAR and shall have rights as a stockholder of the Company in accordance with Section 6.10. (c) Method of Exercise. A Tandem SAR may be exercised (i) by giving written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are cancelled by reason of the exercise of the Tandem SAR and (iii) by executing such documents as the Company may reasonably request. A Free-Standing SAR may be exercised (i) by giving written notice to the Company specifying the whole number of SARs which are being exercised and (ii) by executing such documents as the Company may reasonably request. 2.3 TERMINATION OF EMPLOYMENT. Except as otherwise provided in this Section 2.3 and subject to Section 6.8, all of the terms relating to the exercise, cancellation or other disposition of an option or SAR upon a termination of employment with the Company of the holder of such option or SAR, as the case may be, whether by reason of retirement or other termination, shall be determined by the Committee. Such determination shall be made at the time of the grant of such option or SAR, as the case may be, and shall be specified in the Agreement relating to such option or SAR. Notwithstanding the foregoing, each option or SAR granted under the Plan shall become fully vested and nonforfeitable upon the death or Disability of the Participant awarded such option or SAR, provided such Participant is employed by the Company on the date of death or Disability. III. STOCK AWARDS 3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards to such eligible persons as may be selected by the Committee. The Agreement relating to a Stock Award shall specify whether the Stock Award is a Restricted Stock Award or Bonus Stock Award. 3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) NUMBER OF SHARES AND OTHER TERMS. The number of shares of Common Stock subject to a Restricted Stock Award or Bonus Stock Award and the Performance Measures (if any) and Restriction Period applicable to a Restricted Stock Award shall be determined by the Committee. (b) VESTING AND FORFEITURE. The Agreement relating to a Restricted Stock Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of the shares of Common Stock subject to such award (i) if specified Performance Measures are satisfied or met during the specified Restriction Period or (ii) if the holder of such award remains continuously in the employment of the Company during the specified Restriction Period and for the forfeiture of the shares of Common Stock subject to such award (x) if specified Performance Measures are not satisfied or met during the specified Restriction Period or (y) if the holder of such award does not remain continuously in the employment of the Company during the specified Restriction Period. Bonus Stock Awards shall not be subject to any Performance Measures or Restriction Periods. (c) SHARE CERTIFICATES. During the Restriction Period, a certificate or certificates representing a Restricted Stock Award may be registered in the holder's name and may bear a legend, in addition to any legend which may be required pursuant to Section 6.6, indicating that the ownership of the shares of Common Stock represented by such certificate is subject to the restrictions, terms and conditions of this Plan and the Agreement relating to the Restricted Stock Award. All such certificates shall be deposited with the Company, together with stock powers or other instruments of assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate by the Company, which would permit transfer to the Company of all or a portion of the shares of Common Stock subject to the Restricted Stock Award in the event such award is forfeited in whole or in part. Upon termination of any applicable Restriction Period (and the satisfaction or attainment of applicable Performance Measures), or upon the grant of a Bonus Stock Award, in each case subject to the Company's right to require payment of any taxes in accordance with Section 6.5, a certificate or certificates evidencing ownership of the requisite number of shares of Common Stock shall be delivered to the holder of such award. (d) RIGHTS WITH RESPECT TO RESTRICTED STOCK AWARDS. Unless otherwise set forth in the Agreement relating to a Restricted Stock Award, and subject to the terms and conditions of a Restricted Stock Award, the holder of such award shall have all rights as a stockholder of the Company, including, but not limited to, voting rights, the right to receive dividends and the right to participate in any capital adjustment applicable to all holders of Common Stock; provided, however, that a distribution with respect to shares of Common Stock, other than a distribution in cash, shall be deposited with the Company and shall be subject to the same restrictions as the shares of Common Stock with respect to which such distribution was made. 3.3 TERMINATION OF EMPLOYMENT. Except as otherwise provided in this Section 3.3 and subject to Section 6.8, all of the terms relating to the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Award, or cancellation of or forfeiture of such Restricted Stock Award upon a termination of employment with the Company of the holder of such Restricted Stock Award, whether by reason of retirement or other termination, shall be set forth in the Agreement relating to such Restricted Stock Award, except that, notwithstanding the foregoing, each Restricted Stock Award shall become fully vested and nonforfeitable upon the death or Disability of the Participant awarded such Restricted Stock Award, provided such Participant is employed by the Company on the date of death or Disability. 3.4 DEFERRED SHARES. The Committee may also authorize the granting or sale of Deferred Shares to Participants. Each such grant or sale may utilize any or all of the authorizations and shall be subject to all of the requirements contained in the following provisions: (a) Each such grant or sale shall constitute the agreement by the Company to deliver Common Stock to the Participant in the future in consideration of the performance of services, but subject to the fulfillment of such conditions during the Deferral Period as the Board may specify. (b) Each such grant or sale may be made without additional consideration or in consideration of a payment by such Participant that is less than the Fair Market Value per share of Common Stock at the date of grant. (c) Each such grant or sale shall be subject to a Deferral Period of not less than 1 year, as determined by the Board at the date of grant, and may provide for the earlier lapse or other modification of such Deferral Period in the event of a Change in Control. (d) During the Deferral Period, the Participant shall have no right to transfer any rights under his or her award and shall have no rights of ownership in the Deferred Shares and shall have no right to vote them, but the Committee may, at or after the date of grant, authorize the payment of dividend equivalents on such Shares on either a current or deferred or contingent basis, either in cash or in additional Common Stock. (e) Each grant or sale of Deferred Shares shall be evidenced by an agreement executed on behalf of the Company by any officer and delivered to and accepted by the Participant and shall contain such terms and provisions, consistent with this Plan, as the Board may approve. IV. PERFORMANCE SHARE AWARDS 4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant Performance Share Awards to such eligible persons as may be selected by the Committee. 4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) NUMBER OF PERFORMANCE SHARES AND PERFORMANCE MEASURES. The number of Performance Shares subject to any award and the Performance Measures and Performance Period applicable to such award shall be determined by the Committee. (b) VESTING AND FORFEITURE. The Agreement relating to a Performance Share Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of such award, if specified Performance Measures are satisfied or met during the specified Performance Period, and for the forfeiture of such award, if specified Performance Measures are not satisfied or met during the specified Performance Period. (c) SETTLEMENT OF VESTED PERFORMANCE SHARE AWARDS. The Agreement relating to a Performance Share Award (i) shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof and (ii) may specify whether the holder thereof shall be entitled to receive, on a current or deferred basis, dividend equivalents, and, if determined by the Committee, interest on any deferred dividend equivalents, with respect to the number of shares of Common Stock subject to such award. If a Performance Share Award is settled in shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the settlement of a Performance Share Award in shares of Common Stock, including Restricted Stock, the holder of such award shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such award. 4.3 TERMINATION OF EMPLOYMENT. Except as otherwise provided in this Section 4.3 and subject to Section 6.8, all of the terms relating to the satisfaction of Performance Measures and the termination of the Performance Period relating to a Performance Share Award, or cancellation of or forfeiture of such Performance Share Award upon a termination of employment with the Company of the holder of such Performance Share Award, whether by reason of retirement or other termination, shall be set forth in the Agreement relating to such Performance Share Award, except that, notwithstanding the foregoing, each Performance Share Award shall become fully vested and nonforfeitable upon the death or Disability of the Participant holding such Performance Share Award, provided such Participant is employed by the Company on the date of death or Disability. V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS 5.1 ELIGIBILITY. Each Non-Employee Director shall be eligible to elect to receive shares of Common Stock in accordance with this Article V. 5.2 TIME AND MANNER OF ELECTION. At least 6 (six) months prior to the date of any annual meeting of shareholders of the Company during the term of this Plan, Non-Employee Directors may file with the Committee or its designee a written election to receive shares of Common Stock in lieu of all or a portion of such Non-Employee Director's future annual retainer, paid quarterly, exclusive of meeting or committee fees. Notwithstanding the foregoing, an election made by (i) a Non-Employee Director in respect of the annual retainer payable for the period beginning on the date of the 1995 annual meeting of the shareholders of the Company or (ii) an individual who becomes a Non-Employee Director on a date less than six months prior to any annual meeting of shareholders, shall become effective on the first business day that is six months after the date ("Effective Date") such Non-Employee Director files such election, and such election shall be applicable only to the portion of such Non-Employee Director's annual retainer determined by multiplying such annual retainer by a fraction, the numerator of which is the number of calendar days from the Effective Date to and including the last day for which such Annual Retainer is payable and the denominator is 365. An election pursuant to this Section, once made, shall be irrevocable in respect to the annual retainer for which made. The Shares to be issued pursuant to this Section shall be issued on each date on which an installment of the Non-Employee Director's annual retainer would otherwise be payable in cash. The number of such shares to be issued shall be determined by dividing the amount of the then payable installment of the annual retainer subject to an election under this Section by the Fair Market Value of a share of Common Stock on such date. Any fraction of a share shall be disregarded and the remaining amount of the annual retainer shall be paid in cash. VI. GENERAL 6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the stockholders of the Company for approval and, if approved by the affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the 1997 annual meeting of stockholders, shall become effective on the date of such approval. This Plan shall terminate 10 years after its effective date unless terminated earlier by the Board. Termination of this Plan shall not affect the terms or conditions of any award granted prior to termination. Awards hereunder may be made at any time prior to the termination of this Plan, provided that no award may be made later than 10 years after the effective date of this Plan. In the event that this Plan is not approved by the stockholders of the Company, this Plan and any awards hereunder shall be void and of no force or effect. 6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable, subject to any requirement of stockholder approval required by applicable law, rule or regulation including Section 162(m) of the Code; provided, however, that no amendment shall be made without stockholder approval if such amendment would (a) increase the maximum number of shares of Common Stock available under this Plan (subject to Section 6.7), or (b) extend the term of this Plan; provided further that, subject to Section 6.7. No amendment may impair the rights of a holder of an outstanding award without the consent of such holder. Notwithstanding the foregoing, the Board may condition the grant of any award or combination of awards authorized under the Plan on the surrender or deferral by the Participant of such Participant's right to an award hereunder, a cash bonus, or other compensation otherwise payable by the Company to the Participant. 6.3 AGREEMENT. Each award under this Plan shall be evidenced by an Agreement setting forth the terms and conditions applicable to such award. No award shall be valid until an Agreement is executed by the Company and the recipient of such award and, upon execution by each party and delivery of the Agreement to the Company, such award shall be effective as of the effective date set forth in the Agreement. 6.4 TRANSFERABILITY OF STOCK OPTIONS, SARS AND PERFORMANCE SHARES. (a) Except as set forth in Section 6.4(b) or as otherwise determined by the Board, no option, SAR or Performance Share shall be transferable other than (i) by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Committee or (ii) as otherwise permitted under Rule 16b-3 under the Exchange Act as set forth in the Agreement relating to such award. Except to the extent permitted by the foregoing sentence and Section 6.4(b), each option, SAR or Performance Share may be exercised or settled during the holder's lifetime only by the holder or the holder's legal representative or similar person. Except to the extent permitted by the second preceding sentence and Section 6.4(b), no option, SAR or Performance Share may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Except as provided in Section 6.4(b), upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any option, SAR or Performance Share, such award, and all rights thereunder shall immediately become null and void. (b) Notwithstanding the provisions of Section 6.4(a), option rights (other than Incentive Stock Options) shall be transferable by a Participant, without payment of consideration therefor by the transferee, to any one or more members of the Participant's Immediate Family (or to one or more trusts established solely for the benefit of one or more members of the Participant's Immediate Family or to one or more partnerships in which the only partners are members of the Participant's Immediate Family); provided, however, that (i) no such transfer shall be effective unless reasonable prior notice thereof is delivered to the Company and such transfer is thereafter effected subject to the specific authorization of, and in accordance with any terms and conditions that shall have been made applicable thereto, by the Committee or by the Board and (ii) any such transferee shall be subject to the same terms and conditions hereunder as the Participant. 6.5 TAX WITHHOLDING. The Company shall have the right to require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash pursuant to an award made hereunder, payment by the holder of such award of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with such award. An Agreement may provide that (i) the Company shall withhold whole shares of Common Stock which would otherwise be delivered to a holder, having an aggregate Fair Market Value determined as of the date the obligation to withhold or pay taxes arises in connection with an award (the "Tax Date"), or withhold an amount of cash which would otherwise be payable to a holder, in the amount necessary to satisfy any such obligation or (ii) the holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery to the Company of previously owned whole shares of Common Stock (which the holder has held for at least six months prior to the delivery of such shares and for which the holder has good title, free and clear of all liens and encumbrances) having an aggregate Fair Market Value, determined as of the Tax Date, equal to the amount necessary to satisfy any such obligation, (C) authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered having an aggregate Fair Market Value, determined as of the Tax Date, or withhold an amount of cash which would otherwise be payable to a holder, equal to the amount necessary to satisfy any such obligation, (D) in the case of the exercise of an option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) any combination of (A), (B) and (C), in each case to the extent set forth in the Agreement relating to the award; provided, however, that the Committee shall have sole discretion to disapprove of an election pursuant to any of clauses (B), (E) and that in the case of a holder who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 and the rules and regulations thereunder. An Agreement may provide for shares of Common Stock to be delivered or withheld having an aggregate Fair Market Value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the holder's maximum marginal tax rate. Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder. 6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of Common Stock delivered pursuant to any award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 6.7 ADJUSTMENT. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the number and class of securities available under this Plan, the number and class of securities subject to each outstanding option and the purchase price per security, the terms of each outstanding SAR, the number and class of securities subject to each outstanding Stock Award or Deferred Share Award, and the terms of each outstanding Performance Share shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding options and SARs without an increase in the aggregate purchase price or base price. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being (i) available under this Plan, such fractional security shall be disregarded, or (ii) subject to an award under this Plan, the Company shall pay the holder of such award, in connection with the first vesting, exercise or settlement of such award, in whole or in part, occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the vesting, exercise or settlement date over (B) the exercise or base price, if any, of such award. 6.8 CHANGE IN CONTROL. (a) (1) Notwithstanding any provision in this Plan or any Agreement, in the event of a Change in Control pursuant to Section (b)(3) or (4) below in connection with which the holders of Common Stock receive shares of common stock that are registered under Section 12 of the Exchange Act, (i) all outstanding options and SARS shall immediately become exercisable in full, (ii) the Restriction Period applicable to any outstanding Restricted Stock Award shall lapse, (iii) the Performance Period applicable to any outstanding Performance Share shall lapse, (iv) the Performance Measures applicable to any outstanding Restricted Stock Award (if any) and to any outstanding Performance Share shall be deemed to be satisfied at the maximum level, (v) there shall be substituted for each share of Common Stock available under this Plan, whether or not then subject to an outstanding award, the number and class of shares into which each outstanding share of Common Stock shall be converted pursuant to such Change in Control, and (vi) the Deferral Period applicable to any Deferred Shares shall lapse. In the event of any such substitution, the purchase price per share in the case of an option and the base price in the case of an SAR shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding options and SARs without an increase in the aggregate purchase price or base price. (2) Notwithstanding any provision in this Plan or any Agreement, in the event of a Change in Control pursuant to Section (b)(1) or (2) below, or in the event of a Change in Control pursuant to Section (b)(3) or (4) below in connection with which the holders of Common Stock receive consideration other than shares of common stock that are registered under Section 12 of the Exchange Act, each outstanding award shall be surrendered to the Company by the holder thereof, and each such award shall immediately be cancelled by the Company, and the holder shall receive, within ten days of the occurrence of a Change in Control pursuant to Section (b)(1) or (2) below or within ten days of the approval of the stockholders of the Company contemplated by Section (b)(3) or (4) below, a cash payment from the Company in an amount equal to (i) in the case of an option, the number of shares of Common Stock then subject to such option, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the purchase price per share of Common Stock subject to the option, (ii) in the case of a Free-Standing SAR, the number of shares of Common Stock then subject to such SAR, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the base price of the SAR, (iii) in the case of a Restricted Stock Award, Performance Share Award or Deferred Share Award, the number of shares of Common Stock or the number of Performance Shares, as the case may be, then subject to such award, multiplied by the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control. In the event of a Change in Control, each Tandem SAR shall be surrendered by the holder thereof and shall be cancelled simultaneously with the cancellation of the related option. The Company may, but is not required to, cooperate with any person who is subject to Section 16 of the Exchange Act to assure that any cash payment in accordance with the foregoing to such person is made in compliance with Section 16 and the rules and regulations thereunder. (b) "Change in Control" shall mean: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was acquired directly from the Company), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 6.8(b); or (2) individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall not be deemed a member of the Incumbent Board; or (3) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50 percent of, respectively, the then outstanding shares of Common Stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially in the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20 percent or more of, respectively, the then outstanding shares of Common Stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the incumbent Board at the time of the execution of the initial agreement, or the action of the Board, providing for such Business Combination; or (4) approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company. 6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right to participate in this Plan. Neither this Plan nor any award made hereunder shall confer upon any person any right to continued employment by the Company, any Subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any Subsidiary or any affiliate of the Company to terminate the employment of any person at any time without liability hereunder. 6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder of the Company with respect to any shares of Common Stock or other equity security of the Company which is subject to an award hereunder unless and until such person becomes a stockholder of record with respect to such shares of Common Stock or equity security. 6.11 GOVERNING LAW. This Plan, each award hereunder and the related Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Iowa and construed in accordance therewith without giving effect to principles of conflicts of laws. 6.12 DEFERRAL AGREEMENTS. The Participants may enter into agreements which will defer the receipt of any shares of Common Stock to be received under an award. Any such agreement shall require that the deferred distribution be made in shares of Common Stock. EX-10.XV 4 a2042271zex-10_xv.txt EX-10XV EXHIBIT 10xv HON INDUSTRIES INC. LONG-TERM PERFORMANCE PLAN (As Adopted February 16, 2000 and Effective as of January 1, 2000) HON INDUSTRIES Inc., an Iowa corporation (the "Company"), hereby establishes this Long-Term Performance Plan (the "Performance Plan") effective as of January 1, 2000. 1. PURPOSE. The purpose of this Performance Plan is to promote the attainment of the Company's performance goals by providing incentive compensation for certain designated key executives and employees of the Company and its Subsidiaries. 2. DEFINITIONS. As used in this Performance Plan, the following terms have the following meanings when used herein with initial capital letters: (a) "Board" means the Board of Directors of the Company or, pursuant to any delegation by the Board to the Committee pursuant to Section 13, the Committee. (b) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (c) "Committee" means the Human Resources and Compensation Committee of the Board. (d) "Earned Performance Unit Award" means the number of Performance Units, if any, payable to a Participant at the end of the Performance Period, the dollar amount of which shall be based on the ending value of the Performance Units. (e) "Operating Unit" means either the Company as a whole or other individual subsidiary, division, store, or other business unit of the Company in which individuals employed thereby or therein have been approved to participate in this Performance Plan by the Board. (f) "Participant" means a person who is designated by the Board to receive benefits under this Performance Plan and who is at the time an officer, executive, or other employee of the Company or any one or more of its Subsidiaries, or who has agreed to commence serving in any of such capacities. (g) "Performance Measure" means the level of performance for the Operating Unit; a division or other business unit of an operating unit; or an individual Participant, or any of them, for each Performance Period, in each case as established pursuant to Section 6. (h) "Performance Period" means a period of three consecutive fiscal years of the Company commencing on the first day of a fiscal year of the Company. (i) Performance Unit shall mean a unit of a value, the initial value of which at the time of a Target Performance Unit Award shall be $1.00, and the ending value of which shall be determined by application of the Valuation Formula. (j) "Retirement" means a Participant's voluntary termination of employment with the Company on or after attainment of age 65, or when the Participant is at least 55 years old and the sum of a Participant's age and service equals at least 65. (k) "Target Performance Unit Award" shall mean the initial number of Performance Units awarded to a Participant at the beginning of a Performance Period. (l) "Valuation Formula" shall mean the financial measurement approved by the Board used to determine the ending value of Performance Units. (m) Subsidiary" has the meaning specified in Rule 405 promulgated under the Securities Act of 1933, as amended (or under any successor rule substantially to the same effect). 3. ELIGIBILITY. (a) Except as otherwise provided in this Section 3, an employee of the Company or one of its Subsidiaries will become a Participant for a particular Performance Period to the extent designated by the Board. (b) An employee who first becomes eligible to participate after the beginning of a particular Performance Period will become a Participant for such Performance Period only in accordance with this Section 3(b). The Board may allow participation for a portion of such Performance Period for such employee on such terms and conditions as the Board may determine. 4. EARNED PERFORMANCE UNIT AWARD. Unless changed by the Board, each eligible Participant may earn an Earned Performance Unit Award as hereinafter provided. The performance of the Operating Unit, during a particular Performance Period will be measured using the Performance Measures established therefor by the Board in accordance with Section 6. In the event such performance for such Performance Period is below the minimum Performance Measures established therefore, no Earned Performance Unit Award would be paid to Participants in respect thereof. 5. PERFORMANCE UNITS. Each Participant shall be granted a Target Performance Unit Award valued at $1.00 per Performance Unit at the beginning of the Performance Period, as determined by the Board. The number of Performance Units payable to a Participant at the end of the Performance Period will be determined by applying the Performance Measures applicable to the Performance Period to determine the Earned Performance Unit Award. The ending value of each Performance Unit in an Earned Performance Unit Award will be calculated pursuant to the Valuation Formula at the end of the Performance Period. 6. PERFORMANCE MEASURES. (a) The Board will approve for each Performance Period the applicable Performance Measures, which will be used to determine the number of Performance Units in the Earned Performance Unit Award. Such Performance Measures may be adjusted during a Performance Period to prevent dilution or enlargement of award as a result of extraordinary events or circumstances as determined by the Board or to exclude the effects of extraordinary, unusual or nonrecurring events, changes in accounting principles, discontinued operations, acquisitions, divestitures and material restructuring charges. (b) The Company will (i) notify each eligible employee who has been selected to participate in this Performance Plan that he or she is a Participant under this Performance Plan for such Performance Period and (ii) communicate in writing to each Participant the Target Performance Unit Award granted to such Participant pursuant to Section 5 and the Performance Measure and Valuation Formula applicable to such Participant for such Performance Period. 7. PAYMENT OF AWARDS. Subject to Sections 8 and 9, the value of the Earned Performance Unit Award with respect to a Performance Period will be paid as soon as practicable after the end of such Performance Period, provided the Participant is employed by the Operating Unit as of the date of such payment, and such payment shall be made in the following form: (i) 50% of the value thereof in the form of cash, and (ii) 50% of the value thereof in the form of common stock of HON INDUSTRIES Inc. as Bonus Stock or deferred shares, as elected by the Participant, and as granted by the Board under the 1995 Stock-Based Compensation Plan. All Earned Performance Unit Awards that are paid in cash will be paid in U.S. dollars. The Company may deduct from any payment such amounts as may be required to be withheld under any federal, state, or local tax laws. 8. TERMINATION OF EMPLOYMENT. (a) If a Participant terminates employment with the Company and its Subsidiaries due to death, disability, or Retirement occurring before the date that a Earned Performance Unit Award for a Performance Period is paid, the Participant's Earned Performance Unit Award, if any, will be payable as soon as practicable after the end of such Performance Period, and the value of such Award shall be equal to a value determined using the Performance Measures as of the end of the Performance Period with respect to a number of Performance Units equal to the product of (i) the number of units in the Target Performance Unit Award, multiplied by (ii) a fraction, the numerator of which is the number of months in the Performance Period that occurred prior to such termination of employment, and the denominator of which is the total number of months in such Performance Period ("Prorated Number of Performance Units"), provided that any unpaid units in the Target Performance Unit Award in such event shall be forfeited. (b) Except as provided in Section 9, if a Participant's employment with the Company and its Subsidiaries terminates before the date and Earned Performance Unit Award is paid for any reason other than death, disability or Retirement the Participant will not be entitled to any payment or award under this Performance Plan unless otherwise determined by the Board. 9. CHANGE IN CONTROL OF THE COMPANY. (a) In connection with a Change in Control of the Company, the value of each Target Performance Unit Award shall be determined by the Board prior to the effective date of the Change in Control, and each Participant's Target Performance Unit Award will become payable without proration prior to such date. (b) A "Change in Control of the Company" shall mean: i) the acquisition by any individual, entity or group (with the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of Directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (a) any acquisition directly from the Company, (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (d) any acquisition by any corporation pursuant to a transaction which complies with clauses (a), (b) and (c) of subsection (iii) of this paragraph; or ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that any individual becoming a Director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the Directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or iii) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (a) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of Directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (c) at least a majority of the members of the board of directors of the corporation resulting from such Business combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 10. SALE OF OPERATING UNIT. Except as provided in paragraph 9, in the event of the sale of substantially all of the stock or assets of an Operating Unit, with respect to each Participant employed by such Operating Unit on the date of such sale, the value of each Performance Unit shall be determined as of the date of such sale, and the Participant shall be entitled to payment as of such date of a number of Performance Units equal to the product of (a) the number of Performance Units in the Participant's Target Performance Unit Award, multiplied by (b) a fraction, the numerator of which is the number of months in the Performance Period that occurred prior to such sale, and the denominator of which is the total number of months in such Performance Period, provided that any unpaid Performance Units in such event shall be forfeited. The ending value of each performance unit awarded under this paragraph 10 shall be calculated using the actual purchase price of the Operating Unit in lieu of any ending value calculation that would otherwise have resulted by applying the Valuation Formula under this Plan. 11. TRANSFERS AND CHANGES IN RESPONSIBILITIES. (a) If a Participant's responsibilities materially change or the Participant is transferred during a Performance Period to another Operating Unit or to a position that is not designated or eligible to participate in this Performance Plan, the Company may, as determined by the Board, either (i) continue the Participant's participation in this Performance Plan and, establish a new Target Performance Unit Award and Performance Measures for the Participant with respect to his or her new position, or (ii) terminate the Participant's participation in this Performance Plan and, as of the date of such change or transfer, prorate the Participant's Target Performance Unit Award on the basis of the ratio of the number of months of the Participant's participation during the Performance Period to which such Target Performance Unit Award relates to the aggregate number of months in such Performance Period. (b) If in the event of such a change or transfer the Participant's participation in this Performance Plan in respect of Earned Performance Unit is not terminated pursuant to Section 11(a)(ii), then the Participant's Earned Performance Unit will be prorated on the basis of the number of months of service by the Participant at each Operating Unit during the Performance Period. 12. SECURITY OF PAYMENT OF BENEFITS. Unless otherwise determined by the Board, all Earned Performance Unit Awards will be paid from the Company's general assets, and nothing contained in this Performance Plan will require the Company to set aside or hold in trust any funds for the benefit of any Participant, who will have the status of a general unsecured creditor of the Company. 13. ADMINISTRATION OF THE PLAN. (a) This Performance Plan will be administered by the Board, which may from time to time delegate all or any part of its authority under this Performance Plan to the Human Resources and Compensation Committee of the Board. (b) The Board will take such actions as are required to be taken by it hereunder, may take the actions permitted to be taken by it hereunder, and will have the authority from time to time to interpret this Performance Plan and to adopt, amend, and rescind rules and regulations for implementing and administering this Performance Plan. All such actions will be in the sole discretion of the Board and, when taken, will be final, conclusive, and binding. Without limiting the generality or effect of the foregoing, the interpretation and construction by the Board of any provision of this Performance Plan or of any agreement, notification, or document evidencing the grant of benefits payable to Participants and any determination by the Board in its sole discretion pursuant to any provision of this Performance Plan or any provision of such agreement, notification, or document will be final and conclusive. (c) The existence of this Performance Plan or any right granted or other action taken pursuant hereto will not affect the authority of the Board or the Company to take any other action, including in respect of the grant or award of any annual or long-term incentive or other right or benefit, whether or not authorized by this Performance Plan, subject only to limitations imposed by other benefit plans of the Company and by applicable law. 14. MISCELLANEOUS. (a) This Performance Plan will not confer upon any Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate or modify the terms of such Participant's employment or other service at any time. (b) Except as otherwise provided in this Performance Plan, no right or benefit under this Performance Plan will be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge such right or benefit will be void. No such right or benefit will in any manner be liable for or subject to the debts, liabilities, or torts of a Participant. (c) This Performance Plan may be amended or terminated from time to time by the Board. In the event this Performance Plan is terminated before the last day of a Performance Period, the Earned Performance Unit Award otherwise payable for such Performance Period will be prorated on the basis of the ratio of the number of months in such Performance Period prior to such termination to the aggregate number of months in such Performance Period and will be paid only after the end of such Performance Period, which will be deemed to continue until the expiration thereof as if this Performance Plan had not been terminated. (d) If any provision in this Performance Plan is held to be invalid or unenforceable, no other provision of this Performance Plan will be affected thereby. (e) This Performance Plan will be governed by and construed in accordance with applicable United States federal law and, to the extent not preempted by such federal law, in accordance with the laws of the State of Iowa, without giving effect to the principles of conflict of laws thereof. 15. EFFECTIVENESS. The amendment and restatement of this Performance Plan set forth herein will become effective as of January 1, 2000 EX-21 5 a2042271zex-21.txt EX-21
SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Country/State Subsidiary Of Incorporation Doing Business As - ---------- ---------------- ----------------- Allied Fireside, Inc. Wisconsin Allied Fireside, Inc. Allsteel Inc Illinois Allsteel Inc. BPI Inc. Iowa BPI Inc. The Gunlocke Company Iowa The Gunlocke Company Hearth Technologies Inc. Iowa Hearth Technologies Inc. Hearth Services Inc. Iowa Hearth Services Inc. HFM Partners Iowa HFM Partners Holga Inc. Iowa Holga Inc. The HON Company Iowa The HON Company HON International Inc. Iowa HON International Inc. HON International (Mexico) L.L.C. Iowa HON International (Mexico) L.L.C. HON Financial Corporation III Iowa HON Financial Corporation III HON Financial Services Inc. Iowa HON Financial Services Inc. HON INDUSTRIES (Canada) Inc. Canada HON INDUSTRIES (Canada) Inc. HON Mexico Holdings Inc. Iowa HON Mexico Holdings Inc. HON (Mexico) L.L.C. Iowa HON (Mexico) L.L.C. HON Technology Inc. Iowa HON Technology Inc. Panel Concepts, Inc. Delaware Panel Concepts, Inc. Pearl City Insurance Company Vermont Pearl City Insurance Company T. M. Export Inc. Barbados T. M. Export Inc. Hearth Technologies (Canada) Inc. Canada Inactive HON INDUSTRIAS S.de R.L.de C.V. Mexico HON INDUSTRIAS S.de R.L.de C.V. HON INDUSTRIAS III S.de R.L.de C.V. Mexico HON INDUSTRIAS S.de R.L.de C.V. HON Internacional de Mexico S.de R.L.de C.V. Mexico Inactive Chandler Attwood Limited Iowa Inactive CorryHiebert Corporation Iowa Inactive Hearth Technologies Calgary Inc. Canada Hearth Technologies Calgary Inc. 1640-7041 Quebec Inc. Canada Inactive
EX-23 6 a2042271zex-23.txt EX-23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K, filed March 27, 2001, of our report dated February 5, 2001. It should be noted that we have not audited any financial statements of the Company subsequent to December 30, 2000, or performed any audit procedures subsequent to the date of our report. Arthur Andersen, LLP Chicago, Illinois March 27, 2001 EX-99.B 7 a2042271zex-99_b.txt EX-99B EXHIBIT 99B EXECUTIVE DEFERRED COMPENSATION PLAN HON INDUSTRIES INC. As Amended and Restated Effective November 10, 2000 TABLE OF CONTENTS
PAGE 1. AMENDMENT AND RESTATEMENT................................................................................3 1.1. Amendment and Restatement.......................................................................3 1.2. Purposes........................................................................................3 1.3. Application of the Plan.........................................................................3 2. DEFINITIONS..............................................................................................3 2.1. Definitions.....................................................................................3 2.2. Gender and Number...............................................................................5 3. ELIGIBILITY AND PARTICIPATION............................................................................5 3.1. Eligibility.....................................................................................5 3.2. Participation...................................................................................5 3.3. Partial Year Participation......................................................................5 4. DEFERRAL OPPORTUNITY.....................................................................................5 4.1. Deferral Amount.................................................................................5 4.2. Annual Compensation Deferral Election...........................................................5 4.3. Adjustment in Deferred Amount...................................................................6 4.4. Deferral of Receipt of Shares under Stock-Based Compensation Plans..............................7 4.5. Length of Deferral..............................................................................8 4.6 Form of Payment.................................................................................8 4.7. Termination from Service Other Than Retirement..................................................9 4.8. Death Benefit...................................................................................9 4.9. Financial Hardship..............................................................................9 4.10. Financial Determination.........................................................................9 4.11. Vesting........................................................................................10 4.12. Funding........................................................................................10 4.13. Deduction Issues...............................................................................10 5. INDIVIDUAL ACCOUNTS.....................................................................................10 5.1. Participants' Accounts.........................................................................10 5.2. Charges Against Accounts.......................................................................11 5.3. Participant Statements.........................................................................11 6. ADMINISTRATION..........................................................................................11 6.1. Administration.................................................................................11 6.2. Decisions Binding..............................................................................11 6.3. Expenses.......................................................................................11 6.4. Indemnification and Exculpation................................................................11 7. BENEFICIARY DESIGNATION.................................................................................11 7.1. Designation of Beneficiary.....................................................................11 7.2. Death of Beneficiary...........................................................................11 7.3. Ineffective Designation........................................................................11 i 8. WITHHOLDING OF TAXES....................................................................................12 9. CHANGE IN CONTROL. AMENDMENT, AND TERMINATION..........................................................12 9.1. Change in Control..............................................................................12 9.2. Plan Amendment and Termination.................................................................13 10. CLAIMS PROCEDURE........................................................................................13 10.1. Initial Claim..................................................................................13 10.2. Denial of Claim................................................................................13 10.3. Review of Claim Denial.........................................................................13 11. MISCELLANEOUS...........................................................................................13 11.1. Unfunded Plan..................................................................................13 11.2. Nontransferability.............................................................................14 11.3. Successors.....................................................................................14 11.4. Severability...................................................................................14 11.5. Applicable Law.................................................................................14
ii HON INDUSTRIES INC. EXECUTIVE DEFERRED COMPENSATION PLAN 1. AMENDMENT AND RESTATEMENT 1.1. AMENDMENT AND RESTATEMENT. HON INDUSTRIES Inc., an Iowa corporation (the "Company"), hereby amends and restates, effective as of November 10, 2000 (the "Effective Date"), the HON INDUSTRIES Inc. Executive Deferred Compensation Plan (the "Plan"), a deferred compensation plan for its eligible employees. The Plan was most recently amended and restated effective January 1, 2000. 1.2. PURPOSES. The purpose of the Plan is to give eligible executives the opportunity to defer the receipt of compensation to supplement their retirement savings and to achieve their personal financial planning goals. 1.3. APPLICATION OF THE PLAN. The terms of the Plan, as amended and restated, shall apply only to eligible executives who are in the active employ of an Employer on and after the Effective Date. 2. DEFINITIONS 2.1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meaning set forth below and, when the defined meaning is intended, the term is capitalized: (a) "Account" shall mean the aggregate of the individual bookkeeping Cash Subaccount, Transferable Stock Subaccount, and Nontransferable Stock Subaccount established for each Participant, including any subaccounts of the Cash Subaccount, Transferable Stock Subaccount and Nontransferable Stock Subaccount established under the Plan, for the purpose of crediting a Participant's deferrals and earnings hereunder, as further described in Section 5.1. (b) "Annual Bonus" means bonus awards awarded by the Company to a Participant as provided in the HON INDUSTRIES Inc. Executive Bonus Plan, or any successor plan thereto. (c) "Base Salary" means the annualized salary as of the close of each Plan Year, including all regular basic wages before reduction for any amounts deferred on a tax-qualified or nonqualified basis, payable in cash to a Participant for services rendered to an Employer during the Plan Year. Base Salary shall exclude bonuses, incentive compensation, special fees or awards, allowances, or any other form of premium or incentive pay, or amounts designated by an Employer as payment toward or reimbursement of expenses. (d) "Board of Directors" means the board of directors of the Company. (e) "Cash Profit Sharing" means amounts paid by the Company under the HON INDUSTRIES Inc. Cash Profit Sharing Plan, or any successor plan thereto. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. (g) "Committee" means the Human Resources and Compensation Committee of the Board of Directors or a delegate of such Committee. 3 (h) "Compensation" means the remuneration paid or awarded to the Participant by an Employer as Base Salary, Annual Bonus, Cash Profit Sharing or as an LTIP Award or LTP Award. (i) "Company" means HON INDUSTRIES Inc., an Iowa corporation. (j) "Deferred Amount" means, with respect to a Participant, the Compensation deferred for a Plan Year under the Plan pursuant to the Participant's election in accordance with Section 4.2 for such Plan Year. (k) "Employer" means the Company, and any Subsidiary which adopts the Plan or which continues the Plan as a successor under Section 11.3. (l) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor thereto. (m) "LTP Award" means any payment made pursuant to the HON INDUSTRIES Long-Term Performance Plan. (n) "LTIP Award" means any payment made pursuant to the HON INDUSTRIES Inc. Executive Long-Term Incentive Compensation Plan. (o) "Net Shares" means the difference between the number of shares of Stock subject to a stock option exercise and the number of shares of Stock delivered to the Company to satisfy the stock option exercise price less any shares used to satisfy the minimum amount of FICA or withholding taxes due upon the stock option exercise as may be elected by the Participant. (p) "Participant" means an individual who satisfies the requirements of Section 3.1. (q) "Plan Year" means the consecutive 12-month period beginning each January 1 and ending December 31. (r) "Prime Rate" means the interest rate charged by the Northern Trust Company, Chicago, Illinois on corporate loans made to their best customers as of the first business day coincident with or immediately following the January 1 of each Plan Year. (s) "Retirement" means the discontinuance of employment with the Company and its Subsidiaries after the attainment of age 65, or age 55 with ten years of service with an Employer. (t) "Subsidiary" means a corporation which is wholly owned by the Company. (u) "Stock" means the Company's common stock, $1.00 par value. (v) "Termination from Service" means the discontinuance of employment with the Company and its Subsidiaries by reason of resignation, discharge, Retirement, disability, or death. A transfer of employment from the Company or a Subsidiary to another Subsidiary shall not constitute a Termination from Service. (w) "Stock Unit" means the notational unit representing the right to receive one share of Stock. 4 2.2. GENDER AND NUMBER. Except when otherwise indicated by the context, any masculine term used in the Plan also shall include the feminine gender; and the definition of any plural shall include the singular and the singular shall include the plural. 3. ELIGIBILITY AND PARTICIPATION 3.1. ELIGIBILITY. Subject to Section 9.1, participation in the Plan shall be limited to those executive employees of an Employer who are eligible to participate in the HON INDUSTRIES Inc. Executive Bonus Plan. 3.2. PARTICIPATION. Eligible executive employees shall be notified of their ability to participate prior to the beginning of each Plan Year in which they are eligible, or as soon as administratively possible thereafter. No employee shall have the right to be selected to participate in the Plan or, having been so selected, to be selected to participate in any future Plan Year. Further, nothing in the Plan shall interfere with or limit in any way the right of an Employer to terminate any Participant's employment at any time, nor confer upon any Participant a right to continue in the employ of an Employer, and all Participants shall remain subject to change of salary and other terms of employment, transfer, change of job, discipline, layoff, discharge, or any other change of status. In the event a Participant ceases to be eligible for continued participation in the Plan for any reason, such individual shall become an inactive Participant, retaining all the rights relating to previous deferrals as described under the Plan, except the right to make any further deferrals, until such time that such individual again is determined by the Committee to be an active Participant. 3.3. PARTIAL YEAR PARTICIPATION. In the event that an individual becomes eligible to participate in the Plan after the beginning of a Plan Year, an Employer may allow such individual to elect a deferral amount pursuant to Section 4.2 for such Plan Year within thirty (30) calendar days after the individual becomes eligible to so participate (but before the end of such Plan Year). An election submitted pursuant to this Section 3.3 shall apply only to Compensation earned or awarded for the Plan Year during the period subsequent to the date on which a valid election to defer is received by the Employer from that Participant. 4. DEFERRAL OPPORTUNITY 4.1. DEFERRAL AMOUNT. A Participant may elect to defer all or a portion of his Compensation earned or awarded for a Plan Year, as set forth in Section 4.2. 4.2. ANNUAL COMPENSATION DEFERRAL ELECTION. (a) For each Plan Year, each Participant may elect to defer the payment of one or more components of Compensation earned or awarded for a Plan Year as set forth in Section 4.2(b) by filing a form in accordance with rules prescribed by the Committee. The election shall specify the percentage or dollar amount of the Deferred Amount that is to be credited to the Cash Subaccount and the Transferable Stock Subaccount. (b) Each Participant's election shall specify: (1) The Deferred Amount, expressed as percentage or a flat dollar amount of each of: 5 (A) The Participant's Base Salary earned during the Plan Year (or such shorter period commencing on the date of the Participant's election under this Section); (B) The Participant's Annual Bonus awarded for the Plan Year; (C) The Participant's Cash Profit Sharing payable during the Plan Year; (D) The Participant's LTIP Award which is paid during the Plan Year (for the prior award period); (E) The Participant's LTP Award which is paid during the Plan Year (for the prior award period); and (F) Any other amounts designated by the Company from time to time. (2) Subject to Section 4.4, the future Plan Year (or month or quarter thereof) in which all Deferred Amounts for a Plan Year and earnings credited thereon are payable; and (3) The form of payment of all Deferred Amounts for a Plan Year and earnings credited thereon. (c) Any election to defer amounts specified in Section 4.2(b) for any Plan Year shall be made at any time before the commencement of such Plan Year and shall be effective as of the beginning of such Plan Year. Subject to Section 4.6(d), an election under this Section 4.2 shall be irrevocable with respect to the Deferred Amount for the Plan Year for which the election is in effect. 4.3. ADJUSTMENT IN DEFERRED AMOUNT. (a) The Deferred Amount credited to the Participant's Cash Subaccount shall be credited as of the last day of each month with earnings, computed on a monthly basis and compounded monthly, in an amount equal to the product of the ending monthly balance credited to the Participant's Cash Subaccount, multiplied by a rate equal to one (1) percentage point above the current Prime Rate. (b) The Deferred Amount credited to the Participant's Transferable Stock Subaccount shall be invested in that number of whole and fractional Stock Units determined by dividing the amount (expressed in dollars) of the Deferred Amount by the closing market price of a share of Stock on the date the Deferred Amount would otherwise have been paid to the Participant. If the national exchange on which the Stock is traded is not open for business on that date, then the closing market price on the most recent date on which the exchange was open shall be used. The Transferable Stock Subaccount shall be so invested on the date the Deferred Amount would otherwise have been paid to the Participant. On each date when the Company pays a cash dividend, the Transferable Stock Subaccount shall be credited with a number of additional Stock Units determined under the following sentence. The number of additional Stock Units is equal to the amount of cash dividends paid by the Company on such date on that number of Stock Units credited to the Transferable Stock Subaccount on the record date for the dividend payment, divided by the closing market price per share of Stock on the date the dividend is paid. Appropriate adjustments in the Transferable Stock Subaccount shall be made as equitably required to prevent dilution or enlargement of the subaccount from any stock dividend, stock split, reorganization or other such corporate transaction or event. 6 (c) A Participant may transfer amounts between the Cash Subaccount and the Transferable Stock Subaccount pursuant to this Section 4.3(c). Once each calendar quarter, during the trading window selected by management for Section 16 officers, each Participant may: (1) elect to convert a portion or all of the Stock Units credited to the Participant's Transferable Stock Subaccount to an equivalent hypothetical cash amount, based upon the closing price of a share of Stock on the date the election is received by the Company, and such hypothetical cash amount shall be added to the Participant's Cash Subaccount, or (2) elect to convert a portion or all of the amount credited to the Participant's Cash Subaccount to an equivalent number of Stock Units, based upon the closing price of a share of Stock on the date the election is received by the Company, and such Stock Units shall be added to the Participant's Transferable Stock Subaccount. (d) Notwithstanding the foregoing, except as provided in Section 4.6(c), no earnings shall be credited to a Participant's Cash Subaccount and no dividends shall be credited to a Participant's Transferable Stock Subaccount after the Participant incurs a Termination from Service, with or without cause, for reasons other than Retirement, disability, or death. 4.4. DEFERRAL OF RECEIPT OF SHARES UNDER STOCK-BASED COMPENSATION PLANS. This Section establishes special procedures for deferring the delivery and receipt of Stock which Participants may receive pursuant to an award under the HON INDUSTRIES Inc. Stock-Based Compensation Plan or any similar Plan the Company may from time to time adopt. The Stock awards are governed by the stock plan under which they are granted. No stock options, restricted stock or derivative stock awards are authorized to be issued under the Plan. Participants who elect to defer receipt of Stock will have no rights as stock holders of the Company with respect to allocations made to their Nontransferable Stock Subaccounts established under this Section except the right to receive dividend equivalent allocations as hereafter described. (a) The Committee shall establish procedures for making deferral elections with respect to awards and such procedures may vary depending on the nature of the award. Such procedures shall establish the amount of time prior to the date a Participant would be in constructive receipt of the shares subject to the award that a Participant must make a deferral election. Any such election involving shares which have been issued (e.g., restricted stock awards) shall be conditioned on the Participant transferring the shares to the Company. (b) This paragraph provides additional rules with respect to the deferral of receipt of Stock upon the exercise of a nonqualified stock option. A Participant can elect to defer receipt of Net Shares of Stock resulting from a stock-for-stock exercise of an exercisable stock option issued to the Participant by completing and submitting to the Company an irrevocable stock option deferral election by a date which is at least six months in advance of the date of exercise of the stock option and in the calendar year prior to the date of the exercise of the stock option. The stock option exercise must occur on or prior to the expiration date of the stock option and must be accomplished by delivering by the attestation method, on or prior to the exercise date, shares of Stock which have been personally owned by the Participant for at least six months prior to the exercise date and have not been used in a stock swap in the prior six months. At the time of the deferral election the Participant may designate that some of the shares subject to the stock option shall be used to satisfy FICA or any other taxes due upon the stock option exercise but only to the extent of the minimum amount required under applicable withholding regulations. A Participant's deferral election shall not be effective if the stock option as to which the Participant has made the deferral election terminates prior to the exercise date selected by the Participant. If the Participant dies or fails to deliver shares of Stock which have been personally owned 7 by the Participant at least six months prior to the exercise date (and have not been used in a stock swap in the prior six months) in payment of the exercise price, then the deferral election shall not be effective. (c) A Nontransferable Stock Subaccount will be established for each Participant with respect to each deferral election made pursuant to this Section 4.4. For each Net Share deferred, a Stock Unit will be credited as of the date of the stock option exercise to the Nontransferable Stock Subaccount so established. The Committee shall adjust the Nontransferable Stock Subaccount of each Participant to reflect dividends payable with respect to the Stock from time to time in the manner described in Section 4.3(b) with respect to Transferable Stock Subaccounts. Amounts credited to a Participant's Nontransferable Stock Subaccount may not be converted to the Cash Subaccount. 4.5. LENGTH OF DEFERRAL. Each Participant must elect the subsequent Plan Year in which a Deferred Amount, and earnings credited thereon, is payable. The length of each period commencing on the date of the Participant's election and ending on the date of payment with respect to a Deferred Amount and earnings thereon, as elected by a Participant, for a Plan Year shall be not less than one (1) year following the end of the Plan Year for which the election is made. 4.6. FORM OF PAYMENT. (a) Subject to Section 4.6, each Deferred Amount, and earnings thereon, shall be payable, pursuant to the Participant's election under Section 4.2, in the form of either: (1) a single sum payment, or (2) monthly, quarterly or annual installment payments over a period of up to 15 years. Amounts from the Cash Subaccount are payable in cash. Amounts from the Transferable Stock Subaccount and Nontransferable Stock Subaccount shall be payable in Stock, except fractional shares shall be distributed in the form of cash in an amount equal to the value of the fractional shares on a date selected by the Company within a reasonable period prior to the payment. The Company shall reduce the amount of any cash or Stock payment to the extent the Company deems appropriate for federal, state or local tax withholding or other purposes required by law or authorized by the Participant. (b) If the Participant elects payment in the form of annual installment payments, the initial installment payment shall be made on January 31 of the Plan Year selected by the Participant. The remaining annual installment payments shall be made in January each year thereafter until the Participant's entire Account has been paid. If the Participant elects payment in the form of monthly or quarterly installments, the initial installment shall be made as of the first Friday of the month or quarter, respectively, designated by the Participant. (c) During the installment payment period, earnings and dividends shall be credited with respect to the Participant's Account in the manner provided in Section 4.3(a) and (b). The amount of each installment payment shall be equal to the balance remaining in the Participant's Account (or, if the election is with respect to a subaccount, such subaccount) immediately prior to each such payment, multiplied by a fraction, the numerator of which is one (1), and the denominator of which is the number of installment payments remaining, with the last installment consisting of the balance of the Participant's Account (or, as applicable, subaccount). (d) A Participant may change an election with respect to a Deferred Amount and earnings thereon to any form or timing otherwise permitted under the Plan, provided that such election is made more than one year prior to the date for payment commencement previously elected by the Participant with respect to such Deferred Amount and earnings thereon, and provided that any new deferral period resulting from such a change in election shall not end less than one (1) year following the end of the 8 Plan Year in which such new election is made. The Committee, at its sole discretion, may determine for any reason that such change in election will not be allowed. If the requirements for changing an election set forth in this paragraph are not satisfied, a Participant's election of the form and timing of payment with respect to a Deferred Amount may not be changed or revoked. 4.7. TERMINATION FROM SERVICE OTHER THAN RETIREMENT. Notwithstanding any election by a Participant pursuant to Section 4.2, in the case of any Participant who incurs a Termination from Service during a Plan Year for any reason other than Retirement or Death, payment of the Participant's Account shall be made in a single sum payment (regardless of the form otherwise elected by the Participant) on or before January 31 of the calendar year following the effective date of such Termination from Service. 4.8. DEATH BENEFIT. If a Participant dies with all or a portion of his Account unpaid, the remaining amount shall be paid to his beneficiary, as designated in accordance with Article 7, in the form (lump sum or installments) and time elected by the Participant under Section 4.6. Notwithstanding the foregoing, the Committee may alter the form and timing of any payments after taking into account the circumstances of the Participant's death and the welfare of the Participant's beneficiary. Upon the death of a Participant all rights and privileges of the Participant contained in Article 4, shall inure to the benefit of such Participant's designated beneficiary in accordance with Article 7. 4.9. FINANCIAL HARDSHIP. The Committee shall have the sole authority to alter the timing or manner of payment of a Participant's Account in the event that the Participant (or the Participant's beneficiary, if the Participant has died) establishes, to the satisfaction of the Committee, severe financial and/or medical hardship at the time of distribution. In such event the Committee may: (a) Provide that all or a portion of any Deferred Amount and earnings thereon be paid immediately in a single sum payment, or (b) Provide that all or a portion of the installments payable over a period of time shall be paid immediately in a single sum payment; or (c) Provide for such other installment payment schedule as deemed appropriate by the Committee under the circumstances. However, the amount distributed pursuant to this Section shall not exceed that amount which is reasonably necessary, as determined by the Committee, for the Participant or beneficiary to meet the financial and/or medical hardship at the time of distribution. A request for a payment for hardship reasons must be accompanied or supplemented by such evidence of hardship as the Committee may reasonably require. The severity of the financial and/or medical hardship shall be judged by the Committee. Severe financial and/or medical hardship will be deemed to exist in the event of the Participant's or beneficiary's long and serious illness, impending bankruptcy, or other similar unforeseeable and extraordinary circumstances arising as a result of events beyond the control of the Participant or beneficiary. The Committee's decision with respect to the severity of financial and/or medical hardship and the manner in which, if at all, the payment of deferred amounts shall be altered or modified, shall be final, conclusive, and not subject to appeal. 4.10. FINANCIAL DETERMINATION. As soon as practicable after a Triggering Event, the value of each Participant's Account (determined as of the last day of the month preceding the date of payment) shall be paid in full to such Participant and/or such Participant's beneficiary as promptly as practicable, and the Plan shall terminate. For purposes of this Section, a "Triggering Event" shall include any of the followings: 9 (a) A lender to the Company notifies the Company of default under a credit agreement and the default is not cured within 90 days. (b) As of any fiscal quarter the Company's coverage for the most recent trailing four quarters falls below 2.0 to 1.0 as calculated by Consolidated Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) divided by Consolidated Interest Expense. For purposes of this calculation non-cash writeoffs shall be excluded. (c) As of any fiscal quarter the Company's ratio of Total Assets to Total Liabilities, as reflected on the Company's balance sheet, becomes less than 1 to 1. 4.11. VESTING. A Participant shall have a full and immediate nonforfeitable interest in his Account at all times. 4.12. FUNDING. The Company's obligations under the Plan shall in every case be an unfunded and unsecured promise to pay. Each Participant's or beneficiary's rights under the Plan shall be no greater than those of general, unsecured creditors of the Company. The amount of each Participant's Account shall be reflected on the accounting records of the Employer but shall not be construed to create, or require the creation of, a trust, custodial or escrow account. No Participant shall have any right, title, or interest whatever in or to any investment reserves, accounts, or funds that the Employer may purchase, establish, or accumulate, and, except as provided in the next sentence, no Plan provision or action taken pursuant to the Plan shall create or be construed to create a trust or a fiduciary relationship of any kind between an Employer and a Participant or any other person. All amounts paid under the Plan shall be paid in cash from the general assets of an Employer, and an Employer shall not be obligated under any circumstances to fund its financial obligations under the Plan, except that, notwithstanding the foregoing, the Company shall be obligated not later than upon the occurrence of a Change in Control (as defined in Section 9.1(b)), to transfer assets to one or more irrevocable grantor trusts established by the Company in an amount at least sufficient to provide for the obligations of the Employers under the Plan as of the date of such transfer and, effective as of such date, the provision contained in Section 4.10 shall be null and void. The assets of any such trust shall at all times be subject to the claims of the general unsecured creditors of the Employers and not be subject to the prior claim of any Participant or beneficiary under the Plan. Any such trust so established and the rights and obligations of any individual, the Employers, and the trustee in such trust shall be governed exclusively by such trust; provided that the provisions of the Plan shall govern exclusively the rights of a Participant or beneficiary to benefits under the Plan. 4.13. DEDUCTION ISSUES. Notwithstanding the foregoing provisions of this Article 4, if the deduction of all or any portion of any payment otherwise due to be made by the Company under the Plan would be disallowed solely by reason of Section 162(m) of the Code, but for the operation of this Section, then such payment (or portion thereof) shall be deferred and made at the earliest time that Section 162(m) would not apply to disallow the corresponding deduction by the Company. 5. INDIVIDUAL ACCOUNTS 5.1. PARTICIPANTS' ACCOUNTS. The Company shall establish and maintain an Account for each Participant under the Plan for the benefit of such Participant, consisting of a Cash Subaccount, Transferable Stock Subaccount and Nontransferable Stock Subaccount, and within each of them, separate subaccounts for each Deferred Amount. Each subaccount shall be credited with a Participant's Deferred Amount at the time such amounts otherwise would have been paid to the Participant had such amounts not been deferred, and shall be credited with earnings in accordance with Section 4.3. 10 5.2. CHARGES AGAINST ACCOUNTS. There shall be charged against each Participant's Account any payments made to the Participant or to a Participant's beneficiary. 5.3. PARTICIPANT STATEMENTS. Statements that identify the Participant's Account balance shall be provided to Participants on a monthly basis. 6. ADMINISTRATION 6.1. ADMINISTRATION. This Plan shall be administered by the Committee. The Committee shall have full power to construe and interpret the Plan, to decide questions arising under the Plan, and to take such other action as may be appropriate to carry out the purposes of the Plan. 6.2. DECISIONS BINDING. All determinations and decisions made by the Committee, pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, including the Company, its owners, employees, Participants and their estates and beneficiaries. 6.3. EXPENSES. The expenses of administering the Plan shall be borne by the Company. 6.4. INDEMNIFICATION AND EXCULPATION. The agents, officers, directors, and employees of the Company and its Subsidiaries and the Committee shall be indemnified and held harmless by the Company against and from any and all loss, cost, liability, or expense that may be imposed upon or reasonably incurred by them in connection with or resulting from any claim, action, suit, or proceeding to which they may be a party or in which they may be involved by reason of any action taken or failure to act under this Plan and against and from any and all amounts paid by them in settlement (with the Company's written approval) or paid by them in satisfaction of a judgment in any such action, suit or proceeding. The foregoing provision shall not be applicable to any person if the loss, cost, liability, or expense is due to such person's gross negligence or willful misconduct. 7. BENEFICIARY DESIGNATION 7.1. DESIGNATION OF BENEFICIARY. Each Participant shall be entitled to designate a beneficiary or beneficiaries who, upon the Participant's death, will receive the amounts that otherwise would have been paid to the Participant under the Plan. All designations shall be signed by the Participant, and shall be in a form prescribed by the Committee. The Participant may change his or her designation of beneficiary at any time, on a form prescribed by the Committee. The filing of a new beneficiary designation form by a Participant shall automatically revoke all prior designations by that Participant. 7.2. DEATH OF BENEFICIARY. In the event that all the beneficiaries named by a Participant, pursuant to Section 7.1 herein, predecease the Participant, the deferred amounts that would have been paid to the Participant shall be paid to the Participant's estate. 7.3. INEFFECTIVE DESIGNATION. In the event the Participant does not designate a beneficiary, or for any reason such designation is ineffective in whole or in part, the ineffectively designated amounts shall be paid to the Participant's estate. 11 8. WITHHOLDING OF TAXES The Company shall have the right to deduct from all payments made pursuant to the Plan such amounts as it may reasonably estimate as sufficient to satisfy federal, state and local tax withholding requirements. 9. CHANGE IN CONTROL, AMENDMENT, AND TERMINATION 9.1. CHANGE IN CONTROL (a) A Participant shall retain rights to payment of all Deferred Amounts, including earnings credited in accordance with this Plan, in the event of a Change in Control. (b) For purposes of the Plan, a "Change in Control" means (i) the acquisition by any individual, entity or group (with the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (a) any acquisition directly from the Company, (b) any acquisition by the Company, (c) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (d) any acquisition by any corporation pursuant to a transaction which complies with clauses (a), (b) and (c) of subsection (iii) of this paragraph; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least two-thirds of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least three-quarters of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (a) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then 12 outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (c) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 9.2. PLAN AMENDMENT AND TERMINATION. The Board of Directors or the Committee has the authority to amend, modify, and/or terminate the Plan at any time. No amendment or termination of the Plan shall in any manner adversely affect any Participant's interest in his Account, without the consent of the Participant. Without limiting the foregoing, the Board of Directors may, in its sole discretion, terminate the Plan in its entirety, in which case the value of each Participant's Account shall be paid in full to such Participant and/or such Participant's beneficiary as promptly as practicable, or the Board of Directors may freeze the Plan by precluding any further deferral elections and/or other credits, but otherwise maintain the balance of the provisions of the Plan. 10. CLAIMS PROCEDURE 10.1. INITIAL CLAIM. Payments under the Plan shall be paid in accordance with the provisions of the Plan. The Participant, or a beneficiary designated pursuant to Article 7 or any other person claiming through the Participant, shall mail or deliver to the Committee a written request for benefits under this Plan. Such claim shall be reviewed by the Committee or its delegate. 10.2. DENIAL OF CLAIM. If the claim is denied, in full or in part, the Committee or its delegate shall provide a written notice within ninety (90) days setting forth the specific reasons for denial, and any additional material or information necessary to perfect the claim, and an explanation of why such material or information is necessary, all appropriate information and an explanation of the steps to be taken if a review of the denial is desired. 10.3. REVIEW OF CLAIM DENIAL. If the claim is denied and a review by the Board of Directors is desired, the Participant (or beneficiary) shall notify the Board of Directors or its delegate in writing within sixty (60) days (a claim shall be deemed denied if the Board of Directors does not take any action within the aforesaid ninety (90) day period) after receipt of the written notice of denial. In requesting a review, the Participant or his beneficiary may request a review of the Plan document or other pertinent documents, may submit any written issues and comments, may request an extension of time for such written submission of issues and comments, and may request that a hearing be held, but the decision to hold a hearing shall be within the sole discretion of the Board of Directors. 11. MISCELLANEOUS 11.1. UNFUNDED PLAN. This Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for "a select group of management or highly compensated employees" within the meaning of Sections 201, 301, and 401 of ERISA, and therefore is further intended to be exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA. Accordingly, the Plan shall terminate and no further benefits shall accrue hereunder in the event it is determined by a court of competent jurisdiction or by an opinion of counsel to the Company that such balance of the Plan constitutes an employee pension benefit plan within the meaning of Section 3(2) of ERISA, which is not so exempt. In addition, in the absolute discretion of the Committee, the vested benefit of each Participant accrued under such balance of the Plan on the date of termination shall be paid immediately to such Participant in a lump sum. 13 11.2. NONTRANSFERABILITY. A Participant's rights or interests in the Plan may not be sold, transferred, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. In no event shall the Company make any payment under the Plan to any assignee or creditor of a Participant or to any assignee or creditor of a Participant's beneficiary. 11.3. SUCCESSORS. All obligations of the Company under the Plan shall be binding upon and inure to the benefit of any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company. 11.4. SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 11.5. APPLICABLE LAW. To the extent not preempted by federal law, the Plan shall be governed and construed in accordance with the laws of the state of Iowa. IN WITNESS WHEREOF, the Company has caused this instrument to be executed and its corporate seal to be hereunder affixed this 9th day of November, 2000. HON INDUSTRIES Inc. By: ______________________________ Title: ___________________________ ATTEST: Title: ____________________ 14 -----END PRIVACY-ENHANCED MESSAGE-----