-----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, DPwiigjkjnIEXUOy02E3ntbFhyDNXtzqifuzKlb7r+y3CJOqDv7wLOiGkY70P6XW B7Qoi4ziRunUd+ZkDv2i/w== 0000950131-97-006326.txt : 19971024 0000950131-97-006326.hdr.sgml : 19971024 ACCESSION NUMBER: 0000950131-97-006326 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19971023 SROS: NASD 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: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-36433 FILM NUMBER: 97699682 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 S-3/A 1 AMENDMENT NO. 2 TO FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1997 REGISTRATION NO. 333-36433 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- HON INDUSTRIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- IOWA (STATE OR OTHER JURISDICTION OF 42-0617510 (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 414 EAST THIRD STREET P.O. BOX 1109 MUSCATINE, IOWA 52761-7109 (319) 264-7400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- JAMES I. JOHNSON VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY HON INDUSTRIES INC. 414 EAST THIRD STREET P.O. BOX 1109 MUSCATINE, IOWA 52761-7109 (319) 264-7400 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: ELIZABETH C. KITSLAAR, ESQ. DEIRDRE M. VON MOLTKE, ESQ. JONES, DAY, REAVIS & POGUE SIDLEY & AUSTIN 77 WEST WACKER DRIVE ONE FIRST NATIONAL PLAZA CHICAGO, ILLINOIS 60601 CHICAGO, ILLINOIS 60603 (312) 782-3939 (312) 853-7000 -------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or reinvestment plans, please check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM AGGREGATE AMOUNT OF OFFERING PRICE REGISTRATION TITLE OF SHARES TO BE REGISTERED (1)(2) FEE - ----------------------------------------------------------------------------- Common Stock, $1.00 par value (including Preferred Share Purchase Rights to purchase shares of Series A Junior Participating Preferred Stock, $1.00 par value)............. $213,025,640.63 $64,553.22 - -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (1) Includes 509,250 shares that the Underwriters have the option to purchase to cover over-allotments, if any. (2) The registration fee was paid on September 25, 1997. -------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED OCTOBER 23, 1997 PROSPECTUS 3,395,000 SHARES HON INDUSTRIES INC. COMMON STOCK ----------- Of the 3,395,000 shares of Common Stock of HON INDUSTRIES Inc., an Iowa corporation (the "Company"), offered hereby, 1,000,000 shares are being offered by the Company and 2,395,000 shares are being offered by a certain shareholder (the "Selling Shareholder"). The Company will not receive any of the proceeds of shares sold by the Selling Shareholder. See "Selling Shareholder." Of the 3,395,000 shares of Common Stock of the Company offered, 2,716,000 shares are being offered inside the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and 679,000 shares are being offered in a concurrent international offering outside the United States and Canada by the International Managers (the "International Offering" and together with the U.S. Offering, the "Offerings"). The price to the public and the aggregate underwriting discount per share will be identical for both offerings. See "Underwriting." The Common Stock is quoted on the Nasdaq National Market under the symbol "HONI." On October 1, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $59 5/8 per share. See "Market Price of and Dividends on Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO SELLING PRICE TO UNDERWRITING PROCEEDS TO SHAREHOLDER PUBLIC DISCOUNT (1) COMPANY (2) (2) - -------------------------------------------------------------------------------------------- Per Share $ $ $ $ - -------------------------------------------------------------------------------------------- Total (3) $ $ $ $ - --------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) The Company and the Selling Shareholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deduction of expenses, estimated at $500,000, which are payable by the Company. The Selling Shareholder will not be paying any of the expenses of the Offerings, other than the expenses of its counsel. (3) The Company has granted the U.S. Underwriters and the International Managers options, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 407,400 and 101,850, respectively, additional shares of Common Stock on the same terms set forth above, to cover over-allotments, if any. If the over-allotment options are exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Company, counsel for the Selling Shareholder and counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Common Stock will be made against payment therefor in New York, New York on or about , 1997. ----------- MERRILL LYNCH & CO. WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. MCDONALD & COMPANY INCORPORATED SECURITIES, INC. ----------- The date of this Prospectus is , 1997. [Pictures of filing cabinets, seating and office systems appear here.] CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SHARES OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE SHARES OF COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." HON(R), Concensys(R), Every-Day(R), Regent(R) and Solutions Seating(R) are registered trademarks of the Company. 2 PROSPECTUS SUMMARY The following is a summary of certain information in this Prospectus. This summary is not intended to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information and financial statements appearing elsewhere in this Prospectus or incorporated herein by reference. Investors should consider carefully the information set forth in "Risk Factors" before making any decision to invest in the Common Stock. Except as otherwise noted, all information in this Prospectus assumes that the Underwriters' over-allotment options are not exercised. Unless the context otherwise requires, the term "Company" means HON INDUSTRIES Inc. and its subsidiaries and "fiscal 1992," "fiscal 1993," "fiscal 1994," "fiscal 1995," and "fiscal 1996" mean the fiscal years ended January 2, 1993, January 1, 1994, December 31, 1994, December 30, 1995 and December 28, 1996, respectively, and "fiscal 1997" means the fiscal year ending January 3, 1998. THE COMPANY The Company is a leading designer and manufacturer of value-priced office furniture and furniture systems in the United States. The Company's products are marketed through multiple distribution channels primarily to small- and medium-sized businesses and home offices on the basis of price, quality, selection and quick delivery. The Company maintains its leadership position by offering "compelling value" to its customers through a broad line of quality office furniture, including filing cabinets, seating, office systems, desks and related products, at attractive price points, with quick delivery. The Company's low-cost manufacturing capabilities, extensive distribution network, innovative product development and unique employee ("member") culture enable it to provide compelling value to its customers. In addition to its core office furniture business, the Company, through its Hearth Technologies Inc. subsidiary ("Hearth Technologies"), is the leading manufacturer of wood- and gas-burning fireplaces, stoves and related accessories in the United States. The Company markets its hearth products through the widely-recognized "Heatilator" and "Heat-N-Glo" brand names. In fiscal 1996, the Company had net sales of $998.1 million, of which $887.3 million was attributable to office furniture products and $110.8 million was attributable to hearth products. A key driver of the Company's success has been its highly-efficient and low- cost manufacturing operations. Since its inception, the Company has been committed to constant 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 significantly contributed to increased productivity, lower manufacturing costs, and improved product quality and workplace safety. As a result of RCI, productivity, as measured by annual revenue per member, has increased 50% over the last five years. In addition, the Company's RCI efforts enable it to offer short average lead times of two to four weeks, from receipt of order to shipment, for most of its products. The Company distributes its products through an extensive network of independent office furniture dealers, office products dealers, wholesalers and retailers. The Company is one of the top two suppliers of office furniture to each of the largest national office products dealers, which are Boise Cascade Corporation, BT Office Products International, Inc., U.S. Office Products Company, Corporate Express Inc., Office Depot Inc.--Business Services Division and Staples Commercial Advantage ("mega-dealers"), and to the Office Depot and Office Max superstores. The Company offers reduced freight costs and complete order delivery, regardless of the order size or combination of products, by manufacturing at multiple locations and cross-docking products throughout the United States. The Company believes that more of its products are available for immediate delivery, through over 135 nationwide wholesaler customer locations, than those of any of its competitors. 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 better quality. The Company's ability to apply RCI techniques to reduce manufacturing costs and enhance value allows its products to be sold 3 at prices lower than those offered for competing products. For example, in 1996 the Company redesigned its leading line of file cabinets to add features while lowering the Company's costs and maintaining prices. As a result of the Company's aggressive product development efforts, approximately 45% of the Company's 1996 sales volume consisted of products introduced within the last three fiscal 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 ownership plan, and participates in the Company's qualified profit sharing plan. In addition, most production members are eligible for incentive bonuses. According to industry sources, U.S. office furniture shipments, which totaled approximately $10 billion in 1996, have grown at a compound annual growth rate of approximately 7% over the three-year period ended December 31, 1996. The U.S. office furniture market consists of two primary segments--the contract segment and the transactional segment. The contract segment has traditionally been characterized by one-time sales of large quantities of office furniture to large corporations, such as for new office facilities, relocations or department or office redesigns, which are frequently customized to meet specific client and designer preferences. 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. Over the last several years, as competition in the contract segment has intensified, dealers have sought to provide their clients with moderately- priced alternatives to premium-priced contract furniture. In addition, small- and medium-sized businesses with less complex needs have sought out affordable office furniture that can be delivered quickly. In response to these trends, the Company, as well as some of its competitors, have developed value-priced alternatives to contract furniture lines. The Company believes that this portion of the contract segment will continue to expand with the proliferation of small- and medium-sized businesses, growth in home offices, commoditization of office furniture and consolidation in the office furniture distribution network. 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. The Company has been increasingly successful in developing compelling value alternatives to premium-priced office furniture and intends to expand and further enhance its product offerings by developing new products. The Company's development efforts emphasize the design of products that are easily manufactured, and the use and development of alternative materials that enhance quality and reduce product development cycles and manufacturing costs. The Company conducts market research of end- users to assess evolving customer demands. The Company offers its products in many new models, sizes, alternative materials, designs, fabrics and finishes. Areas in which the Company intends to expand its product offerings include computer furniture, ready-to-assemble furniture, folding chairs and tables, fire-proof files and school furniture. Continually Improve Productivity. The Company intends to strengthen its low- cost manufacturing position by continuing to apply RCI, designing special machines and tooling to enhance proprietary processes, evaluating vertical integration opportunities and improving information systems. Lower costs allow the Company to enhance product features at no additional cost to the customer. As successfully demonstrated in 1996 and the first half of 1997, lower manufacturing costs also allow the Company to reduce prices on certain existing products in order to increase volume and market share while maintaining operating margins. The Company intends to implement proven RCI tools to realize productivity gains in acquired operations. 4 Leverage Distribution Network. The changing dynamics of distribution in the office furniture industry present an opportunity for the Company to benefit from its extensive distributor network and its flexible operating structure. Due to consolidation among office furniture distributors, fewer and larger distributors exist and these distributors, such as office products and furniture dealers, wholesalers and large, national retail chains, are reducing their vendor bases and seeking stronger suppliers who offer more complete product lines. As one of the top two suppliers of office furniture to each of the mega-dealers and the Office Depot and Office Max superstores, the Company believes that it is well-positioned to capitalize on this consolidation trend due to its excellent reputation for price, quality, quick delivery and broad product lines. In addition, the Company's commitment to providing distributors with excellent customer service has helped to strengthen existing relationships as well as develop new distribution channels. Pursue Complementary Strategic Acquisitions. The Company continues to evaluate potential acquisitions of complementary businesses that provide opportunities for increased market penetration, innovative new products, increased distribution capabilities, enhanced industry expertise and expanded geographical presence in North America. Acquisition candidates must present profitable growth opportunities within the Company's core businesses, must be well managed and must be well respected by its customers. For example, in June 1997, the Company acquired Allsteel Inc. ("Allsteel"), a manufacturer of mid- priced office furniture with 1996 sales of approximately $150 million. Allsteel, which has a strong distribution network and modern, strategically- located manufacturing facilities, enables the Company to broaden its customer base by increasing its market penetration in the value-priced segment of the office furniture industry. Further Penetrate Hearth Products Market. The Company's recognized innovation in direct-vent gas fireplace design and manufacturing coupled with its premier position in wood-burning products provides it with the most comprehensive product line and extensive distribution network in the hearth products market. The Company plans to further enhance its competitive position in the hearth products market by leveraging synergies with the office furniture business, such as purchasing, manufacturing and product development. The Company's principal executive offices are located at 414 East Third Street, P.O. Box 1109, Muscatine, Iowa 52761-7109. Its telephone number is (319) 264-7400. The Company's World Wide Web site address is http://www.honi.com. THE OFFERINGS The offering hereby of 2,716,000 shares of common stock, $1.00 par value per share, of the Company (the "Common Stock"), in the United States and Canada (the "U.S. Offering") and the concurrent offering of 679,000 shares of common stock outside of the United States and Canada (the "International Offering") are collectively referred to as the "Offerings." The closing of each of the U.S. Offering and the International Offering is conditioned upon the closing of the other. Common Stock Offered by the Company........... 1,000,000 shares Common Stock Offered by the Selling 2,395,000 shares Shareholder.................................. Total....................................... 3,395,000 shares Common Stock to be Outstanding after the 30,670,610 shares(1) Offerings.................................... Use of Proceeds............................... General corporate purposes, including the repayment of indebtedness. See "Use of Proceeds." Nasdaq National Market Symbol................. HONI
- -------- (1) As of September 22, 1997 and excluding shares of Common Stock reserved for issuance upon the exercise of options under the Company's stock option plan, of which options to purchase 78,000 shares are currently outstanding at a weighted average exercise price of $49.48 per share. 5 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
FIRST HALF OF FISCAL FISCAL ---------------------------------------------- ----------------- 1992 1993 1994 1995 1996(A)(B) 1996(A) 1997(B) -------- -------- -------- -------- ---------- -------- -------- INCOME STATEMENT DATA: Net sales............... $706,550 $780,326 $845,998 $893,119 $998,135 $452,737 $579,426 Gross profit............ 227,371 242,498 272,606 268,419 318,639 142,504 184,263 Operating income........ 62,296 71,450 87,116 66,728 106,193 46,351 59,507 Interest expense (net).. 403 596 778 1,211 926 127 2,283 Income before income taxes.................. 61,893 70,854 86,338 65,517 105,267 46,224 57,224 Income taxes............ 23,210 26,216 31,945 24,419 37,173 17,103 21,459 Net income.............. 38,683 45,127 54,156 41,098 68,094 29,121 35,765 Net income per common share.................. $ 1.18 $ 1.41 $ 1.73 $ 1.35 $ 2.26 $ 0.96 $ 1.20 Weighted average shares outstanding............ 32,759 32,091 31,218 30,496 30,114 30,258 29,696 OPERATING DATA: Net sales per member (c).................... $119,229 $124,712 $137,987 $150,534 $163,097 $160,945 $165,456
JUNE 28, 1997 -------------------- AS ACTUAL ADJUSTED(D) -------- ----------- BALANCE SHEET DATA: Working capital............................................ $ 94,251 $ 94,251 Total assets............................................... 635,392 635,392 Total debt (e)............................................. 151,610 94,870 Shareholders' equity....................................... 278,819 335,559
- -------- (a) Includes a $3,200,000 pre-tax gain on the sale of Ring King Visibles, Inc., a wholly-owned subsidiary of the Company ("Ring King") (after-tax gain of $2,000,000 or $.07 per share). (b) Includes the results of Heat-N-Glo Fireplace Products, Inc. ("Heat-N-Glo") from October 2, 1996, the date it was acquired. (c) Net sales per member is equal to net sales for the year divided by the number of members at year end. First half data are based on annualized net sales divided by the number of members at the end of the period. The data for fiscal 1996 does not give effect to the acquisition of Heat-N-Glo in the fourth quarter of 1996. (d) Adjusted to reflect the sale by the Company of 1,000,000 shares of the Common Stock offered hereby and the application of the estimated net proceeds therefrom (assuming an offering price of $59.625 per share). See "Use of Proceeds." (e) Includes current and non-current long-term debt. Also includes current and non-current capital lease obligations of $7,169,000. 6 RISK FACTORS Prospective purchasers of the Common Stock offered hereby should consider carefully all of the information set forth in this Prospectus, and in particular, should evaluate the following risks in connection with an investment in the Common Stock. Statements in this Prospectus that are not strictly historical, including statements as to plans, objectives and future performance, are "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, which may cause the Company's actual results in the future to differ materially from expected results. These risks include, among others, competition within the office furniture and hearth products industries, the relationship between supply and demand for value-priced office furniture, and gas- and wood-burning hearth products, the effects of economic conditions, the issues associated with the acquisition and integration of recently acquired operations, including Heat-N-Glo and Allsteel, operating risks, the ability of the Company's distributors to successfully market and sell the Company's products, the availability of capital to finance planned growth, and the effect of consolidation in the office furniture industry, as well as the risks, uncertainties and other factors described in this Prospectus and from time to time in the Company's other filings with the Securities and Exchange Commission. STRONG COMPETITION The office furniture industry is highly competitive, with a significant number of competitors offering similar products. The Company's competitors include Global Furniture Inc.; Anderson-Hickey Co., Globe Business Furniture and United Chair, Inc., divisions of Haworth, Inc.; National Office Furniture, a division of Kimball Office Furniture Co.; and High Point Furniture Industries, Inc. In addition, the Company competes with certain office furniture manufacturers which control a substantial portion of the market share in the contract office furniture market, such as Steelcase Inc., Herman Miller, Inc., Haworth, Inc. and Knoll, Inc. Products and brands offered by contract office furniture market participants have strong acceptance in the marketplace, and such competitors 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 market in the future. See "Business--Competition." CONCENTRATION OF CUSTOMER BASE The Company sells its products through multiple distribution channels, including through dealers, wholesalers and retailers. These distribution channels have been consolidating in the past several years and may continue to consolidate in the future. Such consolidation may result in a greater proportion of the Company's sales being concentrated in fewer customers. In 1996, the Company's ten largest customers represented approximately 40% of its consolidated net sales. One customer, United Stationers Inc. ("United Stationers"), accounted for approximately 12%, 12%, 13% and 13% of the Company's consolidated net sales in the six months ended June 28, 1997, and in fiscal 1996, 1995 and 1994, respectively. The increased purchasing power exercised by larger 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 occurs. See "Business--Sales, Marketing and Distribution." RISKS ASSOCIATED WITH MANAGING GROWTH As a part of its growth strategy, the Company seeks to increase sales and market share by introducing innovative new products, further enhancing its existing line of value-priced products and through complementary acquisitions. Part of this strategy depends on the Company's ability to increase sales through its existing customer network, principally office products dealers, wholesalers and retailers. There can be no assurance that 7 the Company's distribution facilities will have the capacity to manage and coordinate the delivery of increased amounts of the Company's products consistent with current levels of customer service. Furthermore, the ability to effectuate and manage any growth profitably will depend on the Company's ability to contain costs, including costs associated with increased sales and marketing efforts, freight utilization, warehouse capacity, product development and acquisition efforts. RISK OF ENVIRONMENTAL LIABILITIES The past and present operation and ownership by the Company of manufacturing plants and real property are subject to extensive and changing federal, state and local environmental laws and regulations, including those relating to discharges in air, water and land, the handling and disposal of solid and hazardous waste and the remediation of contamination associated with releases of hazardous substances. Compliance with environmental regulations has not had a material effect on the Company's capital expenditures, earnings or competitive position to date; however, compliance with current laws or more stringent laws or regulations which may be imposed on the Company in the future, or stricter interpretation of existing laws, may require additional expenditures by the Company in the future, some of which may be material. These risks and uncertainties are referenced in the "Contingencies" note included in the notes to consolidated financial statements. ECONOMIC FACTORS AFFECTING THE OFFICE FURNITURE INDUSTRY Fluctuations in office furniture industry revenues may be driven by a variety of macroeconomic factors, such as white collar employment levels, corporate cash flows and commercial construction, as well as industry factors, such as corporate reengineering and restructuring, technology demands, ergonomic, health and safety concerns and corporate relocations. There can be no assurance that current or future economic or industry trends will not adversely affect the business of the Company. See "Business--Industry." RECENT DEVELOPMENTS On October 6, 1997, the Company, AHC Inc., a wholly-owned subsidiary of the Company ("AHC"), Hunt Manufacturing Co. ("Hunt") and BEVIS Custom Furniture, Inc., a wholly-owned subsidiary of Hunt ("BEVIS"), entered into an Asset Purchase Agreement pursuant to which AHC agreed to purchase substantially all of the assets of BEVIS, including its manufacturing facility located in Florence, Alabama. Consummation of the transaction is subject to customary closing conditions, including the expiration of the waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. BEVIS designs, manufactures and markets a broad line of commercial, high-quality, mid-priced office furniture, panels, conference and training room tables, computer furniture, folding tables, utility and reception area tables, bookcases and seating. For its fiscal year ended December 1, 1996, BEVIS had net sales of $62 million. The Company's net sales for the three- and nine-month periods ended October 4, 1997 increased 53% and 37% to $391.3 million and $970.8, respectively, as compared to the three- and nine-month periods ended September 28, 1996. The increases were attributable to Company and industry growth and acquisitions. The Company's operating income for the three- and nine-month periods ended October 4, 1997 was $42.6 million and $102.1 million, respectively, compared to $25.2 million and $71.6 million for the three- and nine-month periods ended September 28, 1996. However, operating income for the nine-month period ended September 28, 1996 included a $3.2 million gain on the sale of a subsidiary. The Company's net income for the three- and nine-month periods ended October 4, 1997 was $25.2 million and $61.0 million, respectively, compared to $17.9 million and $47.0 million for the three- and nine-month periods ended September 28, 1996. For the three- and nine-month periods ended September 28, 1996, net income included one time tax credits of $2.1 million and the nine- month period also included a $2.0 million after-tax gain on the sale of the subsidiary previously mentioned. 8 USE OF PROCEEDS The net proceeds to the Company from the sale of 1,000,000 shares of Common Stock offered hereby, assuming an offering price of $59.625 per share, will be approximately $56.7 million ($85.9 million if the Underwriters' over-allotment options are exercised in full), after deducting the underwriting discount and estimated offering expenses payable by the Company. The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholder. The Company will pay all offering expenses incurred in the offering, except that the Selling Shareholder will pay the expenses of its counsel. The Company expects to use the net proceeds of this offering for general corporate purposes, including the repayment of indebtedness incurred to finance acquisitions in fiscal 1996 and fiscal 1997, which indebtedness matures on June 11, 2002 and bears interest at a variable rate (currently 5.9%). The Company intends to use the remaining credit under its revolving credit line to finance capital expenditures and any future acquisitions. See "Capitalization." MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK The Company's Common Stock is currently traded on the Nasdaq National Market ("Nasdaq") under the symbol "HONI." The following table sets forth, for the fiscal periods indicated, the high and low sale prices for the Common Stock as reported by Nasdaq.
COMMON STOCK ------------- DIVIDENDS HIGH LOW PER SHARE ------ ------ --------- 1995 First Quarter................................... 30 1/2 23 $.12 Second Quarter.................................. 30 25 3/4 .12 Third Quarter................................... 31 1/4 25 1/2 .12 Fourth Quarter.................................. 29 3/4 23 1/4 .12 1996 First Quarter................................... 24 1/4 18 1/2 .12 Second Quarter.................................. 30 1/2 22 .12 Third Quarter................................... 40 3/4 27 3/4 .12 Fourth Quarter.................................. 42 3/4 30 1/2 .14 1997 First Quarter................................... 43 31 3/4 .14 Second Quarter.................................. 54 1/4 35 .14 Third Quarter (through October 1, 1997)......... 64 1/2 44 1/4 .14
On October 1, 1997, the closing sale price of the Common Stock on Nasdaq, was $59.625 per share. As of September 22, 1997, there were 5,315 record holders of the Common Stock. 9 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 28, 1997, and as adjusted to reflect the sale by the Company of 1,000,000 shares of the Common Stock offered hereby and the application of the estimated net proceeds therefrom (assuming an offering price of $59.625 per share). See "Use of Proceeds." This table should be read in conjunction with the consolidated financial statements of the Company and notes thereto included elsewhere in this Prospectus.
JUNE 28, 1997 ------------------ AS ACTUAL ADJUSTED -------- -------- (IN THOUSANDS) Note payable and current maturities of long-term debt...... $ 575 $ 575 ======== ======== Long-term debt............................................. $143,866 $ 87,126 Shareholders' equity: Preferred, $1 par value; 1,000,000 shares authorized; no shares outstanding...................................... -- -- Common, $1 par value; 100,000,000 shares authorized; 29,689,707 shares issued and outstanding; 30,689,707 shares issued and outstanding as adjusted (a)........... 29,689 30,689 Additional paid-in capital............................... 91 55,831 Retained earnings........................................ 254,080 254,080 Receivable from HON Members Company Ownership Plan....... (5,041) (5,041) -------- -------- Total shareholders' equity............................. 278,819 335,559 -------- -------- Total capitalization................................... $422,685 $422,685 ======== ========
- -------- (a) Excludes shares of Common Stock reserved for issuance upon the exercise of options under the Company's stock option plan, of which options to purchase 78,000 shares are currently outstanding at a weighted average exercise price of $49.48 per share. 10 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA) The following selected financial data for, and as of the end of, the six months ended June 29, 1996 and June 28, 1997 are derived from the unaudited condensed consolidated financial statements of the Company and, in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for such periods. The interim results of operations are not necessarily indicative of results for the entire fiscal year. The selected financial data of the Company presented below for, and as of the end of, fiscal 1996 are derived from the consolidated financial statements of the Company, which have been audited by Arthur Andersen LLP and for, and as of the end of, fiscal 1992, fiscal 1993, fiscal 1994 and fiscal 1995, are derived from the consolidated financial statements of the Company, which have been audited by Ernst & Young LLP. The selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, the consolidated financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operation" included elsewhere in this Prospectus.
FIRST HALF OF FISCAL FISCAL ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996(A)(B) 1996(A) 1997(B) -------- -------- -------- -------- ---------- -------- -------- INCOME STATEMENT DATA: Net sales............... $706,550 $780,326 $845,998 $893,119 $998,135 $452,737 $579,426 Cost of products sold... 479,179 537,828 573,392 624,700 679,496 310,233 395,163 -------- -------- -------- -------- -------- -------- -------- Gross profit............ 227,371 242,498 272,606 268,419 318,639 142,504 184,263 Selling and administrative expenses............... 165,075 171,048 185,490 201,691 215,646 99,353 124,756 Gain on sale of subsidiary............. -- -- -- -- 3,200 3,200 -- -------- -------- -------- -------- -------- -------- -------- Operating income........ 62,296 71,450 87,116 66,728 106,193 46,351 59,507 Interest expense (net).. 403 596 778 1,211 926 127 2,283 -------- -------- -------- -------- -------- -------- -------- Income before income taxes.................. 61,893 70,854 86,338 65,517 105,267 46,224 57,224 Income taxes............ 23,210 26,216 31,945 24,419 37,173 17,103 21,459 -------- -------- -------- -------- -------- -------- -------- Income before cumulative effect of accounting changes................ 38,683 44,638 54,393 41,098 68,094 29,121 35,765 Cumulative effect of accounting changes..... -- 489 (237) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income.............. $ 38,683 $ 45,127 $ 54,156 $ 41,098 $ 68,094 $ 29,121 $ 35,765 ======== ======== ======== ======== ======== ======== ======== Net income per common share.................. $ 1.18 $ 1.41 $ 1.73 $ 1.35 $ 2.26 $ 0.96 $ 1.20 ======== ======== ======== ======== ======== ======== ======== Weighted average number of common shares outstanding............ 32,759 32,091 31,218 30,496 30,114 30,258 29,696 OPERATING DATA (UNAUDITED): Net sales per member (c).................... $119,229 $124,712 $137,987 $150,534 $163,097 $160,945 $165,456 BALANCE SHEET DATA: Working capital......... $ 79,529 $ 77,660 $ 77,717 $ 65,268 $ 52,974 $ 65,735 $ 94,251 Total assets............ 322,746 352,405 372,568 409,518 513,514 409,850 635,392 Total debt (d).......... 56,329 49,840 49,545 46,393 93,849 44,539 151,610 Shareholders' equity.... 163,009 179,553 194,640 216,235 252,397 231,117 278,819
- -------- (a) Includes a $3,200,000 pre-tax gain on the sale of Ring King (after-tax gain of $2,000,000 or $.07 per share). (b) Includes the results of Heat-N-Glo from October 2, 1996, the date it was acquired. (c) Net sales per member is equal to net sales for the year divided by the number of members at year end. First half data are based on annualized net sales divided by the number of members at the end of the period. The data for fiscal 1996 does not give effect to the acquisition of Heat-N-Glo in the fourth quarter of 1996. (d) Includes current and non-current long-term debt. Also includes current and non-current capital lease obligations of $7,169,000. 11 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 Selected Consolidated Financial and Operating Data and the financial statements of the Company and related notes thereto appearing elsewhere in this Prospectus. RESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of net sales represented by certain items reflected in the Company's statements of income.
FIRST HALF FISCAL OF FISCAL ------------------- ------------ 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of products sold..................... 67.8 69.9 68.1 68.5 68.2 ----- ----- ----- ----- ----- Gross profit.............................. 32.2 30.1 31.9 31.5 31.8 Selling and administrative expenses................................. 21.9 22.6 21.6 21.9 21.5 Gain on sale of subsidiary................ 0.0 0.0 0.3 0.7 0.0 ----- ----- ----- ----- ----- Operating income.......................... 10.3 7.5 10.6 10.3 10.3 Interest expense (net).................... 0.1 0.1 0.1 0.1 0.4 ----- ----- ----- ----- ----- Income before income taxes................ 10.2 7.4 10.5 10.2 9.9 Income taxes.............................. 3.8 2.8 3.7 3.8 3.7 ----- ----- ----- ----- ----- Net income................................ 6.4% 4.6% 6.8% 6.4% 6.2% ===== ===== ===== ===== =====
As a result of the Company's October 1996 acquisition of Heat-N-Glo, it now has two reportable core business segments: office furniture and hearth products. SIX MONTHS ENDED JUNE 28, 1997 COMPARED TO SIX MONTHS ENDED JUNE 29, 1996 Net Sales. Net sales increased by 28% to $579.4 million for the six months ended June 28, 1997 from $452.7 million for the six months ended June 29, 1996, reflecting continued strong demand for office furniture products and hearth products. Office furniture products net sales increased by 16% to $484.4 million in the 1997 period from $417.0 million in the 1996 period as a result of increased sales volume driven by industry growth and market share gains. Management believes the Company's market share gain in the office furniture segment is being driven by its leading position in the faster growing value- priced office furniture segment, expanding distribution, particularly as a result of gaining more page count in customer catalog merchandising, and a steady stream of new product offerings. Hearth products net sales increased by 166% to $95.0 million in the 1997 period from $35.7 million in the 1996 period primarily as a result of the Company's October 1996 acquisition of Heat-N-Glo. The Company believes the market share gain in the hearth products segment can be attributed to the Company's leadership position in this expanding industry, strong customer acceptance of its existing fireplace and stove products, especially gas- burning fireplaces and stoves, and innovative new products. Gross Profit. Gross profit increased by 29% to $184.3 million for the six months ended June 28, 1997 from $142.5 million for the six months ended June 29, 1996. Gross profit margin increased to 31.8% for the six months ended June 28, 1997 from 31.5% for the same period in the prior year, due to increased production unit volume, productivity improvements, and effective cost control efforts, partially offset by price reductions on many of the Company's products. 12 Selling and Administrative Expenses. Selling and administrative expenses increased by 26% to $124.8 million for the six months ended June 28, 1997 from $99.4 million for the six months ended June 29, 1996. As a percentage of net sales, selling and administrative expenses decreased to 21.5% for the six months ended June 28, 1997 as compared to 21.9% for the same period in the prior year. This decrease was a result of continued commitment to developing more efficient business processes, which has improved member productivity, coupled with stringent control of expenses and increased efficiencies associated with higher net sales. However, these results were partially offset by increased freight costs due to growth of unit volume, increased distribution costs for new warehouse capacity and product handling technologies that facilitate providing higher level of service to customers, and the ongoing commitment to developing and marketing new products. Operating Income. Operating income from continuing operations increased 38% to $59.5 million for the six months ended June 28, 1997 compared to $43.2 million (excluding a nonrecurring pre-tax gain of $3.2 million) for the six months ended June 29, 1996. The increase is attributable to increased gross profit and lower selling and administrative expenses as a percentage of net sales. In the six months ended June 29, 1996, the Company recognized a pre-tax gain of $3.2 million on the sale of a subsidiary, Ring King. Net Income. Net income increased by 32% to $35.8 million for the six months ended June 28, 1997 compared to $27.1 million (excluding a nonrecurring after- tax gain of $2.0 million) for the six months ended June 29, 1996. This increase is a result of the increase in operating income offset partially by an increase in interest expense and an increase in the Company's effective tax rate to 37.5% for the six months ended June 28, 1997 compared to 37.0% for the six months ended June 29, 1996. Interest expense increased to $3.1 million for the six months ended June 28, 1997 from $1.6 million for the same period in the prior year due to the additional debt assumed to fund the Heat-N-Glo acquisition in October 1996. Net income per common share increased by 35% to $1.20 per share for the six months ended June 28, 1997 from $0.89 earned from ongoing operations last year (excluding a nonrecurring after-tax gain of $0.07 per share). Average shares outstanding decreased to 29.7 million for the six months ended June 28, 1997 from 30.3 million for the six months ended June 29, 1996 due to share repurchases. FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 30, 1995 Net Sales. Net sales increased by 12% to $998.1 million in 1996 from $893.1 million in the prior year. The increase in net sales for both core business segments was due to continued gains in market share, which management believes resulted from the Company's offering of an ongoing stream of innovative and quality new products and a commitment to manufacturing excellence. Office furniture products net sales increased 8% in 1996 to $887.3 million from $818.9 million in 1995. Hearth products net sales increased 49% in 1996 to $110.8 million from $74.2 million in 1995 due in part to the Company's October 1996 acquisition of Heat-N-Glo. Gross Profit. Gross profit increased by 19% to $318.6 million in 1996 from $268.4 million in the prior year. The increase in gross profit is primarily attributable to the Company's sales growth in both business segments, which has been driven by unit sales growth as opposed to pricing growth. Gross profit margin increased to 31.9% for 1996 compared to 30.1% for 1995. This increase was a result of the elimination of production inefficiencies associated with two operations closed during 1995 and increased production unit volume, productivity improvements, and effective cost control efforts, partially offset by continued price reductions on many of the Company's products. Selling and Administrative Expenses. Selling and administrative expenses increased by 7% to $215.6 million in 1996 from $201.7 million in the prior year. Selling and administrative expenses as a percentage of net sales decreased to 21.6% in 1996 from 22.6% in 1995. This decrease was a result of continued implementation of the Company's RCI process, which led to more efficient business processes and increased efficiencies associated with higher net sales. These decreases were partially offset by more aggressive marketing programs, greater use of cooperative advertising programs, freight costs escalating at a more rapid rate than product price increases and additional costs of pursuing a proactive acquisition strategy. 13 Operating Income. Operating income increased by 54% to $103.0 million (excluding a nonrecurring pre-tax gain on the sale of a subsidiary of $3.2 million) in 1996 from $66.7 million in 1995. The increase is a result of the increase in gross profit and lower selling and administrative expenses as a percentage of net sales. Net Income. Net income, excluding the $2.0 million nonrecurring after-tax gain on the sale of a subsidiary, increased by 61% to $66.1 million in 1996 from $41.1 million in the prior year. This increase is primarily attributable to increased operating income, lower net interest expense and a lower effective income tax rate. The effective tax rate was 35.3% for 1996 compared to 37.3% for 1995. The rate for 1996 was favorably impacted by non-recurring income tax credits of $2.1 million, or $0.07 per share, recorded in the third quarter of 1996. Net income per common share increased by 62% to $2.19 (excluding a nonrecurring after-tax gain of $0.07 per share) in 1996 from $1.35 for 1995. The Company's net income per share performance for 1996 benefited from the Company's common stock repurchase program. The Company has closed, consolidated, and sold several operations over the past two years in an effort to concentrate further on its core strengths. In addition, the Company resolved several litigation uncertainties, reduced its work force, addressed several asset realization concerns, and benefited from special tax credits. The net effect of these unusual business events was to reduce annual net income by $3.3 million, or $0.11 per share, in 1996, and $4.8 million, or $0.16 per share, in 1995. FISCAL YEAR ENDED DECEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1994 Net Sales. Net sales increased by 6% to $893.1 million in 1995 from $846.0 million in the prior year. Sales growth in 1995 was impacted by a difficult market environment which resulted in aggressive product pricing and inventory adjustments related to some major customers. Office furniture products net sales increased 6% in 1995 to $818.9 million from $772.3 million in 1994. Hearth products net sales increased by less than 1% in 1995 to $74.2 million from $73.7 million in 1994. Gross Profit. Gross profit decreased by 2% to $268.4 million in 1995 from $272.6 million in the prior year. The gross profit margin decreased to 30.1% in 1995 from 32.2% in 1994. This decrease in margin was primarily attributable to competitive price decreases, inventory adjustments, and production inefficiencies of two financially marginal operations which were closed or consolidated during the year. These decreases were partially offset by the Company's on-going RCI efforts. Selling and Administrative Expenses. Selling and administrative expenses increased by 9% to $201.7 million in 1995 from $185.5 million in the prior year. Selling and administrative expenses as a percentage of net sales increased to 22.6% in 1995 from 21.9% in 1994. These expenses were adversely impacted in 1995 by increased sales support and freight costs, acquisition exploration expenses, temporary business disruption costs resulting from increasing warehouse capacity, increased investment in new product development, and nonrecurring expenses of $7.6 million associated with closing marginal operations and severance payments. Operating Income. Operating income decreased by 23% to $66.7 million in 1995 from $87.1 million for 1994. The decrease is a result of lower gross profit and higher selling and administrative expenses. Net Income. Net income decreased by 24% to $41.1 million in 1995 from $54.4 million in the prior year (excluding a charge for the cumulative effect of an accounting change). This decrease is primarily attributable to reduced operating income. Net income per common share decreased by 22% to $1.35 in 1995 from $1.74 for 1994 (excluding a charge for the cumulative effect of an accounting change). The Company's net income per share performance for 1996 benefitted from the Company's common stock repurchase program. 14 SEASONALITY; QUARTERLY RESULTS OF OPERATIONS The Company's office furniture business is seasonal with the third (July- September) and fourth (October-December) fiscal quarters historically having higher sales than the prior quarters. Hearth products sales tend to have an even larger concentration of sales in the third and fourth fiscal quarters. In fiscal 1996, 53% of the Company's consolidated net sales of office furniture were generated in the third and fourth quarters and 57% of consolidated net sales of hearth products (pro forma to reflect the Heat-N-Glo acquisition) were generated in the third and fourth quarters. The following table presents certain unaudited quarterly financial information for each of the past ten 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 Prospectus 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.
FISCAL 1995 FISCAL 1996(A) FISCAL 1997(A) --------------------------------------- ---------------------------------------- ------------------ FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND QUARTER QUARTER QUARTER QUARTER(B) QUARTER(C) QUARTER QUARTER(D) QUARTER QUARTER QUARTER -------- -------- -------- --------- --------- -------- ---------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales.............. $216,498 $206,604 $228,195 $241,822 $233,477 $219,260 $255,254 $290,144 $282,859 $296,567 Cost of products sold.. 147,556 146,246 160,319 170,579 160,006 150,227 176,403 192,860 194,194 200,969 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Gross profit........... 68,942 60,358 67,876 71,243 73,471 69,033 78,851 97,284 88,665 95,598 Selling and administrative expenses.............. 48,565 47,688 48,084 57,354 49,846 49,507 53,605 62,688 60,453 64,303 Gain on sale of subsidiary............ -- -- -- -- 3,200 -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Operating income....... 20,377 12,670 19,792 13,889 26,825 19,526 25,246 34,596 28,212 31,295 Interest income (expense) (net)....... (258) (304) (344) (305) (119) ( 8) 91 (890) (1,142) (1,141) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes................. 20,119 12,366 19,448 13,584 26,706 19,518 25,337 33,706 27,070 30,154 Income taxes........... 7,544 4,638 7,209 5,028 9,881 7,222 7,430 12,640 10,152 11,307 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income............. $ 12,575 $ 7,728 $ 12,239 $ 8,556 $ 16,825 $ 12,296 $ 17,907 $ 21,066 $ 16,918 $ 18,847 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Net income per common share................. $ 0.41 $ 0.25 $ 0.41 $ 0.28 $ 0.55 $ 0.41 $ 0.60 $ 0.70 $ 0.57 $ 0.63 Weighted average common shares outstanding.... 30,644 30,543 30,416 30,379 30,345 30,170 30,063 29,879 29,700 29,692 AS A PERCENTAGE OF NET SALES ----------------------------------------------------------------------------------------------------- Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit........... 31.8 29.2 29.7 29.5 31.5 31.5 30.9 33.5 31.3 32.2 Selling and administrative expenses.............. 22.4 23.1 21.1 23.7 21.3 22.6 21.0 21.6 21.4 21.7 Operating income....... 9.4 6.1 8.7 5.7 11.5 8.9 9.9 11.9 10.0 10.6 Income taxes........... 3.5 2.2 3.2 2.1 4.2 3.3 2.9 4.4 3.6 3.8 Net income............. 5.8% 3.7% 5.4% 3.5% 7.2% 5.6% 7.0% 7.3% 6.0% 6.4%
- ------- (a) Includes the results of operation of Heat-N-Glo from October 2, 1996, the date it was acquired. (b) Includes various pre-tax charges totaling $5,575,000 (after-tax effect of $3,512,000, or $.12 per share) for nonrecurring costs primarily associated with closing several leased facilities and severance arrangements from eliminating certain administrative positions. (c) Includes a $3,200,000 pre-tax gain on the sale of Ring King (after-tax gain of $2,000,000, or $.07 per share). (d) Includes one-time federal and state income tax credits of $2,100,000, or $.07 per share. 15 LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 28, 1997, cash from operations was $43.8 million. During 1996, cash from operations was $93.3 million, which provided the funds necessary to meet working capital needs, help finance an acquisition, invest in capital improvements, repay long-term debt, pay increased dividends and repurchase Company stock. Cash Management. Cash, cash equivalents, and short-term investments totaled $24.4 million at June 28, 1997, compared to $32.7 million at the end of 1996, $46.9 million at the end of 1995, and $30.7 million at year-end 1994. These funds, coupled with future cash from operations and additional long-term debt, if needed, are expected to be adequate to finance operations, planned improvements, and internal growth. Another major element in maintaining a strong balance sheet is managing the investment in receivables and inventories. The Company's success in managing receivables is in large part due to maintaining close communications with its customers and utilizing prudent risk assessment techniques. Inventory levels and turns continue to improve as a function of reducing production cycle times. Trade receivables turns have approximated 10 times for the past several years, including 1996, and inventory turns have been in the 14 to 16 range, with 1996 reaching 17 turns. Capital Expenditure Investments. Capital expenditures, net of disposals, were $34.2 million for the six months ended June 28, 1997, $44.7 million in 1996, $53.9 million in 1995, and $35.0 million in 1994. Expenditures for the six months ended June 28, 1997 were principally for machinery, equipment, process improvements, support for new products, production and warehouse capacity, and information technology. Expenditures in 1996 were principally for machinery, equipment, process improvements and tooling for new products. Approximately $11.0 million of the expenditures in 1995 were for facility capacity expansion and improvements, with the remainder invested in more productive machinery, equipment, process improvements and tooling of new products. Expenditures for 1994 were also principally for machinery, equipment and process improvements. Looking forward, the projected capital expenditure level for 1997 will be at a higher level than in 1996 and will include some facility capacity expansion, but the bulk of the investment will be for new product tooling and more productive and flexible machinery, equipment and processes as in the past. Long-Term Debt. Long-term debt, including capital lease obligations, was 35% of total capitalization at June 28, 1997. Long-term debt, including capital lease obligations, was 23.5% of total capitalization at December 28, 1996, after recording the debt associated with the Heat-N-Glo acquisition. The Company does not expect future capital resources to be a concern. The Company has significant additional borrowing capacity and treasury stock available in the event cash generated from operations should be inadequate to meet future capital needs. Cash Dividends. Cash dividends were $0.28 per common share for the six months ended June 28, 1997, $0.50 for 1996, $0.48 for 1995, and $0.44 for 1994. The Board of Directors announced a 17% increase in the quarterly dividend rate, from $0.12 to $0.14 per common share, in November 1996, effective with the December 1, 1996, dividend payment. The previous quarterly dividend increase was from $0.11 to $0.12, effective with the March 1, 1995, dividend payment. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. The dividend payout percentage has ranged from approximately 22% to 33% of prior year earnings. Common Share Repurchases. In August 1996, the Board of Directors authorized an additional $20.0 million to acquire the Company's Common Stock. During the first six months of 1997, 63,648 shares were reacquired at a cost of approximately $2.5 million, or an average price of $40.10 per share. During 1996, 753,800 shares were reacquired at a cost of approximately $21.9 million, or an average price of $29.07 per share. During 1995, 367,317 shares were reacquired at a cost of approximately $9.8 million, and 1,078,835 shares were purchased in 1994 at a cost of approximately $29.6 million. The Company purchases its own shares in open market transactions. The stock repurchase strategy was initiated in 1985. Approximately 16.0 million shares have been repurchased since the program's inception at a cost of approximately $231.3 million. As of June 28, 1997, approximately $6.2 million of the Board's last $20.0 million purchase authorization remained available. Litigation and Uncertainties. The Company is involved in various legal action arising in the course of business, including certain environmental matters. These uncertainties are referenced in the "Contingencies" note included in the notes to consolidated financial statements. 16 BUSINESS The Company is a leading designer and manufacturer of value-priced office furniture and furniture systems in the United States. The Company's products are marketed through multiple distribution channels primarily to small- and medium-sized businesses and home offices on the basis of price, quality, selection and quick delivery. The Company maintains its leadership position by offering "compelling value" to its customers through a broad line of quality office furniture, including filing cabinets, seating, office systems, desks and related products, at attractive price points, with quick delivery. The Company's low-cost manufacturing capabilities, extensive distribution network, innovative product development and unique employee ("member") culture enable it to provide compelling value to its customers. In addition to its core office furniture business, the Company, through its Hearth Technologies Inc. subsidiary ("Hearth Technologies"), is the leading manufacturer of wood- and gas-burning fireplaces, stoves and related accessories in the United States. The Company markets its hearth products through the widely-recognized "Heatilator" and "Heat-N-Glo" brand names. In fiscal 1996, the Company had net sales of $998.1 million, of which $887.3 million was attributable to office furniture products and $110.8 million was attributable to hearth products. A key driver of the Company's success has been its highly-efficient and low- cost manufacturing operations. Since its inception, the Company has been committed to constant 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 significantly contributed to increased productivity, lower manufacturing costs, and improved product quality and workplace safety. As a result of RCI, productivity, as measured by annual revenue per member, has increased 50% over the last five years. In addition, the Company's RCI efforts enable it to offer short average lead times of two to four weeks, from receipt of order to shipment, for most of its products. The Company distributes its products through an extensive network of independent office furniture dealers, office products dealers, wholesalers and retailers. The Company is one of the top two suppliers of office furniture to each of the largest national office products dealers, which are Boise Cascade Corporation, BT Office Products International, Inc., U.S. Office Products Company, Corporate Express Inc., Office Depot Inc.--Business Services Division and Staples Commercial Advantage ("mega-dealers"), and to the Office Depot and Office Max superstores. The Company offers reduced freight costs and complete order delivery, regardless of the order size or combination of products, by manufacturing at multiple locations and cross-docking products throughout the United States. The Company believes that more of its products are available for immediate delivery, through over 135 nationwide wholesaler customer locations, than those of any of its competitors. 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 better quality. The Company's ability to apply RCI techniques to reduce manufacturing costs and enhance value allows its products to be sold at prices lower than those offered for competing products. For example, in 1996 the Company redesigned its leading line of file cabinets to add features while lowering the Company's costs and maintaining prices. As a result of the Company's aggressive product development efforts, approximately 45% of the Company's 1996 sales volume consisted of products introduced within the last three fiscal 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 ownership plan, and participates in the Company's qualified profit sharing plan. In addition, most production members are eligible for incentive bonuses. INDUSTRY According to the Business and Institutional Furniture Manufacturer's Association ("BIFMA"), U.S. office furniture industry shipments, which totaled approximately $10 billion in 1996, have grown at a compound annual 17 growth rate of approximately 7% over the three-year period ended December 31, 1996. The Company believes that growth in the office furniture industry is being driven by changing customer needs due to the emergence of open office floor plans to support team work environments, shared and multi-purpose office spaces for flexible work arrangements, new office technology which requires furniture systems that support the use of hardware and software, and an increased focus on ergonomics and employee comfort. The U.S. office furniture market consists of two primary segments--the contract segment and the transactional segment. The contract segment has traditionally been characterized by one-time sales of large quantities of office furniture to large corporations, such as for new office facilities, relocations or department or office redesigns, which are frequently customized to meet specific client and designer preferences. Contract 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 contract 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 contract segment of the market) publish periodic catalogs that display office furniture and products from various manufacturers. Over the last several years, as competition in the contract segment has intensified, dealers have sought to provide their clients with moderately- priced alternatives to premium-priced contract furniture. In addition, small- and medium-sized businesses with less complex needs have sought out affordable office furniture that can be delivered quickly. In response to these trends, the Company, as well as some of its competitors, have developed value-priced alternatives to contract furniture lines--standard selections of quality office furniture offered at attractive price points with quick and convenient delivery. The Company believes that this portion of the contract segment will continue to expand with the proliferation of small- and medium-sized businesses, growth in home offices, commoditization of office furniture and consolidation in the office furniture distribution network. 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. The Company has been increasingly successful in developing compelling value alternatives to premium-priced office furniture and intends to expand and further enhance its product offerings by developing new products. The Company's development efforts emphasize the design of products that are easily manufactured, and the use and development of alternative materials that enhance quality and reduce product development cycles and manufacturing costs. The Company conducts market research of end-users to assess evolving customer demands. The Company offers its products in many new models, sizes, alternative materials, designs, fabrics and finishes. Areas in which the Company intends to expand its product offerings include computer furniture, ready-to-assemble furniture, folding chairs and tables, fire-proof files and school furniture. Continually Improve Productivity. The Company intends to strengthen its low- cost manufacturing position by continuing to apply RCI, designing special machines and tooling to enhance proprietary processes, evaluating vertical integration opportunities and improving information systems. Lower costs allow the Company to enhance product features at no additional cost to the customer. As successfully demonstrated in 1996 and the first half of 1997, lower manufacturing costs also allow the Company to reduce prices on existing products in order to increase volume and market share while maintaining operating margins. The Company intends to implement proven RCI tools to realize productivity gains in acquired operations. 18 Leverage Distribution Network. The changing dynamics of distribution in the office furniture industry present an opportunity for the Company to benefit from its extensive distributor network and its flexible operating structure. Due to consolidation among office furniture distributors, fewer and larger distributors exist and these distributors, such as office products and furniture dealers, wholesalers and large, national retail chains, are reducing their vendor bases and seeking stronger suppliers who offer more complete product lines. As one of the top two suppliers of office furniture to each of the mega-dealers and the Office Depot and Office Max superstores, the Company believes that it is well-positioned to capitalize on this consolidation trend due to its excellent reputation for price, quality, quick delivery and broad product lines. In addition, the Company's commitment to providing distributors with excellent customer service has helped to strengthen existing relationships as well as develop new distribution channels. Pursue Complementary Strategic Acquisitions. The Company continues to evaluate potential acquisitions of complementary businesses that provide opportunities for increased market penetration, innovative new products, increased distribution capabilities, enhanced industry expertise and expanded geographical presence in North America. Acquisition candidates must present profitable growth opportunities within the Company's core businesses, must be well managed and must be well respected by its customers. For example, in June 1997, the Company acquired Allsteel Inc. ("Allsteel"), a manufacturer of mid- priced office furniture with 1996 sales of approximately $150 million. Allsteel, which has a strong distribution network and modern, strategically- located manufacturing facilities, enables the Company to broaden its customer base by increasing its market penetration in the value-priced segment of the office furniture industry. Further Penetrate Hearth Products Market. The Company's recognized innovation in direct-vent gas fireplace design and manufacturing coupled with its premier position in wood-burning products provides it with the most comprehensive product line and extensive distribution network in the hearth products market. The Company plans to further enhance its competitive position in the hearth products market by leveraging synergies with the office furniture business, such as purchasing, manufacturing and product development. PRODUCTS The Company designs, manufactures and markets a broad range of office furniture in four basic categories: (i) filing cabinets; (ii) seating, including task chairs, executive desk chairs and side chairs; (iii) office systems (typically modular and moveable workspaces with integrated work surfaces, space dividers and lighting); and (iv) desks and related products, including tables, bookcases and credenzas. The Company's products are sold through the Company's HON Company Division ("The HON Company") and the Company's wholly-owned subsidiaries--BPI Inc. ("BPI"), Holga Inc. ("Holga") and The Gunlocke Company ("Gunlocke"). The Company's office furniture products are generally available in contemporary as well as traditional styles, and are priced to sell in different channels of distribution and at different price points. The Company's products are offered in many models, sizes, designs and finishes and are constructed from both wood and non-wood materials. The following is a description of the Company's major product categories and product lines: Filing Cabinets The Company offers a variety of filing options designed either to be integrated into and support the Company's office systems products, or to function as free-standing furniture in commercial and home offices. The Company believes it is the largest manufacturer and marketer of mid-priced steel filing cabinets in the United States. The Company sells most of its free-standing files--such as The HON Company's 310 and 510 Series vertical files and 600, 700 and 800 Series lateral files-- through mega-dealers, wholesalers, office products 19 superstores, warehouse clubs and mail order distributors. Higher priced files, such as The HON Company's 9000 Series lateral files and Allsteel's lateral file line, both of which have drawer fronts designed to complement systems furniture, are sold through contract office furniture dealers. In 1996, the Company redesigned its industry-leading line of vertical filing cabinets to make it even more attractive to customers. Drawer sides were raised to a height that allows users to hang suspension file folders directly on them, thus eliminating the need to purchase separate file folder suspension frames at $2 to $3 per drawer. At the same time, the Company reduced the cost of the cabinets using its RCI process and was able to sell the feature- enriched units at the same price as the previous models. 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. The Company submits each of its chair models to customer surveys to assure that it is among the best in its price range for design, comfort and ergonomic adjustability to further build "compelling value" into its products. The Company has high volume sellers throughout the range of value price points. HON's Every-Day(R) chair and Solutions Seating(R) task chair are top sellers with mega-dealers, wholesalers and superstores, while the HON 6000 and 5900 chairs and Allsteel's Tolleson chair are widely used by contract dealers as key components in systems-based furniture projects. Gunlocke is one of the few remaining companies that continues to make wood curved legs, arms and backs through the steambending process, which produces strong and attractive seating components. In the last year, Gunlocke introduced two new contemporary wood seating lines, Serra(TM) and Miles, which have been well-received by the market. Office Systems The Company offers a complete line of office systems products in order to meet the needs of a variety of organizations. Systems may be used for team work settings, private offices and open floor plans, and are typically modular and movable workspaces composed of adjustable partitions, work surfaces, desk extensions, storage cabinets and electrical lighting systems which can be moved, reconfigured and reused within the office. Systems offer a cost- effective and flexible alternative to traditional drywall office construction. The Company has experienced increased demand for panel systems able to accommodate new work arrangements such as team work spaces and work spaces shared by several employees who are frequently out of the office. According to BIFMA, panel systems comprise the largest product segment in the office furniture industry with 1996 sales from this segment amounting to $3.4 billion. Importantly, a typical installation of office panels often includes associated sales of seating, case goods, files and accessories. The Company offers whole office solutions, movable panels, storage units and work surfaces that can be installed easily and reconfigured to accommodate growth and change in organizations. The Company also offers consultative selling and design services for certain of its office system products. The compelling value of the Company's systems lines is that these products are styled and featured similar to those of premium-priced contract systems manufacturers but are offered at substantially lower prices. As a result of this, the Company's system lines have grown considerably faster than industry system sales over the past four years. Leading products and brands include HON's Concensys(R) (solid panel) and Terrace(TM) (tiled panel) systems lines, and its complementary line of Regent(R) case goods and seating, which are sold through selected contract furniture dealers in key markets throughout North America. BPI's People Furniture is popular with smaller companies because of its entry level price point and ease of assembly and reconfigurability. Echelon(TM) is a new and more fully featured BPI systems line which is growing rapidly. 20 Desks and Related Products The Company's collection of desks and related products include stand-alone steel and wood furniture items, such as desks, bookshelves and credenzas, and are available in a range of designs and price points. The Company offers these products in both contemporary and traditional styles. The Company's desks and related products are sold to a wide variety of customers from those designing large office configurations to small retail and home office purchasers. The Company offers a variety of contemporary and traditional tables designed for use in conference rooms, private offices, training areas, teamwork settings and open floor plans. Tables are produced in wood veneer and laminate and are available in numerous sizes, shapes and base styles. HEARTH TECHNOLOGIES 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 and Heat-N-Glo brand names. The Company's line of hearth products includes wood- and gas-burning fireplaces and stoves, fireplace inserts, chimney systems and related accessories. In October 1996, the Company acquired Heat-N-Glo and combined it with its existing Heatilator operations to form Hearth Technologies, through which it sells all its hearth products. The Company believes that shipments for the North American segment of the building products industry in which Hearth Technologies directly participates, representing the wood fireplace, hearth stove, gas- and wood-fireplace insert and gas log set product lines were $1 billion for 1996, representing an increase of approximately 15% over the prior year. Heatilator and Heat-N-Glo are leaders in the two largest segments of the home fireplace market: vented- gas and wood fireplaces. Historically, the hearth products industry has consisted primarily of low- cost builders' box fireplaces sold through builder distributors and wood stoves and high efficiency fireplaces sold through dealer showrooms. With the acquisition of Heat-N-Glo in October 1996, Hearth Technologies began marketing a "direct vent" fireplace, which replaces the top-venting chimney system used in traditional fireplaces. See "Business--Intellectual Property." The Company believes that the introduction of the direct vent fireplace, together with the introduction of fireplace inserts and accessories such as remote controls, and more sophisticated marketing, will lead to rapid industry growth in the future. Sales of home fireplaces are largely dependent on new housing starts while sales of heating stoves and fireplace inserts are largely dependent upon home remodeling expenditures. Management believes that this complementary diversity and Hearth Technologies' broad national distribution afford potential for growth for the Company's products. As of December 28, 1996, the Company's hearth products sales organization consisted of 9 regional sales managers supervising 22 salespersons and 15 independent manufacturers' representatives. MANUFACTURING 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 over 100 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. 21 Manufacturing also plays a key role in the Company's concurrent product development process that primarily seeks to design new products for ease of manufacturability. PRODUCT DEVELOPMENT The Company's product development efforts are primarily focused on reducing the cost to manufacture existing products and designing new products that provide additional features and quality. The Company accomplishes this through improving existing products, extending product lines, applying ergonomic research, improving manufacturing processes, applying alternative materials and providing engineering support and training to its operating units. The Company conducts its product development efforts at both the corporate and operating unit level. At the corporate level, the staff at the Company's Stanley 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. As a result of the Company's aggressive product development efforts, approximately 45% of the Company's 1996 sales volume consisted of products introduced within the last three fiscal years. The Company invested approximately $10.4 million, $11.6 million, and $10.1 million in product development during fiscal 1996, 1995 and 1994, respectively, and has budgeted $15 million for product development in fiscal 1997. BIFMA and the American National Standards Institute ("ANSI") have promulgated a variety of voluntary standards governing the construction and design of office furniture. The ANSI/BIFMA standards include tests for strength, stability and durability. The Company's products undergo internal testing in the Company's product testing laboratory to confirm that such products meet or exceed applicable ANSI/BIFMA standards. All HON branded products meet or exceed applicable ANSI/BIFMA standards. HON is a member of the BIFMA task force working to develop standards for ready-to-assemble furniture. SALES, MARKETING AND DISTRIBUTION 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. According to The Dun and Bradstreet Corporation, the number of office products dealers has decreased from approximately 12,000 in 1986 to approximately 6,000 in 1996. 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. 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 the mega-dealers, including Boise Cascade Corporation, BT Office Products International, Inc., U.S. Office Products Company, Corporate Express Inc., Office Depot Inc.-- Business Services Division and Staples Commercial Advantage. Many of the independent dealers and mega-dealer locations assist their customers with the evaluation of office space requirements, systems lay-out and product selection, and design and office solution services provided by professional designers. The third distribution channel, wholesalers, serve as distributors of the Company's products to independent dealers, mega-dealers and superstores. The Company sells to the nation's largest wholesalers, United Stationers and S.P. Richards, as well as to smaller, regional wholesalers. Wholesalers maintain stocks of standard product lines for resale to dealers. They also special order products from the Company in customer-selected models and colors. The Company's wholesalers maintain over 135 warehouse locations throughout the United States, which enable the Company to make its products available for rapid delivery to dealers anywhere in the country. 22 The fourth distribution channel is retail stores, which include office products superstores such as Office Depot, Office Max and Staples, and warehouse clubs like Sam's Club and Costco. The fifth distribution channel consists of government-focused dealers that sell the Company's products to federal, state and local government offices in accordance with contract terms to which the Company has agreed. As of December 28, 1996, the Company's office furniture sales force consisted of 16 regional sales managers supervising 70 salespersons, plus approximately 150 independent manufacturers' representatives, who collectively provided national sales coverage. Approximately 25 salespersons were added in June 1997 as a result of the Allsteel acquisition. Office products dealers, national wholesalers and retailers market their products through catalogs published periodically and distributed to existing and potential customers. The Company's marketing objective is to gain share in its customers' catalogs. The Company believes that the inclusion of the Company's product lines in customer catalogs offers strong potential for increased sales of the listed product items due to the exposure provided by these publications. The Company measures its sales potential and ranking relative to its competitors on the basis of the Company's percentage share in its customers' catalogs. The Company's average percentage share of pages in the office furniture section of catalogs published for 1996 and 1997 and estimated for 1998 by the six megadealers was approximately 39%, 48% and 64%, respectively. The Company's average percentage share of pages in the office furniture section of catalogs published for 1996 and 1997 and estimated for 1998 by SP Richards and United Stationers, two of the nation's largest wholesalers, was approximately 34%, 38% and 53%, respectively. Catalog page share is calculated on the basis of the total catalog page space featuring the Company's products as a percentage of total catalog pages devoted to comparable office furniture products from all suppliers. The Company also makes export sales through HON Export Limited to approximately 75 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 less than 1% of net sales in fiscal 1996. COMPETITION The office furniture industry is highly competitive, with a significant number of competitors offering similar products. The Company competes by emphasizing its ability to deliver compelling value products. In executing this strategy, the Company has two significant classes of competitors. First, the Company competes with numerous small- and medium-sized office furniture manufacturers that focus on more limited product lines and/or end-user segments and include Global Furniture Inc.; Anderson-Hickey Co., Globe Business Furniture and United Chair, Inc., divisions of Haworth, Inc.; National Office Furniture, a division of Kimball Office Furniture Co.; and High Point Furniture Industries, Inc. Second, the Company competes with a small number of large office furniture manufacturers which control a substantial portion of the market share in the contract 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 contract market than the Company. 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 the relatively small industry. Both office furniture and hearth products compete on the basis of price, product performance, product quality, complete and on-time delivery to the customer and customer service and support. The Company believes that it competes principally by providing compelling value products designed to be among the best in their price range for product quality and performance, superior customer service and short lead-times. This is made possible, in part, by the Company's significant on-going investment in product development, highly-efficient and low cost manufacturing operations, and an extensive distribution network. 23 The Company is the fourth largest office furniture manufacturer 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. PROPERTIES The Company maintains its corporate headquarters in Muscatine, Iowa, and conducts its operations at locations throughout the United States and Canada which house manufacturing and distribution operations and offices totaling an aggregate of approximately 7.3 million square feet. Of this total, approximately 2 million square feet are leased, including approximately 0.3 million square feet under a capital lease. Although the plants are of varying ages, the Company believes they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. The Company has sufficient capacity to increase output at most locations by increasing the use of overtime and/or number of production shifts employed. 24 The Company's principal manufacturing and distribution facilities (100,000 square feet in size or larger) are as follows:
OWNED APPROXIMATE OR DESCRIPTION LOCATION SQUARE FEET LEASED OF USE -------- ----------- ------ ----------- Cedartown, Georgia 443,334 Owned Manufacturing non-wood case goods office furni- ture(1) Chester, Virginia 283,040 Leased(2) Manufacturing non-wood case goods office furni- ture(1) Jackson, Tennessee 303,000 Leased Manufacturing parts for office furniture(1) Jackson, Tennessee 170,000 Leased Manufacturing non-wood office seating Lake City, Minnesota 235,000 Leased Manufacturing metal pre- fabricated fireplaces Louisburg, North Carolina 176,354 Owned Manufacturing wood case goods office furniture Milan, Tennessee 358,000 Leased Manufacturing systems of- fice furniture Mt. Joy, Iowa 159,500 Leased Distributing office furni- ture Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal pre- fabricated fireplaces Muscatine, Iowa 231,444 Owned Manufacturing non-wood office seating Muscatine, Iowa 612,713 Owned Manufacturing non-wood case goods office furni- ture(1) Muscatine, Iowa 177,000 Owned Manufacturing wood case goods office furniture Muscatine, Iowa 209,100 Owned Manufacturing systems of- fice furniture Owensboro, Kentucky 311,575 Owned Manufacturing wood office seating South Gate, California 520,270 Owned Manufacturing non-wood case goods and seating of- fice furniture(1) Sulphur Springs, Texas 155,690 Owned Manufacturing non-wood case goods office furni- ture Wayland, New York 692,226 Owned Manufacturing wood case goods and seating office furniture West Hazelton, Pennsylvania 268,800 Owned Manufacturing non-wood case goods office furni- ture Williamsport, Pennsylvania 238,326 Owned Manufacturing wood office seating Winnsboro, South Carolina 180,093 Owned Manufacturing non-wood office seating Verona, Mississippi 257,000 Owned Manufacturing systems of- fice furniture
- -------- (1) Also includes a regional warehouse/distribution center. (2) A capital lease. 25 Other Company manufacturing and distribution facilities, under 100,000 square feet in size, are located in Muscatine and Mt. Pleasant, Iowa; Van Nuys, California; Kent, Washington; Salisbury, North Carolina; Richmond, Virginia; Rome, Georgia; Cedartown, Georgia; and Calgary, Alberta, Canada. These facilities total approximately 980,000 square feet with approximately 900,000 square feet used for the manufacture and distribution of office furniture and approximately 80,000 square feet for hearth products. Of this total, approximately 500,000 square feet are leased. The Company also leases sales showroom space in office furniture market centers in several major metropolitan areas. The Company is in the process of expanding its Cedartown and Chester facilities to add an aggregate of approximately 150,000 square feet of manufacturing and distribution capacity. The Company also has two facility changes in progress. It recently moved the manufacturing being performed at a approximately 104,000 square foot leased plant in Savage, Minnesota to its Lake City, Minnesota plant. This plant had been used for the manufacture of metal prefabricated fireplaces. The Savage plant is in the process of being subleased. In addition, the Company is in the process of renovating approximately 165,000 square feet of owned space in Muscatine, Iowa to use for manufacturing systems office furniture. This space was previously leased to a third party. INTELLECTUAL PROPERTY The Company owns 141 U.S. and 143 foreign patents and has applications pending for 64 U.S. and 79 foreign patents. In addition, the Company holds registrations for 77 U.S. and 132 foreign trademarks, and has applications pending for 18 U.S. and 48 foreign trademarks. The Company's principal office furniture products do not require frequent technical changes. The majority of the Company's patents are design patents which expire at various times depending on the patent's date of issuance. The Company believes that neither any individual patents nor the Company's patents in the aggregate are material to the Company's business as a whole. When Hearth Technologies acquired Heat-N-Glo in October 1996, it also acquired its patent for the design of a zero-clearance direct vent gas fireplace (the "direct vent patent"). The direct vent design replaces the traditional top-venting chimney system by permitting the exhaust pipe to traverse a structure's exterior wall. The sealed combustion chamber of the direct vent gas fireplace increases indoor air quality by using outside rather than inside air for combustion and the direct vent design achieves 70% heating efficiency, which means that the patented direct vent gas fireplaces are an efficient alternative heat source in individual rooms. The direct vent gas fireplaces are highly versatile for use in home design because the direct vent design eliminates the need for a traditional chimney system with top venting, thus opening the space above the fireplace up for use. The Company currently offers numerous product designs that would not be possible without the direct vent technology. Additionally, since a chimney is not employed in the direct vent design, the cost of adding a new fireplace to a home is greatly reduced. The direct vent patent has been successfully enforced against numerous infringers. Hearth Technologies presently is engaged as a plaintiff in two patent infringement cases involving this patent. Final disposition of these cases is not likely for several years. Although the Company believes that the protection afforded by the direct vent patent is not vital to sustaining Hearth Technologies' gross profit margins on its direct vent gas fireplaces due to other technological innovations that support the direct vent design, the technology that underlies the patent is a significant distinguishing feature for the Company's products. The Company applies for patent protection when it believes the expense of doing so is justified, and believes that the duration of its registered patents is adequate to protect these rights. The Company also pays royalties in certain instances for the use of patents on products and processes owned by others. The Company actively protects its trademarks which it believes have significant goodwill value. 26 EMPLOYEES/MEMBERS As of June 28, 1997, the Company employed approximately 6,900 persons, 6,300 of whom were members and 600 of whom were temporary personnel. Of the approximately 6,900 persons employed by the Company, 4,300 were in the Company's manufacturing operations. The Company employed approximately 300 members who were members of unions. The Company believes that its labor relations are good. As a result of the Allsteel acquisition, approximately 1,100 employees have been added subsequent to June 28, 1997. 27 MANAGEMENT The current executive officers and directors of the Company are as follows:
NAME AGE POSITION ---- --- ------------------------------------ Jack D. Michaels................. 60 Chairman, President and Chief Executive Officer; Director George J. Koenigsaecker III...... 52 President, The HON Company David C. Stuebe.................. 57 Vice President and Chief Financial Officer Jeffrey D. Fick.................. 36 Vice President, Member and Community Relations Melvin L. McMains................ 56 Controller James I. Johnson................. 48 Vice President, General Counsel and Secretary Robert W. Cox.................... 60 Director Stanley M. Howe.................. 73 Director Lee Liu.......................... 64 Director Lorne R. Waxlax.................. 64 Director W. James Farrell................. 55 Director Michael S. Plunkett.............. 59 Director Herman J. Schmidt................ 80 Director Robert L. Katz................... 71 Director Celeste C. Michalski............. 55 Director Richard H. Stanley............... 64 Director
Set forth below is certain information with respect to the Company's executive officers and directors: Jack D. Michaels. Mr. Michaels has served as the Company's Chairman of the Board since 1996, the Company's Chief Executive Officer since 1991, and the Company's President since March 1990. He has been a director since 1990. Prior to joining the Company, Mr. Michaels served as President and Chief Executive Officer of Hussmann Corporation, a manufacturer and marketer of food store refrigerated display equipment, from 1987 to January 1990. Mr. Michaels is also a director of Huffy Corporation. George J. Koenigsaecker III. Mr. Koenigsaecker has served as President of The HON Company since November 1995. From February 1995 to November 1995, he served as Senior Vice President of the Company. From August 1992 through October 1995, Mr. Koenigsaecker served as Executive Vice President, Operations, The HON Company. Prior to joining the Company, Mr. Koenigsaecker was Group Executive, Danaher Corporation, a manufacturer of automotive, instrumentation and precision components products from 1990 to 1992. David C. Stuebe. Mr. Stuebe has served as Vice President and Chief Financial Officer of the Company since October 1994. Prior to joining the Company, he was President, Chief Executive Officer and a director of Diversified Industries, Inc., a processor and trader of precious and semi-precious metals from January 1990 to September 1994. Jeffrey D. Fick. Mr. Fick has served as the Company's Vice President, Member and Community Relations since May 1997 and the Company's Secretary from March 1997 to September 1997. From March 1994 to April 1997, Mr. Fick served as Senior Counsel. Prior to joining the Company, Mr. Fick was an attorney with Gray, Plant, Mooty, Mooty & Bennett from May 1986 to February 1994. 28 Melvin L. McMains. Mr. McMains has served as the Company's Controller since 1980. James I. Johnson. Mr. Johnson has served as Vice President, General Counsel and Secretary of the Company since September 1997. From May 1990 to August 1997, Mr. Johnson served as General Counsel and Secretary of Norand Corporation. Robert W. Cox. Mr. Cox has served as a Director of the Company since 1994. He is currently of counsel to Baker & McKenzie, an international law firm. From 1992 to 1994, Mr. Cox was Chairman of Baker & McKenzie's Policy Committee and from 1984 to 1992, he was its Managing Partner and Chairman of its Executive Committee and Strategic Planning Committee. Mr. Cox is also a director of Carey International, Inc. Stanley M. Howe. Mr. Howe has served as Chairman Emeritus of the Company since 1996 and a Director since 1958. He has served the Company since 1948, serving as Chairman from 1984 to 1996, President from 1964 to 1990 and Chief Executive Officer from 1979 to 1991. Lee Liu. Mr. Liu has served as a Director of the Company since 1990. He has served as an officer of IES Industries Inc. ("IESI"), IES Utilities ("IESU") and various affiliates or predecessor companies, in the energy, transportation and telecommunications industries, since 1990, serving IESI as Chairman and Chief Executive Officer since 1993 and President from 1993 to November 1996 and serving IESU as Chairman and Chief Executive Officer since 1993 and as President in 1996, 1994 and 1993. From 1990 to 1993, Mr. Liu served as an officer to various affiliates to IESI and IESU. Mr. Liu is also a director of Eastman Chemical Company, Principal Financial Group and McLeod USA. Lorne R. Waxlax. Mr. Waxlax has served as a Director of the Company since 1994. He served as Executive Vice President, Diversified Group of The Gillette Company, a marketer and manufacturer of personal care and use products from 1985 to 1993. Mr. Waxlax is also a director of Clean Harbors, Inc., Quaker State Corporation, B.J's Wholesale Club Inc. and Homebase Inc. W. James Farrell. Mr. Farrell has been a Director of the Company since 1988. He has served Illinois Tool Works Inc., a manufacturer of highly engineered products and systems, since 1965, serving as Chairman since May 1996, Chief Executive Officer since September 1995, President from 1994 to 1995 and as Executive Vice President and President of the Specialty Mechanical and Adhesive Products Group from 1983 to 1994. Mr. Farrell is also a director of Morton International, Inc. and Premark International, Inc. Michael S. Plunkett. Mr. Plunkett has served as a Director of the Company since 1980. He has been the Senior Vice President, Engineering, Technology and Human Resources since 1986 and a Director from 1986 to 1993 of Deere & Company, a manufacturer of mobile power machinery. Mr. Plunkett is also a director of Bank One, Quad Cities, NA. Herman J. Schmidt. Mr. Schmidt has been a Director of the Company since 1980. He served as Vice Chairman of Mobil Oil Corporation from 1974 to 1978. Mr. Schmidt is also a director of H.J. Heinz Co. Robert L. Katz. Dr. Katz has served as a Director of the Company since 1995. He has been President of Robert L. Katz and Associates, consultants on corporate strategy, since 1953 and President of Caltex Investment Management Co., a venture capital firm since 1975. Dr. Katz is also a director of Newell Co., a manufacturer of window shades, hardware, cookware and school supplies. Celeste C. Michalski. Ms. Michalski has served as a Director of the Company since 1993. She served the Telecommunications Group of NYNEX, in the telecommunications, directory publishing and information delivery services industries, from July 1995 to April 1997, serving as Managing Director, Finance from December 1996 to April 1997, Vice President--Collections-- Residence and Business from November 1995 to November 1996 and Managing Director, Productivity and Process Improvement from July to November 1995. From 1994 to June 1995, Ms. Michalski served as Assistant Comptroller of NYNEX and from 1993 to 1994 she 29 served as Comptroller of New York Telephone, the largest operating subsidiary of NYNEX. From 1988 to 1993, she was the Vice President and Controller of GenCorp, Inc. Richard H. Stanley. Mr. Stanley has served as Vice Chairman of the Company since 1979 and as a Director since 1964. He has been the President of SC Companies, Inc. since 1986, Chairman of Stanley Consultants, Inc., an international engineering, architecture, planning and management firm, since 1984 and President since 1984 and Chairman since 1995 of The Stanley Foundation, a private operating foundation. Mr. Stanley also serves as a director of Dover Resources, Inc., a subsidiary of Dover Corporation, a diversified manufacturer of industrial products. SELLING SHAREHOLDER The following table sets forth certain information regarding the Selling Shareholder's beneficial ownership of the Company's Common Stock as of October 23, 1997, and as adjusted to reflect the sale of the shares of Common Stock offered hereby.
BEFORE THIS OFFERING AFTER THIS OFFERING ------------------------ ------------------------ SHARES TO SHARES PERCENT BE SOLD SHARES PERCENT NAME AND ADDRESS OF BENEFICIALLY OF SHARES IN BENEFICIALLY OF SHARES BENEFICIAL OWNER OWNED OUTSTANDING OFFERING OWNED OUTSTANDING - ------------------- ------------ ----------- --------- ------------ ----------- BTC, Inc................ 2,395,000 8.1% 2,395,000 0 0% 1105 N. Market St., Suite 1300 Wilmington, Delaware, 19899
BTC, Inc. is a Delaware corporation and a newly-formed, wholly-owned subsidiary of Bandag, Incorporated. Bandag, Incorporated, headquartered in Muscatine, Iowa, manufactures retreading materials and equipment for its worldwide network of 1,300 independent franchised dealers who produce and market retread tires. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 100 million shares of Common Stock, par value $1.00 per share, and one million shares of preferred stock, par value $1.00 per share (the "Preferred Stock"). At September 22, 1997, the Company had 29,670,610 shares of Common Stock issued and outstanding, held of record by approximately 5,315 shareholders, and no shares of Preferred Stock issued and outstanding. No series of Preferred Stock has been designated other than 200,000 shares of Series A Junior Participating Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"). The following summarizes the capital stock of the Company and certain provisions of the Company's Articles of Incorporation, as amended (the "Articles of Incorporation"), and its By-laws, as amended (the "By-laws") and is qualified in its entirety by reference to the provisions of the Company's Articles of Incorporation and By-laws and the Company's Rights Agreement. COMMON STOCK Except as required by law, holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the holders of Common Stock. The holders of Common Stock are not entitled to cumulative voting rights with respect to the election of directors. Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution, or winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no preemptive rights. There are no redemption or sinking fund 30 provisions applicable to the Common Stock. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon consummation of the Offerings will be, fully paid and nonassessable. The Board of Directors may issue additional authorized shares of Common Stock without further action by the shareholders. The Articles of Incorporation provide that the affirmative vote of the holders of two-thirds of the total number of outstanding shares of Common Stock entitled to vote shall be required and shall be sufficient to take any action at any meeting of shareholders. Notwithstanding the foregoing, the affirmative vote of the holders of a majority of the total number of outstanding shares of Common Stock entitled to vote shall be required and shall be sufficient to approve (i) any amendment to the Articles of Incorporation which has been approved or recommended by the Board of Directors of the Company (other than the provisions of the Articles of Incorporation relating to voting requirements and election or removal of directors), (ii) the election of a class of directors at any annual meeting of the shareholders if (A) at the annual meeting of the shareholders in the third preceding year, an election of such class of directors was held or attempted, but no director of such class was elected at such meeting because no candidate received a two- thirds majority vote and (B) the term of such class of directors was extended for an additional three-year term pursuant to the Articles of Incorporation, and (iii) any other motion, resolution or action which has been approved or recommended by the Board of Directors of the Company (provided, that this provision shall not apply to any motion, resolution or action regarding the election or removal of directors, any amendment of the Articles of Incorporation, any Corporate Combination (as defined below), any liquidating dividend or distribution, or any dissolution of the Company). PREFERRED STOCK The Board of Directors has the authority, without further action by the shareholders, to issue up to one million shares of Preferred Stock in one or more series and, except as to those shares of Series A Preferred Stock designated by the Board, to fix the rights and preferences thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, and the number of shares constituting any series or the designation of such series. Except as required by Iowa law, holders of Preferred Stock have no voting rights. Holders of Preferred Stock shall have no preemptive rights. The issuance of Preferred Stock could adversely affect the voting power of holders of Common Stock and could have the effect of delaying, deferring, or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock other than the issuance of shares of Series A Preferred Stock in connection with the Company's shareholder rights plan. SHAREHOLDER RIGHTS AGREEMENT Pursuant to the Company's Rights Agreement, each share of Common Stock carries with it one right entitling a shareholder to buy one two-hundredth of a share of Series A Preferred Stock at an exercise price of $75. For a description of the Company's Rights Agreement, see notes to the Company's consolidated financial statements. ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION, BY-LAWS AND IOWA CORPORATE LAW The Company's Articles of Incorporation and By-laws and the Iowa Business Corporation Act contain provisions that could make more difficult or delay the acquisition of control of the Company by various means, such as a tender offer, open market purchases, a merger, a proxy contest or otherwise. The purposes of these provisions are to discourage certain types of transactions which may involve an actual or threatened change of control of the Company and encourage persons seeking to acquire control of the Company to consult first with the Board of Directors to negotiate the terms of any proposed business combination or offer. The provisions are designed to reduce the vulnerability of the Company to an unsolicited proposal for a takeover that does not contemplate the acquisition of all outstanding shares or is otherwise unfair to shareholders of the Company, or an unsolicited proposal for the restructuring or sale of all or part of the Company. Supermajority Vote Requirement. The Company's Articles of Incorporation provide that the affirmative vote of the holders of that fraction of the total outstanding shares of Common Stock entitled to vote, but not less than two- thirds, determined by using as the numerator a number equal to the sum of (i) the outstanding shares of Common Stock entitled to vote which are owned by a Related Person (as defined below), plus (ii) two-thirds of 31 the remaining number of outstanding shares of Common Stock entitled to vote, and using as the denominator a number equal to the total number of outstanding shares of Common Stock entitled to vote, shall be required for any act of the shareholders of the Company relating to adoption of a Corporate Combination or any amendment of such provision of the Articles of Incorporation. For purposes of the Articles of Incorporation, "Corporate Combination" is defined as (a) any merger or consolidation of the Company or any majority-owned subsidiary with (i) any Related Person other than a majority-owned subsidiary or (ii) any other corporation other than a majority-owned subsidiary which is, or after such merger or consolidation would be, an affiliate of a Related Person, (b) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition in one transaction or a series of transactions to or with any Transaction Person (as defined below) of any assets of the Company or any majority-owned subsidiary having an aggregate fair market value of $1,000,000 or more; (c) the issuance or transfer by the Company or any majority-owned subsidiary in one transaction or a series of transactions of any securities of the Company or any majority-owned subsidiary to any Transaction Person in exchange for cash, securities, other property, or a combination thereof, having an aggregate fair market value of $1,000,000 or more; (d) the adoption of any plan or proposal for the liquidation or dissolution of the Company proposed by or on behalf of a Related Person or any affiliate of any Related Person; (e) any reclassification of securities, including any reverse stock split or recapitalization of the Company, or any merger or consolidation of the Company with any of its majority-owned subsidiary, or any other transaction (whether or not with, into, or otherwise involving a Related Person) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of capital stock or any securities which are convertible (with or without consideration) into shares of capital stock or into other securities convertible into shares of capital stock or convertible securities of the Company or any majority-owned subsidiary which is directly or indirectly owned by any Related Person or any affiliate of any Related Person. "Related Person" is defined as any person which, together with its affiliates, associates and the associates of its affiliates, owns 10% or more of the outstanding Common Stock. Notwithstanding the foregoing, the affirmative vote of two-thirds of the outstanding shares of Common Stock entitled to vote shall be sufficient for the adoption and authorization of a Corporate Combination when (i) the Corporate Combination will result in an involuntary sale, redemption, cancellation, or other termination of ownership of all shares of Common Stock owned by shareholders who do not vote in favor of or consent in writing to the Corporate Combination; (ii) the cash or fair market value (as determined in good faith by the Board of Directors) of other readily marketable consideration to be received by all holders of Common Stock for their shares will be (A) at least equal to the highest gross price per share paid or agreed to be paid to acquire any shares of Common Stock by any Related Person within two years of the record date for determining the shareholders entitled to vote on the Corporate Combination, and (B) in cash or in the same form as the Related Person, any person who would become a Related Person as a result of the Corporate Combination or any affiliate, associate or affiliate of an associate of such a person ("Transaction Person") has previously paid for shares of Common Stock (if the Transaction Person has paid for shares of Common Stock with varying forms of consideration, the form of consideration for such Common Stock shall be either cash or the form used to acquire the largest number of shares of such class of stock of the Company previously acquired by it); (iii) during the period from the earlier of the date that a person becomes a Transaction Person or a Transaction Person becomes a Related Person until the date of consummation of such Corporate Combination (A) there shall have been no failure to declare and pay at the regular date therefor any full dividends, whether or not cumulative, on any outstanding preferred stock of the Company; (B) there shall have been no reduction in the annual rate of dividends paid on the Common Stock, except as necessary to reflect any subdivision of such stock, and all increases in such annual rate of dividends necessary to reflect any reclassification, including any reverse stock split, recapitalization, reorganization, or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock; (C) the Transaction Person shall not have become the beneficial owner of any additional shares of stock of the Company except as part of the transaction which results in the Transaction Person's becoming a Related Person; and (D) the Transaction Person shall not have received the benefit, directly or indirectly, except proportionately as a shareholder, of any loans, advances, guaranties, pledges, other financial assistance, tax credits, or tax advantages provided by the Company, whether in anticipation of or in connection with such Corporate Combination or otherwise; and (iv) a proxy statement 32 responsive to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), shall be mailed to the shareholders of the Company at least 30 days prior to the proposed consummation of a Corporate Combination (whether or not such proxy statement is required to be mailed pursuant to the Exchange Act or subsequent provisions) for the purpose of soliciting shareholder approval of the proposed Corporate Combination. Classified Board of Directors. The Company's Board of Directors is divided into three classes, as nearly equal in number as is reasonably possible, serving staggered terms. One class of directors is elected at each annual meeting to serve a term of three years. Amendments to the staggered board provisions require a two-thirds vote of shareholders. In addition, special meetings of shareholders may only be called by a majority of the Board of Directors or by the holders of at least 10% of the outstanding shares entitled to vote at the meeting. Section 490.1109 of the Iowa Business Corporation Act. The Company is subject to the provisions of Section 490.1109 of the Iowa Business Corporation Act (the "Business Combination Statute"). Under the Business Combination Statute, certain "business combinations" between an Iowa corporation whose stock is publicly traded or held by more than 2,000 shareholders and an "interested shareholder" are prohibited for a three-year period following the date that such a shareholder became an interested shareholder, unless (i) prior to the time the shareholder became an interested shareholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder; (ii) at or subsequent to the time the shareholder became an interested shareholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of shareholders (such approval shall not be by written consent) by the affirmative vote of at least sixty-six and two-thirds percent of the outstanding voting stock which is not owned by the interested shareholder; or (iii) upon consummation of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction (excluding voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan). The three-year prohibition also does not apply to certain business combinations proposed by an interested shareholder following the announcement or notification of certain extraordinary transactions involving the corporation and a person who had not been an interested shareholder during the previous three years. The term "business combination" is defined generally to include mergers or consolidations between an Iowa corporation and an "interested shareholder," transactions with an "interested shareholder" involving the assets or stock of the corporation or its majority-owned subsidiaries and transactions which increase an interested shareholder's percentage ownership of stock. The term "interested shareholder" is defined generally as a shareholder who, together with affiliates and associates, owns (or, within three years prior, did own) 10% or more of an Iowa corporation's voting stock. 33 UNDERWRITING Subject to the terms and conditions set forth in a purchase agreement (the "U.S. Purchase Agreement"), among the Company, the Selling Shareholder and each of the underwriters named below (the "U.S. Underwriters"), and concurrently with the sale of 679,000 shares of Common Stock to the International Managers (as defined below), the Company and the Selling Shareholder have agreed to sell to each of the U.S. Underwriters, and each of the U.S. Underwriters severally has agreed to purchase from the Company and the Selling Shareholder the number of shares of Common Stock set forth opposite its name below.
NUMBER U.S. UNDERWRITER OF SHARES ---------------- --------- Merrill Lynch Pierce Fenner & Smith Incorporated........................................... William Blair & Company, L.L.C.................................. Robert W. Baird & Co. Incorporated.............................. McDonald & Company Securities, Inc.............................. --------- Total...................................................... 2,716,000 =========
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "U.S. Representatives") for the U.S. Underwriters. The Company and the Selling Shareholder have also entered into a purchase agreement (the "International Purchase Agreement" and, together with the U.S. Purchase Agreement, the "Purchase Agreements") with certain underwriters outside the United States and Canada (collectively, the "International Managers," and together with the U.S. Underwriters, the "Underwriters"), for whom Merrill Lynch International, William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "International Representatives" and, together with the U.S. Representatives, the "Representatives"). Subject to the terms and conditions set forth in the International Purchase Agreement, and concurrently with the sale of 2,716,000 shares of Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement, the Company and the Selling Shareholder have agreed to sell to the International Managers, and the International Managers have severally agreed to purchase from the Company and the Selling Shareholder, an aggregate of 679,000 shares of Common Stock. The public offering price per share of Common Stock and the underwriting discount per share of Common Stock are identical under the U.S. Purchase Agreement and the International Purchase Agreement. The respective percentages of the Common Stock to be sold by each of the Company and the Selling Shareholder will be identical in the U.S. Offering and the International Offering. In the U.S. Purchase Agreement and the International Purchase Agreement, the several U.S. Underwriters and the several International Managers, respectively, have agreed, subject to the terms and conditions set forth 34 therein, to purchase all of the shares of Common Stock being sold pursuant to each such agreement if any of the shares of Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances involving a default by an Underwriter, the commitments of non-defaulting U.S. Underwriters or International Managers (as the case may be) may be increased or the U.S. Purchase Agreement or the International Purchase Agreement (as the case may be) may be terminated. The sale of Common Stock to the U.S. Underwriters is conditioned upon the sale of Common Stock to the International Managers and vice versa. The U.S. Underwriters and the International Managers have entered into an intersyndicate agreement (the "Intersyndicate Agreement") providing for the coordination of their activities. The Underwriters are permitted to sell shares of Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non- Canadian persons, and the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. persons or Canadian persons, except in the case of transactions pursuant to the Intersyndicate Agreement. The U.S. Representatives have advised the Company and the Selling Shareholder that the U.S. Underwriters propose initially to offer the shares of Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $. per share. The U.S. Underwriters may allow, and such dealers may reallow, a discount not in excess of $. per share to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. The Company has granted to the U.S. Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 407,400 additional shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, less the underwriting discount. The U.S. Underwriters may exercise this option only to cover over- allotments, if any, made on the sale of Common Stock offered hereby. To the extent that the U.S. Underwriters exercise this option, each U.S. Underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of Common Stock proportionate to such U.S. Underwriters' initial amount reflected in the foregoing table. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 3,395,000 shares are being offered. The Company has, subject to certain exceptions, agreed not to, directly or indirectly, offer, pledge, sell, contract to sell or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock without the prior written consent of Merrill Lynch for a period of 90 days from the date of this Prospectus, except that the Company may, without such consent, issue shares of Common Stock upon the exercise or conversion of any outstanding options, rights, warrants or other convertible securities, or issue shares of Common Stock or grant options to purchase shares of Common Stock pursuant to the Company's existing employee benefit plans, director stock plan, or dividend reinvestment plan. In addition, the Company's executive officers and directors have agreed not to effect any sales of Common Stock in open market transactions without the prior written consent of Merrill Lynch for a period of 90 days from the date of this Prospectus. In connection with the Offerings, the Underwriters or their respective affiliates and selling group members (if any) who are qualified market makers on Nasdaq may engage in "passive market making" in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 permits, upon the satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also Nasdaq market makers in the security being distributed (or a related security) to engage in limited market making transactions during the period when Regulation M under the Exchange Act would otherwise prohibit such activity. Rule 103 prohibits underwriters and selling group members engaged in passive market making generally from entering a bid or affecting a purchase at a price that 35 exceeds the highest bid for those securities displayed on the Nasdaq National Market by a market maker that is not participating in the distribution. Under Rule 103, each underwriter or selling group member engaged in passive market making is subject to a daily net purchase limitation equal to 30% of such entity's average daily trading volume during the two full consecutive calendar months immediately preceding the date of the filing of the registration statement under the Securities Act of 1933, as amended (the "Securities Act") pertaining to the security to be distributed (or such related security). Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. The Company and the Selling Shareholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act or to contribute to payments initially the Underwriters may be required to make in respect thereof. Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Edgar D. Jannotta, a director of the Selling Shareholder, is Senior Director of William Blair & Company, L.L.C. 36 LEGAL MATTERS The legality of the Common Stock offered hereby has been passed upon for the Company by Stanley, Lande & Hunter, P.C., Muscatine, Iowa. Certain other legal matters will be passed upon for the Company by Jones, Day, Reavis & Pogue, Chicago, Illinois and Stanley, Lande & Hunter, P.C., for the Selling Shareholder by Foley & Lardner, Milwaukee, Wisconsin and for the Underwriters by Sidley & Austin, Chicago, Illinois. Members of Stanley, Lande & Hunter, P.C., own of record and beneficially a total of 96,987 shares of Common Stock. EXPERTS The audited consolidated financial statements and schedules of HON INDUSTRIES Inc. and Subsidiaries as of and for the fiscal year ended December 28, 1996 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in its reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The consolidated balance sheets of HON INDUSTRIES Inc. and its subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended included in this Prospectus and the related financial statement schedule listed in Item 14 of HON INDUSTRIES Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1996, incorporated by reference into this Registration Statement, have been audited by Ernst & Young LLP, as stated in its reports appearing herein and incorporated by reference into this Registration Statement. Such financial statements and financial statement schedule have been so included and incorporated by reference in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (of which this Prospectus is a part) under the Securities Act, with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information about the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed as a part thereof and otherwise incorporated therein. Statements made in this Prospectus as to the contents of any document referred to are not necessarily complete, and in each instance reference is made to such exhibit for a more complete description and each such statement is qualified in its entirety by such reference. The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files periodic reports, proxy statements and other information with the Commission. The Registration Statement, including exhibits thereto, as well as such reports, proxy statements and other information filed by the Company with the Commission can be inspected, without charge, and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission and that is located at http://www.sec.gov. The Registration Statement was filed electronically with the Commission. 37 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission by the Company (File No. 0-2648) pursuant to the Exchange Act are incorporated by reference in this Prospectus and made a part hereof: the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996; the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 29, 1997 and June 28, 1997; the Company's Current Reports on Form 8-K dated June 30, 1997, October 8, 1997 and October 22, 1997; and the descriptions of the Company's Common Stock set forth in Item 1 of the Company's Registration Statement on Form 8-A filed May 1, 1967 and Series A Junior Participating Preferred Stock and Rights Agreement set forth in Item 1 of the Company's Registration Statement on Form 8-A filed July 12, 1988, and all amendments and reports filed for the purpose of updating such descriptions. All documents filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from their respective dates of filing. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies, supersedes or replaces such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE DOCUMENTS SO INCORPORATED. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO HON INDUSTRIES INC., OFFICE OF THE SECRETARY, 414 EAST THIRD STREET, P.O. BOX 1109, MUSCATINE, IOWA 52761- 7109 (TELEPHONE NUMBER (319) 264-7400). 38 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- HON INDUSTRIES Inc. and Subsidiaries: Audited Financial Statements Report of Independent Public Accountants................................ F-2 Report of Independent Auditors.......................................... F-3 Consolidated Statements of Income for the Years Ended December 28, 1996, December 30, 1995 and December 31, 1994................................ F-4 Consolidated Balance Sheets as of December 28, 1996, December 30, 1995 and December 31, 1994.................................................. F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 28, 1996, December 30, 1995 and December 31, 1994............. F-6 Consolidated Statements of Cash Flows for the Years Ended December 28, 1996, December 30, 1995 and December 31, 1994................................ F-7 Notes to Consolidated Financial Statements.............................. F-8 Unaudited Financial Statements Condensed Consolidated Statements of Income for the Quarters Ended June 28, 1997 and June 29, 1996...................................................... F-20 Condensed Consolidated Statements of Income for the Six Months Ended June 28, 1997 and June 29, 1996...................................................... F-21 Condensed Consolidated Balance Sheets at June 28, 1997 and December 28, 1996................................................................... F-22 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 28, 1997 and June 29, 1996........................................ F-23 Notes to Condensed Consolidated Financial Statements.................... F-24
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders HON INDUSTRIES Inc. We have audited the accompanying consolidated balance sheet of HON INDUSTRIES Inc. and subsidiaries as of December 28, 1996, and the related consolidated statement of income, shareholders' equity, and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of HON INDUSTRIES Inc. and subsidiaries as of December 28, 1996, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois January 30, 1997 F-2 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders HON INDUSTRIES Inc. We have audited the accompanying consolidated balance sheets of HON INDUSTRIES Inc. and subsidiaries as of December 30, 1995, and December 31, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of HON INDUSTRIES Inc. and subsidiaries as of December 30, 1995, and December 31, 1994, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. As discussed in the Notes to Consolidated Financial Statements, the Company changed its method of accounting for postemployment benefits in 1994. Ernst & Young LLP Chicago, Illinois January 30, 1996 F-3 HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS -------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Net sales.............................. $998,135,000 $893,119,000 $845,998,000 Cost of products sold.................. 679,496,000 624,700,000 573,392,000 ------------ ------------ ------------ Gross Profit....................... 318,639,000 268,419,000 272,606,000 Selling and administrative expenses.... 215,646,000 201,691,000 185,490,000 Gain on sale of subsidiary............. 3,200,000 -- -- ------------ ------------ ------------ Operating Income................... 106,193,000 66,728,000 87,116,000 ------------ ------------ ------------ Interest income........................ 3,247,000 2,358,000 2,470,000 Interest expense....................... 4,173,000 3,569,000 3,248,000 ------------ ------------ ------------ Income Before Income Taxes......... 105,267,000 65,517,000 86,338,000 Income taxes........................... 37,173,000 24,419,000 31,945,000 ------------ ------------ ------------ Income Before Cumulative Effect of Accounting Changes................ 68,094,000 41,098,000 54,393,000 Cumulative effect of accounting changes............................... -- -- (237,000) ------------ ------------ ------------ Net Income......................... $ 68,094,000 $ 41,098,000 $ 54,156,000 ============ ============ ============ Net Income Per Common Share: Income before cumulative effect of accounting changes.................. $2.26 $1.35 $1.74 Cumulative effect of accounting changes............................. -- -- (.01) ------------ ------------ ------------ Net Income......................... $2.26 $1.35 $1.73 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-4 HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF YEAR-END ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ ASSETS Current Assets Cash and cash equivalents.......... $ 31,196,000 $ 32,231,000 $ 27,659,000 Short-term investments............. 1,502,000 14,694,000 3,083,000 Receivables........................ 109,095,000 88,178,000 94,269,000 Inventories........................ 43,550,000 36,601,000 43,259,000 Deferred income taxes.............. 9,046,000 14,180,000 11,565,000 Prepaid expenses and other current assets............................ 11,138,000 8,299,000 8,975,000 ------------ ------------ ------------ Total Current Assets............. 205,527,000 194,183,000 188,810,000 Property, Plant, and Equipment....... 234,616,000 210,033,000 177,844,000 Goodwill............................. 51,213,000 908,000 1,247,000 Other Assets......................... 22,158,000 4,394,000 4,667,000 ------------ ------------ ------------ Total Assets..................... $513,514,000 $409,518,000 $372,568,000 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses.......................... $127,910,000 $117,273,000 $ 99,898,000 Income taxes....................... 2,574,000 5,361,000 4,949,000 Note payable and current maturities of long-term obligations.......... 22,069,000 6,281,000 6,246,000 ------------ ------------ ------------ Total Current Liabilities........ 152,553,000 128,915,000 111,093,000 Long-Term Debt and Other Liabilities. 91,468,000 45,911,000 46,080,000 Capital Lease Obligations............ 6,320,000 7,700,000 8,661,000 Deferred Income Taxes................ 10,726,000 10,757,000 12,094,000 Minority Interest in Subsidiary...... 50,000 -- -- Commitments and Contingencies........ Shareholders' Equity Common stock....................... 29,713,000 30,394,000 30,675,000 Paid-in capital.................... 360,000 550,000 434,000 Retained earnings.................. 227,365,000 193,505,000 174,642,000 Receivable from HON Members Company Ownership Plan.................... (5,041,000) (8,214,000) (11,111,000) ------------ ------------ ------------ Total Shareholders' Equity....... 252,397,000 216,235,000 194,640,000 ------------ ------------ ------------ Total Liabilities and Shareholders' Equity............ $513,514,000 $409,518,000 $372,568,000 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-5 HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Common Stock Balance, beginning of year......... $ 30,394,000 $ 30,675,000 $ 31,676,000 Purchase of shares................. (742,000) (367,000) (1,078,000) Shares issued under Members Stock Purchase Plan and restricted stock awards............................ 61,000 86,000 77,000 ------------ ------------ ------------ Balance, end of year............. $ 29,713,000 $ 30,394,000 $ 30,675,000 ------------ ------------ ------------ Paid-In Capital Balance, beginning of year......... $ 550,000 $ 434,000 $ 281,000 Purchase of shares................. (1,654,000) (1,725,000) (1,567,000) Shares issued under Members Stock Purchase Plan and restricted stock awards............................ 1,464,000 1,841,000 1,720,000 ------------ ------------ ------------ Balance, end of year............. $ 360,000 $ 550,000 $ 434,000 ------------ ------------ ------------ Retained Earnings Balance, beginning of year......... $193,505,000 $174,642,000 $161,079,000 Net income......................... 68,094,000 41,098,000 54,156,000 Purchase of shares................. (19,264,000) (7,699,000) (26,992,000) Dividends paid..................... (14,970,000) (14,536,000) (13,601,000) ------------ ------------ ------------ Balance, end of year............. $227,365,000 $193,505,000 $174,642,000 ------------ ------------ ------------ Receivable from HON Members Company Ownership Plan Balance, beginning of year......... $ (8,214,000) $(11,111,000) $(13,483,000) Principal repaid by HON Members Company Ownership Plan............ 3,173,000 2,897,000 2,372,000 ------------ ------------ ------------ Balance, end of year............. $ (5,041,000) $ (8,214,000) $(11,111,000) ------------ ------------ ------------ Shareholders' Equity Balance, end of year............... $252,397,000 $216,235,000 $194,640,000 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-6 HON INDUSTRIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ----------------------------------------- 1996 1995 1994 ------------- ------------ ------------ Net Cash Flows From (To) Operating Activities: Net income........................ $ 68,094,000 $ 41,098,000 $ 54,156,000 Noncash items included in net income: Depreciation and amortization... 25,252,000 21,416,000 19,042,000 Gain on sale of subsidiary, net of tax......................... (2,016,000) -- -- Other postretirement and postemployment benefits........ 1,398,000 2,273,000 2,104,000 Deferred income taxes........... 5,103,000 (3,952,000) 854,000 Cumulative effect of accounting changes........................ -- -- 237,000 Other--net...................... 252,000 1,185,000 54,000 Changes in working capital, excluding acquisition and disposition: Receivables..................... (5,085,000) 6,091,000 (10,619,000) Inventories..................... 184,000 6,658,000 (4,629,000) Prepaid expenses and other current assets................. (2,613,000) 676,000 1,484,000 Accounts payable and accrued expenses....................... 998,000 17,009,000 4,619,000 Accrued facilities closing and reorganization expenses........ (1,147,000) 366,000 (1,885,000) Income taxes.................... (3,971,000) 412,000 (1,847,000) Increase in other liabilities..... 6,860,000 (216,000) 1,077,000 ------------- ------------ ------------ Net cash flows from (to) operating activities......... 93,309,000 93,016,000 64,647,000 ------------- ------------ ------------ Net Cash Flows From (To) Investing Activities: Capital expenditures--net......... (44,684,000) (53,879,000) (35,005,000) Acquisition spending, net of cash acquired......................... (79,136,000) -- -- Net proceeds from sale of subsidiary....................... 7,336,000 -- -- Principal repaid by HON Members Company Ownership Plan........... 3,173,000 2,897,000 2,372,000 Short-term investments--net....... 12,392,000 (11,611,000) 8,515,000 Other--net........................ (976,000) (205,000) (291,000) ------------- ------------ ------------ Net cash flows from (to) investing activities......... (101,895,000) (62,798,000) (24,409,000) ------------- ------------ ------------ Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock............................ (21,912,000) (9,791,000) (29,637,000) Proceeds from long-term debt...... 51,072,000 104,000 -- Payments of note and long-term debt............................. (8,416,000) (3,350,000) (3,916,000) Proceeds from sale of HON INDUSTRIES common stock to members.......................... 1,777,000 1,927,000 1,797,000 Dividends paid.................... (14,970,000) (14,536,000) (13,601,000) ------------- ------------ ------------ Net cash flows from (to) financing activities......... 7,551,000 (25,646,000) (45,357,000) ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents................... (1,035,000) 4,572,000 (5,119,000) ------------- ------------ ------------ Cash and cash equivalents at beginning of year.................. 32,231,000 27,659,000 32,778,000 ------------- ------------ ------------ Cash and cash equivalents at end of year............................... $ 31,196,000 $ 32,231,000 $ 27,659,000 ------------- ------------ ------------ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest........................ $ 3,334,000 $ 3,401,000 $ 3,234,000 Income taxes.................... $ 36,318,000 $ 27,560,000 $ 32,534,000 ============= ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-7 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATURE OF OPERATIONS HON INDUSTRIES Inc. and subsidiaries (the Company) are a national manufacturer and marketer of office furniture and hearth products. Both industries are reportable segments; however, the Company's office furniture business is its principal line of business. Refer to the "Business Segment Information" note for further information. Office furniture products are sold through a national system of dealers, wholesalers, mass merchandisers, warehouse clubs, and 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- and gas-burning factory-built fireplaces, fireplace inserts, gas logs, and stoves. These products are sold through a national system of dealers, wholesalers, and large regional contractors. The Company's products are marketed predominately in the United States and Canada. The Company exports select products to a limited number of markets outside North America, principally Latin America and the Caribbean, through its export subsidiary; however, based on sales, it is not significant. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Fiscal Year-End The consolidated financial statements include the accounts and transactions of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company's fiscal year ends on the Saturday nearest December 31. Fiscal year 1996 ended on December 28, 1996; 1995 ended on December 30, 1995; and 1994 ended on December 31, 1994. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash and commercial paper. These securities have original maturity dates not exceeding three months from date of purchase. Short-Term Investments Short-term investments are classified as available-for-sale and are highly liquid debt and equity securities. These investments are stated at cost which approximates market value. Receivables Accounts receivable are presented net of an allowance for doubtful accounts of $1,830,000; $1,867,000; and $1,654,000 for 1996, 1995, and 1994, respectively. Inventories Inventories are valued at the lower of cost or market, determined principally by the last-in, first-out (LIFO) method. Property, Plant, and Equipment Property, plant, and equipment are carried at cost. Depreciation has been computed by the straight-line method over estimated useful lives: land improvements, 10-20 years; buildings, 10-40 years; and machinery and equipment, 3-12 years. The Company capitalized interest costs of $95,000 and $256,000 in 1996 and 1995, respectively. F-8 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Goodwill and Patents Goodwill represents the excess of cost over the fair value of net identifiable assets of acquired companies. Goodwill is being amortized on a straight-line basis predominately over 40 years. Patents are being amortized on a straight-line basis over their estimated useful lives which range from 7 to 16 years. Patents are reported by the Company as "Other Assets." The carrying value of goodwill and patents is reviewed by the Company whenever significant events or changes occur which might impair recovery of recorded costs. Based on its most recent analysis, the Company believes no material impairment of these intangible assets exists at December 28, 1996.
1996 1995 1994 ------- ------ ------ (IN THOUSANDS) Goodwill........................................... $52,051 $2,865 $2,865 Patents............................................ 16,060 -- -- Less accumulated amortization...................... 838 1,957 1,618 ------- ------ ------ $67,273 $ 908 $1,247 ======= ====== ======
Product Development Costs Product development costs relating to the development of new products and processes, including significant improvements and refinements to existing products, are expensed as incurred. The amounts charged against income were $10,423,000 in 1996, $11,591,000 in 1995, and $10,081,000 in 1994. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. New Accounting Policies The Company adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in the first quarter of 1996. The adoption had no material effect on results of operations. BUSINESS COMBINATIONS On October 2, 1996, the Company acquired all of the outstanding stock of Heat-N-Glo Fireplace Products, Inc., located in Savage, Minnesota, for a combination of cash and debt totaling approximately $79 million. The Company merged Heat-N-Glo into Heatilator Inc., a wholly owned subsidiary, which changed its name to Hearth Technologies Inc. Both Heatilator and Heat-N-Glo are engaged in the manufacture and marketing of quality hearth products and operate as divisions of Hearth Technologies Inc. The Company paid approximately $62.0 million in cash, a $5.0 million long- term note, and $12.0 million as a convertible debenture for Heat-N-Glo. In connection with the merger, the Company entered into a $34.0 million five-year term loan with LaSalle National Bank. This transaction has been accounted for under the purchase method. Accordingly, the accounts and transactions of the acquired company have been included in the consolidated financial statements from the date of acquisition. F-9 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assuming the acquisition had occurred as of the beginning of fiscal year 1995, the Company's pro forma consolidated net sales would have been approximately $1.07 billion and $971.6 million for 1996 and 1995, respectively. Pro forma consolidated net income and net income per common share would not have been materially different than reported amounts. The net purchase price was preliminarily allocated as follows: (In thousands) Working capital, other than cash................................. $10,702 Property, plant, and equipment................................... 6,441 Other assets..................................................... 548 Patents.......................................................... 16,060 Goodwill......................................................... 52,051 Other liabilities................................................ (6,666) ------- Purchase price, net of cash received........................... $79,136 =======
BUSINESS DISPOSITION On January 24, 1996, the Company sold the outstanding stock of Ring King Visibles, Inc., a wholly owned subsidiary, for $8.0 million in cash and the forgiveness of intercompany receivables of approximately $2.0 million. The sale resulted in an approximate $3.2 million pretax gain for the Company (an after-tax gain of $2.0 million, or $0.07 per share) which was recorded in the first quarter of fiscal year 1996. INVENTORIES
1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Finished products................................ $15,793 $11,265 $13,554 Materials and work in process.................... 27,757 25,336 29,705 ------- ------- ------- $43,550 $36,601 $43,259 ======= ======= =======
Current replacement cost exceeded the amount stated for inventories valued by the LIFO method by approximately $12,337,000; $13,594,000; and $12,983,000 as of year-end 1996, 1995, and 1994, respectively. PROPERTY, PLANT, AND EQUIPMENT
1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Land and land improvements.................... $ 9,114 $ 9,701 $ 8,832 Buildings..................................... 92,509 95,310 84,801 Machinery and equipment....................... 231,780 208,707 185,421 Construction and equipment installation in progress..................................... 42,507 30,036 17,915 -------- -------- -------- 375,910 343,754 296,969 Less allowances for depreciation.............. 141,294 133,721 119,125 -------- -------- -------- $234,616 $210,033 $177,844 ======== ======== ========
F-10 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1996 1995 1994 -------- -------- ------- (IN THOUSANDS) Trade accounts payable......................... $ 44,762 $ 47,617 $40,939 Compensation................................... 6,331 4,855 3,343 Profit sharing and retirement expense.......... 11,736 11,490 11,066 Vacation pay................................... 8,064 8,492 8,579 Marketing expenses............................. 36,550 23,930 17,443 Workers' compensation, general, and product liability expenses............................ 3,787 4,032 4,700 Other accrued expenses......................... 16,680 16,857 13,828 -------- -------- ------- $127,910 $117,273 $99,898 ======== ======== =======
LONG-TERM DEBT AND OTHER LIABILITIES
1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Industrial development revenue bonds, various issues, payable through 2013 with interest at 4.50-8.50% per annum............................ $24,063 $24,542 $24,928 Note payable to bank, term loan payable in 2001 with interest at 7.11% per annum*............... 27,200 -- -- Note payable to bank, payable quarterly through 1997 with interest at a variable rate (6.03% at year-end 1996).................................. -- 7,750 9,700 Convertible debenture payable to individuals, due in 1999 with interest at 7.0% per annum......... 12,000 -- -- Accrued employee health care costs............... 7,901 6,503 4,230 Other notes and amounts.......................... 20,304 7,116 7,222 ------- ------- ------- $91,468 $45,911 $46,080 ======= ======= =======
- -------- * The Company has entered into an interest rate swap agreement on a notional amount of $34 million, which is equivalent to the amount of the term loan, to obtain a fixed rate of interest in lieu of a floating rate. The interest rate swap agreement matures at the time the related note matures. The Company is exposed to credit loss in the event of nonperformance by the bank making the loan who is the other party to the agreement. However, the Company does not anticipate nonperformance by the counterparty. Aggregate maturities of long-term debt are as follows (in thousands): 1997...................................... $15,107 1998...................................... 7,459 1999...................................... 19,486 2000...................................... 10,104 2001...................................... 10,026 Thereafter................................ 24,209
The note and convertible debenture payable to individuals are payable to the former owners of a business acquired by the Company in 1996. These individuals continue as officers of a subsidiary of the business F-11 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) following the merger. The convertible debenture is convertible into shares of common stock of Hearth Technologies Inc., a subsidiary of the Company, representing 10% of the current issued and outstanding stock of Hearth Technologies Inc. Certain of the above borrowing arrangements include covenants which require the maintenance of a minimum level of working capital, place restrictions on the payment of cash dividends, and limit the assumption of additional debt and lease obligations. Approximately $198,176,000 of retained earnings were unrestricted at the end of 1996. The fair value of the Company's outstanding long-term debt obligations at year-end 1996 approximates the recorded aggregate amount. Property, plant, and equipment, with net carrying values of approximately $33,451,000 at the end of 1996, are mortgaged. INCOME TAXES Significant components of the provision for income taxes are as follows:
1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Current: Federal........................................ $27,958 $25,360 $27,504 State.......................................... 3,932 3,011 3,587 ------- ------- ------- 31,890 28,371 31,091 Deferred......................................... 5,283 (3,952) 854 ------- ------- ------- $37,173 $24,419 $31,945 ======= ======= =======
A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is as follows:
1996 1995 1994 ---- ---- ---- Federal statutory tax rate.............................. 35.0% 35.0% 35.0% State taxes, net of federal tax effect.................. 2.7 2.6 2.8 Federal and state tax credits........................... (2.2) -- -- Other, net.............................................. (.2) (.3) (.8) ---- ---- ---- Effective tax rate...................................... 35.3% 37.3% 37.0% ==== ==== ====
The Company recognized one-time federal and state research and development and new jobs tax credits totaling $2.1 million, or $0.07 per share, in 1996 related to prior tax years. F-12 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Net long-term deferred tax liabilities: Tax over book depreciation............ $(17,584) $(16,358) $(13,630) OPEB obligations...................... 2,947 2,048 1,301 Other--net............................ 3,911 3,553 235 -------- -------- -------- Total net long-term deferred tax liabilities........................ (10,726) (10,757) (12,094) Net current deferred tax assets: Workers' compensation, general, and product liability accruals........... 1,548 1,670 2,029 Vacation accrual...................... 1,855 3,167 3,180 Other--net............................ 5,643 9,343 6,356 -------- -------- -------- Total net current deferred tax assets............................. 9,046 14,180 11,565 -------- -------- -------- Net deferred tax (liabilities) assets............................. $ (1,680) $ 3,423 $ (529) ======== ======== ========
SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
1996 1995 1994 ----------- ----------- ----------- Common Stock, $1 Par Value Authorized........................ 100,000,000 100,000,000 100,000,000 Issued and outstanding............ 29,713,265 30,394,337 30,674,603 Preferred Stock Authorized........................ 1,000,000 1,000,000 1,000,000 Issued and outstanding............ -- -- --
The Company purchased 753,800; 367,317; and 1,078,835 shares of its common stock during 1996, 1995, and 1994, respectively. Cash dividends declared and paid per share for each year are:
1996 1995 1994 ---- ---- ---- Common shares.............................................. $.50 $.48 $.44
Net income per common share is based on the weighted average number of shares of common stock outstanding during each year including allocated and unallocated ESOP shares. Shares of common stock were issued in 1996, 1995, and 1994 pursuant to a members' stock purchase plan as follows:
1996 1995 1994 ------ ------ ------ Shares issued....................................... 61,370 86,049 77,302 Average price per share............................. $24.90 $22.39 $23.25
F-13 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company uses the par value method of accounting for common stock repurchases. The excess of the cost of shares acquired over their par value is allocated to Paid-In Capital to the extent appropriate, with the excess charged to Retained Earnings. During 1994, shareholders approved the 1994 Members' Stock Purchase Plan. Under the new plan, 500,000 shares of common stock were registered for issuance to participating members. Beginning on July 3, 1994, rights to purchase stock are granted on a quarterly basis to all members who have one year of employment eligibility and work a minimum of 20 hours per week. The price of the stock purchased under the plan is 85% of the closing price on the applicable purchase date. No member may purchase stock under the plan in an amount which exceeds the lesser of 20% of his or her gross earnings or 2,000 shares, with a maximum fair market value of $25,000 in any calendar year. An additional 275,279 shares were available for issuance under the plan at December 28, 1996. The effect of the application of adopting Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," was not material to the Company. The Company has granted restricted stock awards aggregating 75,500 shares of common stock to officers. The officers were entitled to dividends and had voting rights on all shares awarded. Unearned compensation expense, representing the fair market value of the shares at the date of grant, was charged to income over the vesting period. Approximately $37,000 were charged to income as a result of the awards for the years 1995 and 1994. All of the awarded shares were vested as of year-end 1995. Pursuant to the Company's Shareholder Rights Plan, each share of common stock carries with it one Right. Each Right entitles a shareholder to buy one two-hundredth of a share of a new series of preferred stock at an exercise price of $75.00. Each one two-hundredth of a share of the new preferred stock has terms designed to make it the economic equivalent of one share of common stock. Rights will be exercisable only if a person or group acquires 20% or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20% or more of the common stock. If the Company is acquired in a merger or other business combination transaction, each Right will entitle its holder to purchase, at the then current exercise price of the Right, a number of the acquiring company's common shares having a market value at that time of twice the exercise price of the Right. The Company has entered into change in control employment agreements with corporate officers and certain other key employees. According to the agreements, a change in control occurs when a third person or entity becomes the beneficial owner of 20% or more of the Company's common stock or when more than one-third of the Company's Board of Directors is composed of persons not recommended by at least three-fourths of the incumbent Board of Directors. Upon a change in control, a key employee is deemed to have a two-year employment with the Company, and all his or her benefits are vested under Company plans. If, at any time within two years of the change in control, the employee's employment is terminated by the Company for any reason other than cause or by the key employee for good reason, as such terms are defined in the agreement, then the key employee is entitled to receive a severance payment equal to two times salary and the average of the prior two years' bonuses. RETIREMENT BENEFITS The Company has defined contribution profit-sharing plans covering substantially all employees who are not participants in certain defined benefit plans. The Company's annual contribution to the defined contribution plans is based on employee eligible earnings and results of operations and amounted to $11,118,000; $10,955,000; and $10,849,000 in 1996, 1995, and 1994, respectively. The Company sponsors defined benefit plans which include a limited number of salaried and hourly employees at certain subsidiaries. The Company's funding policy is generally to contribute annually the minimum actuarially computed amount. Net pension costs relating to these plans were $146,000; $256,000; and F-14 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) $228,000 for 1996, 1995, and 1994, respectively. The actuarial present value of benefit obligations, less related plan assets at fair value, is not significant. In 1992, the Company established a trust to administer a leveraged employee stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company contributions based on employee eligible earnings and dividends on the shares are used to make loan interest and principal payments. As the loan is repaid, shares are distributed to the ESOP trust for allocation to participants. Selected financial data pertaining to the ESOP is as follows:
1996 1995 1994 ------- ------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) Company contribution to ESOP..................... $ 3,348 $ 3,302 $ 2,977 Dividend income of ESOP.......................... 446 436 403 Company interest expense on ESOP loan............ 555 749 656 Shares of common stock allocated to ESOP participant accounts............................ 152,733 149,749 133,945 Shares held in suspense (unallocated) by ESOP as of year-end.......................... 223,939 376,672 526,421 Fair value of shares held in suspense by ESOP as of year-end..................................... $ 7,264 $ 8,758 $14,082 Closing market price of common stock as of year- end............................................. $ 32.44 $ 23.25 $ 26.75
In 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect of adoption was to reduce net income by $237,000 after tax, or $.01 a share. POSTRETIREMENT HEALTH CARE The Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," as of January 3, 1993, and recorded the cumulative effect of the accounting change on the deferred recognition basis. The following table sets forth the funded status of the plan, reconciled to the accrued postretirement benefits cost recognized in the Company's balance sheet at:
1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Accumulated postretirement benefit obligation (APBO): Retirees............................... $ 6,535 $ 8,138 $ 6,947 Fully eligible active plan participants.......................... 3,916 5,612 3,816 Other active plan participants......... 4,808 7,809 6,397 Unrecognized net (loss)/gain............. 6,919 (933) (713) Unrecognized prior service cost.......... (2,776) (2,922) -- Unrecognized transition obligation....... (11,501) (12,214) (12,932) -------- -------- -------- Accrued postretirement benefit cost...... $ 7,901 $ 5,490 $ 3,515 ======== ======== ======== Net periodic postretirement benefits costs include: Service cost............................. $ 810 $ 685 $ 687 Interest cost............................ 1,629 1,344 1,242 Amortization of transition obligation over 20 years........................... 713 718 718 Amortization of prior service cost....... 146 -- -- -------- -------- -------- Net periodic postretirement benefits cost.................................... $ 3,298 $ 2,747 $ 2,647 ======== ======== ========
F-15 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The discount rates at fiscal year-end 1996, 1995, and 1994 were 7.5%, 7.75%, and 8.0%, respectively. The pre-65 1997 gross trend rates begin at 11.0% for the medical and prescription drug coverages and grade down to 5.0% in 2006 and remain at this level for all future years. The post-64 gross trend rates begin at 9.0% for the medical coverage and decrease until the maximum Company subsidy (cap) is reached in 2003. For the prescription drug coverage, the 1997 gross trend rates begin at 11.0% and decrease until the cap is reached in 2003. If the health care cost trend rates were increased by 1.0% for each year, the accumulated postretirement benefit obligation as of December 28, 1996, would increase by $493,520; and, the sum of the service and interest cost components of the net periodic postretirement benefit cost for fiscal year 1996 would increase by $45,000. The Company's postretirement health care plans are not funded. LEASES The Company leases certain warehouse and plant facilities and equipment. Commitments for minimum rentals under noncancellable leases at the end of 1996 are as follows:
CAPITALIZED OPERATING LEASES LEASES ----------- --------- (IN THOUSANDS) 1997............................................... $2,024 $ 5,532 1998............................................... 2,024 4,941 1999............................................... 2,024 3,975 2000............................................... 2,024 2,897 2001............................................... 664 2,113 Thereafter......................................... 2,069 883 ------ ------- Total minimum lease payments....................... 10,829 $20,341 ======= Less amount representing interest.................. 3,377 ------ Present value of net minimum lease payments, including current maturities of $1,133,000........ $7,452 ======
Property, plant, and equipment at year-end include the following amounts for capitalized leases:
1996 1995 1994 ------ ------ ------ (IN THOUSANDS) Buildings........................................... $3,299 $3,299 $3,709 Machinery and equipment............................. 8,419 8,419 8,419 ------ ------ ------ 11,718 11,718 12,128 Less allowances for depreciation.................... 4,854 3,569 2,507 ------ ------ ------ $6,864 $8,149 $9,621 ====== ====== ======
Rent expense for the years 1996, 1995, and 1994 amounted to approximately $6,788,000; $7,439,000; and $6,572,000, respectively. The Company has operating leases for office and production facilities with annual rentals totaling $578,000 with the former owners of a business acquired in 1996. These individuals continue as officers of a subsidiary of the Company following the merger. Contingent rent expense under both capitalized and operating leases (generally based on mileage of transportation equipment) amounted to $353,000; $608,000; and $525,000 for the years 1996, 1995, and 1994, respectively. CONTINGENCIES The Company is involved in various legal actions arising in the course of business. Although management cannot predict the ultimate outcome of these matters with certainty, it believes, after taking into consideration F-16 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) legal counsel's evaluation of such actions, that the outcome of these matters will not have a material effect on the financial position or results of operations of the Company. The Company and certain subsidiaries are party to three environmental actions which have arisen in the ordinary course of business. These include possible obligations to investigate and mitigate the effects on the environment of the disposal or release of certain chemical substances at various sites, such as Superfund sites and other operating or closed facilities. The effect of these actions on the Company's financial position and operations to date has not been significant. The Company is participating in environmental assessments and monitoring, and liabilities have been accrued reflecting management's best estimate of the eventual future cost of the Company's anticipated share (based upon estimated ranges of remediation costs, the existence of many other larger "potentially responsible parties" who are financially viable to share in such costs, the Company's experience to date in relation to the determination of its allocable share, the volume and type of waste the Company is believed to have contributed to each site, and the anticipated periods of time over which such costs may be paid) of remediation costs. Potential insurance reimbursements are not anticipated. The Company is also reviewing available defenses and claims it may have against third parties. Due to such factors as the wide discretion of regulatory authorities regarding clean-up levels and uncertain allocation of liability at multiple party sites, estimates made prior to the approval of a formal plan of action represent management's best judgment as to estimates of reasonably foreseeable expenses based upon average remediation costs at comparable sites. While the final resolution of these contingencies could result in expenses in excess of current accruals and therefore have an impact on the Company's consolidated financial results in a future reporting period, management believes that the ultimate outcome will not have a material effect on the Company's financial position or results of operations. BUSINESS SEGMENT INFORMATION The Company has two reportable business segments: office furniture and hearth products. However, the manufacture and marketing of office furniture is the Company's principal business segment. The office furniture segment manufactures and markets a broad line of metal and wood commercial and home office furniture which includes file cabinets, desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding office partitions and panel systems, and other related products. The hearth products segment manufactures and markets a broad line of manufactured gas- and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems principally for the home. The Company's October 2, 1996, acquisition of Heat-N-Glo Fireplace Products, Inc., resulted in hearth products becoming a reportable segment. Prior to this acquisition, the Company had only one reportable segment, office furniture. Refer to the "Business Combinations" note for additional information regarding this acquisition. For purposes of segment reporting, intercompany sales transfers between segments are not material, and operating profit is income before income taxes exclusive of certain unallocated corporate expenses. Identifiable assets by segment are those assets applicable to the respective industry segments. Corporate assets consist principally of cash and cash equivalents, short-term investments, and corporate office real estate and related equipment. F-17 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Reportable segment data reconciled to the consolidated financial statements for the years ended 1996, 1995, and 1994 is as follows:
1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Net sales: Office furniture............................ $887,299 $818,907 $772,299 Hearth products............................. 110,836 74,212 73,699 -------- -------- -------- $998,135 $893,119 $845,998 ======== ======== ======== Operating profit: Office furniture............................ $106,824 $ 79,085 $ 96,813 Hearth products............................. 14,155 6,395 6,373 -------- -------- -------- Total operating profit.................. 120,979 85,480 103,186 Unallocated corporate expenses.............. (15,712) (19,963) (16,848) -------- -------- -------- Income before income taxes.............. $105,267 $ 65,517 $ 86,338 ======== ======== ======== Identifiable assets: Office furniture.......................... $330,575 $308,783 $288,436 Hearth products........................... 122,037 25,811 25,791 General corporate......................... 60,902 74,924 58,341 -------- -------- -------- $513,514 $409,518 $372,568 ======== ======== ======== Depreciation and amortization expense: Office furniture.......................... $ 21,140 $ 18,328 $ 16,264 Hearth products........................... 2,813 1,424 1,191 General corporate......................... 1,299 1,664 1,587 -------- -------- -------- $ 25,252 $ 21,416 $ 19,042 ======== ======== ======== Capital expenditures, net: Office furniture.......................... $ 41,186 $ 50,816 $ 29,987 Hearth products........................... 4,060 2,857 3,763 General corporate......................... (562) 206 1,255 -------- -------- -------- $ 44,684 $ 53,879 $ 35,005 ======== ======== ========
One office furniture customer accounted for approximately 12%, 13%, and 13% of consolidated net sales in 1996, 1995, and 1994, respectively. F-18 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR-END 1996:* Net sales..................... $233,477 $219,260 $255,254 $290,144 $998,135 Gross profit.................. 73,471 69,033 78,851 97,284 318,639 Income before income taxes.... 26,706 19,518 25,337 33,706 105,267 Income taxes.................. 9,881 7,222 7,430 12,640 37,173 Net income**.................. 16,825 12,296 17,907 21,066 68,094 Net income per common share**. .55 .41 .60 .70 2.26 YEAR-END 1995: Net sales..................... $216,498 $206,604 $228,195 $241,822 $893,119 Gross profit.................. 68,942 60,358 67,876 71,243 268,419 Income before income taxes.... 20,119 12,366 19,448 13,584 65,517 Income taxes.................. 7,544 4,638 7,209 5,028 24,419 Net income***................. 12,575 7,728 12,239 8,556 41,098 Net income per common share***..................... .41 .25 .41 .28 1.35 YEAR-END 1994: Net sales..................... $200,693 $193,045 $222,112 $230,148 $845,998 Gross profit.................. 63,374 59,713 71,005 78,514 272,606 Income before income taxes.... 18,458 14,637 24,659 28,584 86,338 Income taxes.................. 6,830 5,415 9,124 10,576 31,945 Income before cumulative effect of accounting change.. 11,628 9,222 15,535 18,008 54,393 Cumulative effect of accounting change............ (237) -- -- -- (237) Net income.................... 11,391 9,222 15,535 18,008 54,156 Net income per common share: Income before cumulative effect of accounting change.. .37 .30 .49 .58 1.74 Cumulative effect of accounting change............ (.01) -- -- -- (.01) Net income per common share... .36 .30 .49 .58 1.73
- -------- *Includes the results of operation of Heat-N-Glo Fireplace Products, Inc., acquired October 2, 1996. **First quarter 1996 includes a $3,200,000 pretax gain on the sale of Ring King Visibles, Inc., a wholly owned subsidiary (after-tax gain of $2,000,000, or $.07 per share), and third quarter includes one-time federal and state income tax credits of $2,100,000, or $.07 per share. ***Fourth quarter 1995 includes various pretax charges totaling $5,575,000 (after-tax effect of $3,512,000, or $.12 per share) for nonrecurring costs primarily associated with closing several leased facilities and severance arrangements from eliminating certain administrative positions. F-19 HON INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED --------------------- JUNE 28, JUNE 29, 1997 1996 ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Net sales (Note E)....................................... $ 296,567 $ 219,260 Cost of products sold.................................... 200,969 150,227 ---------- ---------- Gross Profit........................................... 95,598 69,033 Selling and administrative expenses...................... 64,303 49,507 ---------- ---------- Operating Income....................................... 31,295 19,526 Interest income.......................................... 441 759 Interest expense......................................... 1,582 767 ---------- ---------- Income Before Income Taxes............................. 30,154 19,518 Income taxes............................................. 11,307 7,222 ---------- ---------- Net Income............................................. $ 18,847 $ 12,296 ========== ========== Net income per common share (Note D)..................... $ 0.63 $ 0.41 ========== ========== Average number of common shares outstanding.............. 29,692,077 30,170,014 ========== ========== Cash dividends per common share.......................... $ 0.14 $ 0.12 ========== ==========
See accompanying notes to condensed consolidated financial statements. F-20 HON INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED --------------------- JUNE 28, JUNE 29, 1997 1996 ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Net sales (Note E)....................................... $ 579,426 $ 452,737 Cost of products sold.................................... 395,163 310,233 ---------- ---------- Gross Profit........................................... 184,263 142,504 Selling and administrative expenses...................... 124,756 99,353 Gain on sale of subsidiary (Note C)...................... -- 3,200 ---------- ---------- Operating Income....................................... 59,507 46,351 Interest income.......................................... 852 1,500 Interest expense......................................... 3,135 1,627 ---------- ---------- Income Before Income Taxes............................. 57,224 46,224 Income taxes............................................. 21,459 17,103 ---------- ---------- Net Income............................................. $ 35,765 $ 29,121 ========== ========== Net income per common share (Note D)..................... $ 1.20 $ 0.96 ========== ========== Average number of common shares outstanding.............. 29,695,994 30,257,593 ========== ========== Cash dividends per common share.......................... $ 0.28 $ 0.24 ========== ==========
See accompanying notes to condensed consolidated financial statements. F-21 HON INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 DECEMBER 28, (UNAUDITED) 1996 ----------- ------------ (IN THOUSANDS) ASSETS CURRENT ASSETS Cash and cash equivalents........................... $ 24,137 $ 31,196 Short-term investments.............................. 256 1,502 Receivables......................................... 142,019 109,095 Inventories (Note B)................................ 61,156 43,550 Deferred income taxes............................... 19,746 9,046 Prepaid expenses and other current assets........... 15,927 11,138 -------- -------- Total Current Assets.............................. 263,241 205,527 PROPERTY, PLANT, AND EQUIPMENT, at cost Land and land improvements.......................... 8,969 9,114 Buildings........................................... 132,154 92,509 Machinery and equipment............................. 256,146 231,780 Construction in progress............................ 45,903 42,507 -------- -------- 443,172 375,910 Less accumulated depreciation....................... 149,661 141,294 -------- -------- Net Property, Plant, and Equipment.................. 293,511 234,616 GOODWILL.............................................. 58,020 51,213 OTHER ASSETS.......................................... 20,620 22,158 -------- -------- Total Assets...................................... $635,392 $513,514 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses............... $160,432 $127,910 Income taxes........................................ 3,714 2,574 Note payable and current maturities of long-term obligations........................................ 4,844 22,069 -------- -------- Total Current Liabilities......................... 168,990 152,553 LONG-TERM DEBT AND OTHER LIABILITIES.................. 162,889 91,468 CAPITAL LEASE OBLIGATIONS............................. 6,036 6,320 DEFERRED INCOME TAXES................................. 18,602 10,726 MINORITY INTEREST IN SUBSIDIARY....................... 56 50 SHAREHOLDERS' EQUITY Capital Stock: Preferred, $1 par value; authorized 1,000,000 shares; no shares outstanding.................... -- -- Common, $1 par value; authorized 100,000,000 shares; outstanding--1997--29,689,707 shares; 1996--29,713,265 shares.......................... 29,689 29,713 Paid-in capital..................................... 91 360 Retained earnings................................... 254,080 227,365 Receivable from HON Members Company Ownership Plan.. (5,041) (5,041) -------- -------- Total Shareholders' Equity...................... 278,819 252,397 -------- -------- Total Liabilities and Shareholders' Equity...... $635,392 $513,514 ======== ========
See accompanying notes to condensed consolidated financial statements. F-22 HON INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ------------------ JUNE 28, JUNE 29, 1997 1996 -------- -------- (IN THOUSANDS) Net Cash Flows From (To) Operating Activities: Net income............................................... $ 35,765 $ 29,121 Noncash items included in net income: Depreciation and amortization.......................... 15,084 11,392 Gain on sale of subsidiary, net of tax (Note C)........ -- (2,016) Other postretirement and postemployment benefits....... 686 1,205 Deferred income taxes.................................. 1,234 (113) Other--net............................................. 12 248 Net increase (decrease) in noncash operating assets and liabilities............................................. (6,674) (6,281) Increase in other liabilities............................ (2,356) (519) -------- -------- Net cash flows from operating activities............... 43,751 33,037 Net Cash Flows From (To) Investing Activities: Capital expenditures--net................................ (34,222) (20,928) Acquisition spending, net of cash acquired............... (66,292) -- Net proceeds from sale of subsidiary (Note C)............ -- 7,336 Short-term investments--net.............................. 446 (604) Long-term investments.................................... 1,045 (95) Other--net............................................... (194) -- -------- -------- Net cash flows (to) investing activities............... (99,217) (14,291) Net Cash Flows From (To) Financing Activities: Purchase of HON INDUSTRIES common stock.................. (2,535) (7,971) Proceeds from long-term debt............................. 100,000 -- Payments of note and long-term debt...................... (42,249) (1,883) Proceeds from sales of HON INDUSTRIES common stock to members and stock-based compensation.................... 1,505 991 Dividends paid........................................... (8,314) (7,258) -------- -------- Net cash flows from (to) financing activities.......... 48,407 (16,121) Net increase (decrease) in cash and cash equivalents....... (7,059) 2,625 Cash and cash equivalents at beginning of period........... 31,196 32,231 -------- -------- Cash and cash equivalents at end of period................. $ 24,137 $ 34,856 ======== ========
See accompanying notes to condensed consolidated financial statements. F-23 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 28, 1997 NOTE A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 28, 1997, are not necessarily indicative of the results that may be expected for the year ending January 3, 1998. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 28, 1996. NOTE B. INVENTORIES Inventories of the Company and its subsidiaries are summarized as follows:
JUNE 28, DECEMBER 28, 1997 1996 ---------- ------------ (UNAUDITED) (IN THOUSANDS) Finished products................................ $20,583 $15,793 Materials and work in process.................... 40,573 27,757 ------- ------- $61,156 $43,550 ======= =======
NOTE C. GAIN ON SALE OF SUBSIDIARY During the first quarter of 1996, the Company sold all outstanding shares of its subsidiary, Ring King Visibles, Inc., for a sale price of $8,000,000 in cash and the forgiveness of intercompany receivables of approximately $2,000,000. The sale resulted in an approximate $3,200,000 pre-tax gain. NOTE D. NET INCOME PER COMMON SHARE In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (FAS) No. 128, "Earnings per Share." The Statement requires the current primary earnings per share calculation to be replaced with a new basic earnings per share calculation. The Statement will become effective for public companies for financial statements issued after December 15, 1997, and early adoption is not permitted. Management estimates the impact of adopting FAS 128 will have no effect on the calculation of the Company's reported year-end 1997 earnings per share given its current capital structure of common stock and no potentially dilutive securities. NOTE E. BUSINESS COMBINATIONS Assuming the acquisition of Heat-N-Glo Fireplace Products, Inc., had occurred on December 31, 1995, the beginning of the Company's 1996 fiscal year, instead of on October 2, 1996, when it actually occurred, the Company's pro forma consolidated net sales for the second quarter ended June 29, 1996, would have been approximately $242.5 million instead of the reported $219.3 million. Pro forma consolidated net sales for the six months ended June 29, 1996, would have been approximately $495.6 million instead of the reported $452.7 million. Pro forma consolidated net income and net income per share for the second quarter and first six months of 1996 would not have been materially different from the reported amounts. F-24 HON INDUSTRIES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company acquired Allsteel Inc. on June 17, 1997. The transaction has been accounted for under the purchase method. Accordingly, Allsteel's opening balance has been included in the Company's consolidated balance sheet as of June 28, 1997, and its purchase in the Consolidated Statement of Cash Flows for the six months ended June 28, 1997. The purchase price of Allsteel was $66.0 million which has been preliminarily allocated as follows:
(IN THOUSANDS) Working capital, other than cash........................... $29.4 Property, plant, and equipment............................. 38.4 Goodwill................................................... 6.1 Other liabilities.......................................... (7.9)
Allsteel had no impact on the Company's reported consolidated statements of income for the second fiscal quarter and six months ended June 28, 1997. Further information regarding the transaction is set forth in the Company's Form 8-K, filed June 30, 1997. F-25 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCOR- PORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COV- ERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURIS- DICTION WHERE, OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SO- LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN- DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY OR THE SELLING SHAREHOLDER SINCE THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 7 Recent Developments....................................................... 8 Use of Proceeds........................................................... 9 Market Price of and Dividends on Common Stock............................................................. 9 Capitalization............................................................ 10 Selected Consolidated Financial and Operating Data........................ 11 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 12 Business.................................................................. 17 Management................................................................ 28 Selling Shareholder....................................................... 30 Description of Capital Stock.............................................. 30 Underwriting.............................................................. 34 Legal Matters............................................................. 37 Experts................................................................... 37 Available Information..................................................... 37 Incorporation of Certain Documents by Reference........................... 38 Index to Consolidated Financial Statements............................................................... F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,395,000 SHARES HON INDUSTRIES INC. COMMON STOCK -------------- PROSPECTUS -------------- MERRILL LYNCH & CO. WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. INCORPORATED MCDONALD & COMPANY SECURITIES, INC. , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE + +WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES + +LAWS OF ANY SUCH JURISDICTION. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED OCTOBER 23, 1997 PROSPECTUS 3,395,000 SHARES HON INDUSTRIES INC. COMMON STOCK ----------- Of the 3,395,000 shares of Common Stock of HON INDUSTRIES Inc., an Iowa corporation (the "Company"), offered hereby, 1,000,000 shares are being sold by the Company and 2,395,000 shares are being sold by a certain shareholder (the "Selling Shareholder"). The Company will not receive any of the proceeds of shares sold by the Selling Shareholder. See "Selling Shareholder." Of the 3,395,000 shares of Common Stock of the Company offered, 679,000 shares are being offered initially outside the United States and Canada by the International Managers (the "International Offering") and 2,716,000 shares are being offered in a concurrent offering inside the United States and Canada by the U.S. Underwriters (the "U.S. Offering" and together with the International Offering, the "Offerings"). The price to the public and the aggregate underwriting discount per share will be identical for both offerings. See "Underwriting." The Common Stock is listed on the Nasdaq National Market under the symbol "HONI." On October 1, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $59 5/8 per share. See "Market Price of and Dividends on Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO SELLING PRICE TO UNDERWRITING PROCEEDS TO SHAREHOLDER PUBLIC DISCOUNT (1) COMPANY (2) (2) - ------------------------------------------------------------------------------------------- Per Share................................. $ $ $ $ - ------------------------------------------------------------------------------------------- Total (3)................................. $ $ $ $ - -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) The Company and the Selling Shareholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, estimated at $500,000, which are payable by the Company. The Selling Shareholder will not be paying any expenses of the Offerings, other than the expenses of its counsel. (3) The Company has granted the International Managers and the U.S. Underwriters options, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 101,850 and 407,400, respectively, additional shares of Common Stock on the same terms as set forth above, to cover over-allotments, if any. If the over-allotment options are exercised in full, the total Price to Public, Underwriting Discount, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are being offered by the several Underwriters subject to prior sale, when, as and if issued to and accepted by them and subject to approval of certain legal matters by counsel for the Company, counsel for the Selling Shareholder and counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Common Stock will be made against payment therefor in New York, New York on or about , 1997. ----------- MERRILL LYNCH INTERNATIONAL WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. MCDONALD & COMPANY INCORPORATED SECURITIES, INC. ----------- The date of this Prospectus is , 1997. UNITED STATES TAXATION OF FOREIGN SHAREHOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of Common Stock that may be relevant to Non-United States Holders of such Common Stock. For purposes of this discussion, a "Non-United States Holder" is any corporation, individual, partnership, estate or trust that is, as to the United States, a foreign corporation, a non-resident alien individual, a foreign partnership or a foreign estate or trust as such terms are defined in Section 7701 of the United States Internal Revenue Code of 1986, as amended (the "Code"). In general, a "Non-United States Holder" is any holder of Common Stock that is not (i) a citizen or resident alien individual of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any State thereof, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust with respect to which a court within the United States is able to exercise primary supervision over its administration, and one or more United States persons have the authority to control all of its substantial decisions. Resident alien individuals will be subject to United States federal income taxation with respect to the Common Stock in the same manner as if they were United States citizens. The following discussion does not deal with all aspects of United States federal income and estate taxation and does not consider specific facts and circumstances that may be relevant to a particular Non-United States Holder in light of such holder's personal investment or tax position. Furthermore, the discussion does not address tax consequences that may be relevant to certain Non-United States Holders subject to special treatment under the United States federal income tax laws, such as insurance companies, tax-exempt organizations, financial institutions or broker-dealers. The discussion does not discuss any aspects of non-United States or United States state and local tax consequences that may be relevant to Non-United States Holders. Finally, the discussion is based on the current provisions of the Code, the final, temporary and proposed Treasury Regulations promulgated thereunder, and administrative and judicial interpretations of the foregoing, all as in effect on the date of this Prospectus and all of which are subject to change, possibly with retroactive effect. PROSPECTIVE NON-UNITED STATES HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE SPECIFIC UNITED STATES FEDERAL, STATE AND LOCAL AND NON-UNITED STATES INCOME, ESTATE AND OTHER TAX CONSEQUENCES TO THEM OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK (INCLUDING SUCH HOLDER'S STATUS AS A NON-UNITED STATES HOLDER). DIVIDENDS Dividends paid by the Company to a Non-United States Holder will generally be subject to United States federal income tax withholding at the rate of 30 percent of the gross amount of the dividends, or at such lower rate as may be specified by an applicable United States income tax treaty. Under the United States Treasury Regulations currently in effect and published Revenue Rulings, dividends paid to an address in a foreign country generally are presumed to be paid to a resident of such country (unless the payor has actual knowledge to the contrary) for purposes of both applying the withholding tax and determining the applicability of a reduced treaty rate of withholding, if any. Under newly issued United States Treasury Regulations, which will become effective for payments made after December 31, 1998, however, a Non-United States Holder who wishes to claim the benefit of an applicable reduced treaty rate of withholding will be required to satisfy certain certification and other requirements, including the requirement generally to file a properly completed IRS Form W-8 with the Company, the paying agent or such other entity as may be required to withhold tax. The new Treasury Regulations also provide special rules for dividends paid to foreign intermediaries, United States or foreign wholly-owned entities that are disregarded as entities separate from their owners for United States federal income tax purposes, and flow-through entities or arrangements that are treated as fiscally transparent for United States federal income tax purposes or under the laws of an applicable income tax treaty jurisdiction or both. For example, in the case of Common Stock held by a foreign partnership, the certification requirement will be applied to the partners of the partnership, rather than the partnership itself, although the partnership will also be required to provide certain information, and a look- through rule is provided for tiered partnership structures. 34 A Non-United States Holder eligible for a reduced rate of United States withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the United States Internal Revenue Service (the "IRS"). To the extent that a distribution with respect to the Common Stock represents a return of basis for United States federal income tax purposes, a Non-United States Holder may apply for a refund of any amounts currently withheld with respect to such return of basis by filing an appropriate claim for refund with the IRS. Dividends received by a Non-United States Holder that are effectively connected with the conduct by the Non-United States Holder of a trade or business within the United States (or, if certain income tax treaties apply, that are attributable to a permanent establishment maintained by such Non- United States Holder in the United States) are exempt from United States federal income tax withholding provided that such Non-United States Holder files with the Company, its paying agent or such other entity as may be required to withhold tax, a properly completed IRS Form 4224 (or, in the case of an applicable tax treaty, IRS Form 1001), or, after the newly issued United States Treasury Regulations become effective on January 1, 1999, a properly completed IRS Form W-8. In general, a Non-United States Holder will not be considered to be engaged in a trade or business within the United States solely as a result of ownership of Common Stock. If the dividends are effectively connected with a United States trade or business (or are attributable to a United States permanent establishment), the dividends will be subject to United States federal income tax (on a net income basis) at the same graduated rates applicable to United States persons. In the case of a Non-United States Holder that is a corporation, such effectively connected dividends may also be subject to the branch profits tax (which is generally imposed at a 30 percent rate (or a lower applicable treaty rate) on repatriated effectively connected earnings and profits). DISPOSITION OF COMMON STOCK A Non-United States Holder generally will not be subject to United States federal income tax (and no tax generally will be withheld) on any gain realized upon the sale or other disposition of Common Stock unless (i) such gain is effectively connected with a United States trade or business of the Non-United States Holder (or, if certain income tax treaties apply, such gain is attributable to a permanent establishment maintained by such Non-United States Holder in the United States), (ii) the gain is not described in clause (i) above and the Non-United States Holder is a non-resident alien individual who holds the Common Stock as a capital asset and who is present in the United States for a period or periods aggregating 183 days or more during the calendar year (or taxable year if one has been established) in which such disposition occurs, and either (a) such individual's "tax home," within the meaning of Section 911(d)(3) of the Code, is in the United States or (b) the gain is attributable to an office or other fixed place of business in the United States, (iii) the Non-United States Holder is an individual who is a former citizen or long-term resident alien of the United States and who is subject to tax pursuant to the provisions of the United States federal income tax laws applicable to certain United States expatriates, or (iv) the Company is, or has been at any time during the five-year period preceding the disposition (or such shorter period during which such Non-United States Holder has owned such Common Stock), a "United States real property holding corporation" for United States federal income tax purposes and, so long as the Common Stock continues to be "regularly traded on an established securities market" for tax purposes, the Non-United States Holder disposing of the Common Stock directly or indirectly owned more than five percent in value of the Common Stock at any time during such five-year (or shorter) period. A corporation is generally a "United States real property holding corporation" if the fair market value of its United States real property interests equals or exceeds 50 percent of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business both within and without the United States. The Company believes it is not currently, and does not expect that it will become, a United States real property holding corporation for United States federal income tax purposes. There can be no assurance, however, that the Company will not become, or be determined to be, such a corporation. Gain that is effectively connected with the conduct of a trade or business by a Non-United States Holder within the United States (or that is attributable to a United States permanent establishment maintained by such 35 Non-United States Holder in the United States) will be subject to United States federal income tax (on a net income basis) at the same graduated rates applicable to United States persons, but will not be subject to withholding. In the case of a Non-United States Holder that is a corporation, such gain may also be subject to the branch profits tax. An individual Non-United States Holder that is described under clause (ii) above will be subject to a flat 30 percent tax on the gain derived from the sale, which gain may be offset by certain U.S.-source capital losses (notwithstanding the fact that such individual is not considered to be a resident of the United States for United States federal income tax purposes). BACKUP WITHHOLDING AND INFORMATION REPORTING The Company must report annually to the IRS and to each Non-United States Holder the amount of dividends paid, and the tax withheld, with respect to shares of Common Stock held by such holder. These information reporting requirements apply regardless of whether the withholding tax was reduced or eliminated by an applicable tax treaty. This information may also be made available (under the provisions of an applicable income tax treaty or other international agreement) to the tax authorities of the country in which the Non-United States Holder resides. United States federal income tax backup withholding (imposed at a rate of 31 percent on dividends paid to certain holders who fail to provide in the required manner certain identifying information, such as the holder's name, address and taxpayer identification number, or under certain other circumstances) generally does not apply to dividends that are subject to United States federal income tax withholding at the 30 percent statutory rate or at a reduced tax treaty rate, dividends that are effectively connected with a United States trade or business of the Non- United States Holder, or dividends paid to a Non-United States Holder at an address outside the United States or otherwise to a Non-United States Holder who is an "exempt recipient" (such as a corporation). Under the newly issued United States Treasury Regulations, certain Non-United States Holders who are not currently subject to backup withholding on dividend payments will have to certify as to their non-United States status to avoid backup withholding on dividends paid after December 31, 1998. If a Non-United States Holder sells or otherwise disposes of shares of Common Stock to or through a United States office of a broker, the broker is required to file an information return and is required to apply backup withholding at the rate of 31 percent unless the Non-United States Holder has provided the broker with a certification, under penalties of perjury, as to its non-United States status or has otherwise established its entitlement to an exemption from backup withholding. If payment of the proceeds from the sale or other disposition of Common Stock by a Non-United States Holder is made to or through an office of a broker outside the United States, the broker generally will not be required to apply backup withholding or to file information returns, except as provided below. Under the Treasury Regulations currently in effect, information reporting (but not backup withholding) is required with respect to the payment of proceeds from the sale or other disposition of Common Stock to or through a foreign office of a broker that is (a) a United States person, (b) a controlled foreign corporation for United States federal income tax purposes, or (c) a foreign person 50 percent or more of whose gross income for the three-year period ending with the close of the taxable year preceding the year of payment (or for the part of that period that the broker has been in existence) is effectively connected with the conduct of a trade or business in the United States, unless that broker has documentary evidence in its files that the payee is not a United States person (and the broker has no actual knowledge to the contrary) and certain other conditions are met, or the payee has otherwise established its entitlement to an exemption. The newly issued United States Treasury Regulations, which will become effective for payments made after December 31, 1998, expand the categories of brokers that will be required to comply with the information reporting requirements with respect to the payment of proceeds from the sale or other disposition of Common Stock effected at an office outside the United States. As a result, information reporting may apply to certain payments of proceeds from the sale or other disposition of Common Stock made after December 31, 1998 by or through foreign offices of brokers that were previously exempt. Under the new Treasury Regulations, however, backup withholding will not be required with respect to the payment of proceeds from the sale or other disposition of Common Stock effected at a foreign office of a broker unless the broker has actual knowledge that the payee is a United States person. 36 Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules are generally allowable as a refund or credit against a Non-United States Holder's United States federal income tax liability, if any, provided that the required information is furnished to the IRS. As previously noted above, the procedures for United States federal income tax withholding on dividend payments and some of the associated backup withholding and information reporting rules are the subject of new United States Treasury Regulations, which were issued on October 6, 1997, and become effective for payments made after December 31, 1998, subject to certain transition rules. These new Treasury Regulations modify the procedures for establishing an exemption from or a reduced rate of withholding tax as described above, as well as the certification procedures and forms for purposes of backup withholding and information reporting, and also clarify and modify reliance standards. Prospective Non-United States Holders should consult their own tax advisors concerning these new Treasury Regulations and the effect of such Treasury Regulations on their ownership of Common Stock. ESTATE TAX Common Stock owned, or treated as owned, by an individual who is neither a citizen or a resident (as specially defined for United States federal estate tax purposes) of the United States at the time of such individual's death will be included in such individual's gross estate for United States federal estate tax purposes and thus will be subject to United States federal estate tax, subject to certain credits, at graduated rates of up to 55 percent, unless an applicable estate tax treaty provides otherwise. 37 UNDERWRITING Subject to the terms and conditions set forth in an international purchase agreement (the "International Purchase Agreement") among the Company, the Selling Shareholder and each of the underwriters named below (the "International Managers") and concurrently with the sale of 2,716,000 shares of Common Stock to the U.S. Underwriters (as defined below), the Company and the Selling Shareholder have agreed to sell to the International Managers, and each of the International Managers severally has agreed to purchase from the Company and the Selling Shareholder the number of shares of Common Stock set forth opposite its name below.
NUMBER OF INTERNATIONAL UNDERWRITER SHARES ------------------------- ------- Merrill Lynch International...................................... William Blair & Company, L.L.C................................... Robert W. Baird & Co. Incorporated............................... McDonald & Company Securities, Inc............................... ------- Total........................................................ 679,000 =======
Merrill Lynch International ("Merrill Lynch"), William Blair & Co., L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "International Representatives") of the International Managers. The Company and the Selling Shareholder have also entered into a purchase agreement (the "U.S. Purchase Agreement" and, together with the International Purchase Agreement, the "Purchase Agreements") with certain underwriters in the United States and Canada (collectively, the "U.S. Underwriters," and together with the International Managers, the "Underwriters"), for whom Merrill Lynch, Pierce Fenner & Smith Incorporated, William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "U.S. Representatives") and, together with the International Representatives, the "Representatives"). Subject to the terms and conditions set forth in the U.S. Purchase Agreement, and concurrently with the sale of 679,000 shares of Common Stock to the International Managers pursuant to the International Purchase Agreement, the Company and the Selling Shareholder have agreed to sell to the U.S. Underwriters, and the U.S. Underwriters have severally agreed to purchase from the Company and the Selling Shareholder, an aggregate of 2,716,000 shares of Common Stock. The public offering price per share of Common Stock and the underwriting discount per share of Common Stock are identical under the International Purchase Agreement and the U.S. Purchase Agreement. The respective percentages of the Common Stock to be sold by each of the Company and the Selling Shareholder will be identical in the U.S. Offering and the International Offering. In the International Purchase Agreement and the U.S. Purchase Agreement, the several International Managers and the several U.S. Underwriters, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to each such agreement if any of the shares of Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances involving a default by an Underwriter, the commitments of non-defaulting International Managers 38 or U.S. Underwriters (as the case may be) may be increased or the International Purchase Agreement or the U.S. Purchase Agreement (as the case may be) may be terminated. The sale of Common Stock to the International Managers is conditioned upon the sale of Common Stock to the U.S. Underwriters and vice versa. The International Underwriters and the U.S. Underwriters have entered into an intersyndicate agreement (the "Intersyndicate Agreement") providing for the coordination of their activities. The Underwriters are permitted to sell shares of Common Stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the International Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are United States or Canadian persons or to persons they believe intend to resell to persons who are United States or Canadian persons, and the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to non-United States persons or to non-Canadian persons or to persons they believe intend to resell to non-United States persons or non-Canadian persons, except in the case of transactions pursuant to the Intersyndicate Agreement. The International Representatives have advised the Company and the Selling Shareholder that the International Managers propose initially to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus, and to certain selected dealers at such price less a concession not in excess of $ . per share. The International Managers may allow, and such dealers may reallow, a discount not in excess of $ . per share on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount and may be changed. Each International Manager has agreed that (i) it has not offered or sold, and will not for a period of six months following consummation of the Offerings offer or sell, in the United Kingdom by means of any document, any shares of Common Stock offered hereby, other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that do not constitute an offer to the public within the meaning of the Public Offers to Securities Regulations of 1995; (ii) it has complied with and will comply with all applicable provisions of the Financial Services Act of 1986 with respect to anything done by it in relation to the Common Stock in, from or otherwise involving the United Kingdom and (iii) it has only issued or passed on and will only issue or pass on to any person in the United Kingdom any document received by it in connection with the issue of the Common Stock if that person is of a kind described in Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended, or is a person to whom the document may otherwise lawfully be issued or passed on. The Company has granted to the International Managers an option, exercisable within 30 days after the date of this Prospectus, to purchase up to an aggregate of 101,850 additional shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, less the underwriting discount. The International Managers may exercise this option only to cover over-allotments, if any, made on the sale of Common Stock offered hereby. To the extent that the International Managers exercise this option, each International Manager will be obligated, subject to certain conditions, to purchase a number of additional shares of Common Stock proportionate to such International Manager's initial amount reflected in the foregoing table. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 3,395,000 shares are being offered. Purchasers of the shares of Common Stock offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase, in addition to the offering price set forth on the cover page hereof. The Company has, subject to certain exceptions, agreed not to, directly or indirectly, offer, pledge, sell, contract to sell or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock without the prior written consent of Merrill Lynch for a period of 90 days from the date of this Prospectus, except that the Company may, without such consent, issue 39 shares of Common Stock upon the exercise or conversion of any outstanding options, rights, warrants or other convertible securities, or issue shares of Common Stock or grant options to purchase shares of Common Stock pursuant to the Company's employee benefit plans, director stock plan or dividend reinvestment plan. In addition, the Company's executive officers and directors have agreed not to effect any sales of Common Stock in open market transactions without the prior written consent of Merrill Lynch for a period of 90 days from the date of this Prospectus. In connection with this Offering, the Underwriters or their respective affiliates and selling group members (if any) who are qualified market makers on Nasdaq may engage in "passive market making" in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 permits, upon the satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also Nasdaq market makers in the security being distributed (or a related security) to engage in limited market making transactions during the period when Regulation M under the Exchange Act would otherwise prohibit such activity. Rule 103 prohibits underwriters and selling group members engaged in passive market making generally from entering a bid or affecting a purchase at a price that exceeds the highest bid for those securities displayed on the Nasdaq National Market by a market maker that is not participating in the distribution. Under Rule 103, each underwriter or selling group member engaged in passive market making is subject to a daily net purchase limitation equal to 30% of such entity's average daily trading volume during the two full consecutive calendar months immediately preceding the date of the filing of the registration statement under the Securities Act of 1933, as amended (the "Securities Act") pertaining to the security to be distributed (or such related security). In the International Purchase Agreement and the U.S. Purchase Agreement, the several International Managers and the several U.S. Underwriters, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock being sold pursuant to each such agreement if any of the shares of Common Stock being sold pursuant to such agreement are purchased. Under certain circumstances involving a default by an Underwriter, the commitments of non-defaulting International Underwriters or U.S. Underwriters (as the case may be) may be increased or the International Purchase Agreement or the U.S. Purchase Agreement (as the case may be) may be terminated. The sale of Common Stock to the International Managers is conditioned upon the sale of Common Stock to the U.S. Underwriters and vice versa. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase Common Stock. As the exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. The Company and the Selling Shareholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments initially the Underwriters may be required to make in respect thereof. 40 Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Edgar D. Jannotta, a director of the Selling Shareholder, is Senior Director of William Blair & Company, L.L.C. 41 LEGAL MATTERS The legality of the Common Stock offered hereby has been passed upon for the Company by Stanley, Lande & Hunter, P.C., Muscatine, Iowa. Certain other legal matters will be passed upon for the Company by Jones, Day, Reavis & Pogue, Chicago, Illinois and Stanley, Lande & Hunter, P.C., for the Selling Shareholder by Foley & Lardner, Milwaukee, Wisconsin and for the Underwriters by Sidley & Austin, Chicago, Illinois. Members of Stanley, Lande & Hunter, P.C., own of record and beneficially a total of 96,987 shares of Common Stock. EXPERTS The audited consolidated financial statements and schedules of HON INDUSTRIES Inc. and Subsidiaries as of and for the fiscal year ended December 28, 1996 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in its reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The consolidated balance sheets of HON INDUSTRIES Inc. and its subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended included in this Prospectus and the related financial statement schedule listed in Item 14 of HON INDUSTRIES Inc.'s Annual Report on Form 10-K for the fiscal year ended December 28, 1996, incorporated by reference into this Registration Statement, have been audited by Ernst & Young LLP, as stated in its reports appearing herein and incorporated by reference into this Registration Statement. Such financial statements and financial statement schedule have been so included and incorporated by reference in reliance upon such reports given upon the authority of such firms as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (of which this Prospectus is a part) under the Securities Act, with respect to the securities offered hereby. This Prospectus does not contain all information set forth in the Registration Statement, certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information about the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed as a part thereof and otherwise incorporated therein. Statements made in this Prospectus as to the contents of any document referred to are not necessarily complete, and in each instance reference is made to such exhibit for a more complete description and each such statement is qualified in its entirety by such reference. The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files periodic reports, proxy statements and other information with the Commission. The Registration Statement, including exhibits thereto, as well as such reports, proxy statements and other information filed by the Company with the Commission can be inspected, without charge, and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission and that is located at http://www.sec.gov. The Registration Statement was filed electronically with the Commission. 42 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents previously filed with the Commission by the Company (File No. 0-2648) pursuant to the Exchange Act are incorporated by reference in this Prospectus and made a part hereof: the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996; the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended March 29, 1997 and June 28, 1997; the Company's Current Reports on Form 8-K dated June 30, 1997, October 8, 1997 and October 22, 1997; and the descriptions of the Company's Common Stock set forth in Item 1 of the Company's Registration Statement on Form 8-A filed May 1, 1967 and Series A Junior Participating Preferred Stock and Rights Agreement set forth in Item 1 of the Company's Registration Statement on Form 8-A filed July 12, 1988, and all amendments and reports filed for the purpose of updating such descriptions. All documents filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of this offering shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from their respective dates of filing. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies, supersedes or replaces such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE DOCUMENTS SO INCORPORATED. REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO HON INDUSTRIES INC., OFFICE OF THE SECRETARY, 414 EAST THIRD STREET, P.O. BOX 1109, MUSCATINE, IOWA 52761- 7109 (TELEPHONE NUMBER (319) 264-7400). 43 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY OR THE SELLING SHAREHOLDER SINCE THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 3 Risk Factors.............................................................. 7 Recent Developments....................................................... 8 Use of Proceeds........................................................... 9 Market Price of and Dividends on Common Stock............................. 9 Capitalization............................................................ 10 Selected Consolidated Financial and Operating Data........................ 11 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 12 Business.................................................................. 17 Management................................................................ 28 Selling Shareholder....................................................... 30 Description of Capital Stock.............................................. 30 United States Taxation of Foreign Shareholders............................ 34 Underwriting.............................................................. 38 Legal Matters............................................................. 42 Experts................................................................... 42 Available Information..................................................... 42 Incorporation of Certain Documents by Reference........................... 43 Index to Consolidated Financial Statements................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,395,000 SHARES HON INDUSTRIES INC. COMMON STOCK ---------------- PROSPECTUS ---------------- MERRILL LYNCH INTERNATIONAL WILLIAM BLAIR & COMPANY ROBERT W. BAIRD & CO. INCORPORATED MCDONALD & COMPANY SECURITIES, INC. , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following expenses incurred in connection with the issuance and distribution of the securities being registered, other than the registration, listing and filing fees, are estimated.
ITEM AMOUNT ---- ----------- Securities and Exchange Commission Registration Fee........ $ 64,553.22 Printing and Engraving..................................... 150,000.00 NASD Filing Fee............................................ 23,194.00 Nasdaq Listing Fee......................................... 17,500.00 Legal Fees and Expenses.................................... 120,000** Accounting Fees and Expenses............................... 100,000** Miscellaneous.............................................. 24,752.78** ----------- Total.................................................. $500,000.00**
- -------- **Estimated. The Company will pay for all the above-listed fees and expenses of the offering, except that the Selling Shareholder will pay all legal fees of its attorneys. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by the Iowa Business Corporation Act ("IBCA"), the Company's Articles of Incorporation (the "Articles") provide that no director shall be personally liable to the Company or any shareholder for monetary damages for breach of fiduciary duty as a director, except for: (i) a breach of the director's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, (iii) a transaction from which the director derived an improper personal benefit, or (iv) an improper act related to the payment of dividends or approval of a stock purchase in violation of Section 833 of the IBCA. While the Articles provide protection from awards for monetary damages for breaches of the duty of care, it does not eliminate the director's duty of care. Accordingly, the Articles will not effect the availability of equitable remedies, such as an injunction, based on a director's breach of the duty of care. In addition, the Company's By-Laws provide that the Company may indemnify 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 Company (collectively, "Action")) by reason of the fact that he or she is or was a director, officer, employee, or agent of the Company, or is or was serving at the request of the Company 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 (each a "Qualified Person"). The indemnification, which may be made in any manner not prohibited by Iowa law, 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. Indemnification shall not be provided in any case for (i) a breach of a person's duty of loyalty to the Company, (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, (iii) a transaction from which the person derives an improper personal benefit, (iv) acts arising under IBCA Section 490.833 (regarding liability for unlawful distributions by the Company) or (v) proceedings by or in the right of the Company unless permitted by the IBCA. The By-Laws also provide that a Qualified Person shall be indemnified against actually and reasonably incurred expenses in connection with any Action to the extent such Qualified Person has been successful on the merits or otherwise in defense of such Action or in the defense of any claim, issue or matter therein. II-1 The Company has director and officer liability insurance in the amount of $20,000,000, under which each director and each of certain officers of the Company is insured against certain liabilities. The Company and its directors and executive officers are also parties to Indemnification Agreements that entitle such director or officer to indemnification to the fullest extent permitted by applicable law against all expenses and liabilities with respect to all proceedings relating to or arising out of the indemnitee's being or having been a director or officer of the Company. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of U.S. Underwriting Agreement. 1.2 Form of International Underwriting Agreement. 4.1 Articles of Incorporation, as amended, incorporated by reference to Exhibit (3)(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 4.2 By-Laws, as amended, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 filed May 14, 1997. 4.3 Rights Agreement dated as of July 7, 1988 between the Company and First Chicago Trust Company of New York, incorporated by reference to Exhibit 1 to Registration Statement on Form 8-A filed July 12, 1988, as amended by amendment dated as of May 1, 1990, incorporated by reference to Exhibit 1 to Amendment No. 1 to Registration Statement on Form 8 filed May 29, 1990. *5.1 Form of opinion of Stanley, Lande & Hunter, P.C., as to the validity of securities registered hereunder. *23.1 Consent of Stanley, Lande & Hunter, P.C. (set forth in their opinion filed as Exhibit 5.1 to this Registration Statement). 23.2 Consent of Arthur Andersen LLP. 23.3 Consent of Ernst & Young LLP. *24.1 Powers of Attorney (included on the signature page of the Registration Statement, as filed September 26, 1997).
- -------- *Filed with the Registration Statement on September 26, 1997. Long-term debt of the registrant or various of its subsidiaries is outstanding under numerous instruments. No such instrument authorizes an amount of securities thereunder in excess of 10% of the total assets of registrant and its subsidiaries on a consolidated basis. The registrant agrees that it will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request. ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the II-2 Securities Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registrant statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registrant statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MUSCATINE, STATE OF IOWA, ON OCTOBER 23, 1997. HON INDUSTRIES Inc. (Registrant) /s/ Jack D. Michaels By:__________________________________ Jack D. Michaels Chairman, President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Jack D. Michaels Chairman, President and October 23, 1997 ____________________________________ Chief Executive Officer and Jack D. Michaels Director Principal Executive Officer /s/ Melvin L. McMains Controller and Principal October 23, 1997 ____________________________________ Accounting Officer Melvin L. McMains /s/ David C. Stuebe Vice President and Chief October 23, 1997 ____________________________________ Financial Officer David C. Stuebe /s/ Robert W. Cox* Director October 23, 1997 ____________________________________ Robert W. Cox /s/ W. James Farrell* Director October 23, 1997 ____________________________________ W. James Farrell /s/ Stanley M. Howe* Director October 23, 1997 ____________________________________ Stanley M. Howe /s/ Robert L. Katz* Director October 23, 1997 ____________________________________ Robert L. Katz
II-4
SIGNATURE TITLE DATE --------- ----- ---- /s/ Lee Liu* Director October 23, 1997 ____________________________________ Lee Liu /s/ Celeste C. Michalski* Director October 23, 1997 ____________________________________ Celeste C. Michalski /s/ Michael S. Plunkett* Director October 23, 1997 ____________________________________ Michael S. Plunkett /s/ Herman J. Schmidt* Director October 23, 1997 ____________________________________ Herman J. Schmidt /s/ Richard H. Stanley* Director October 23, 1997 ____________________________________ Richard H. Stanley /s/ Lorne R. Waxlax* Director October 23, 1997 ____________________________________ Lorne R. Waxlax
- -------- *The undersigned by signing his name hereunto has hereby signed this Amendment No. 2 to the Registration Statement on behalf of the undersigned in the capacities indicated and the above-named directors on October 23, 1997, pursuant to a power of attorney executed on behalf of each such director and filed with the Securities and Exchange Commission. /s/ James I. Johnson By: ___________________________ James I. Johnson Vice President, General Counsel and Secretary II-5 EX-1.1 2 U.S. UNDERWRITING AGREEMENT Draft of 10/23/97 ================================================================================ HON INDUSTRIES INC. (an Iowa corporation) 3,395,000 Shares of Common Stock U.S. PURCHASE AGREEMENT Dated: October 23, 1997 ================================================================================ TABLE OF CONTENTS
PURCHASE AGREEMENT.................................................................................. 1 SECTION 1. Representations and Warranties.......................................................... 4 (a) Representations and Warranties by the Company........................................... 4 (i) Compliance with Registration Requirements....................................... 4 (ii) Incorporated Documents.......................................................... 5 (iii) Independent Accountants......................................................... 5 (iv) Financial Statements............................................................ 5 (v) No Material Adverse Change in Business.......................................... 5 (vi) Good Standing of the Company.................................................... 6 (vii) Good Standing of Subsidiaries................................................... 6 (viii) Capitalization.................................................................. 6 (ix) Authorization of Agreement...................................................... 7 (x) Authorization and Description of Securities..................................... 7 (xi) Absence of Defaults and Conflicts............................................... 7 (xii) Absence of Labor Dispute........................................................ 8 (xiii) Absence of Proceedings.......................................................... 8 (xiv) Accuracy of Exhibits............................................................ 8 (xv) Possession of Intellectual Property............................................. 8 (xvi) Absence of Further Requirements................................................. 9 (xvii) Possession of Licenses and Permits.............................................. 9 (xviii) Title to Property............................................................... 9 (xix) Absence of Manipulation......................................................... 10 (xx) Investment Company Act.......................................................... 10 (xxi) Environmental Laws.............................................................. 10 (b) Representations and Warranties by Bandag and the Selling Shareholder.................... 10 (i) Accurate Disclosure............................................................. 10 (ii) Authorization of Agreement...................................................... 11 (iii) Good and Marketable Title....................................................... 11 (iv) Absence of Manipulation......................................................... 12 (v) Absence of Further Requirements................................................. 12 (vi) No Association with NASD........................................................ 12 (c) Officer's Certificates.................................................................. 12
i
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing......................................... 12 (a) Initial U.S. Securities................................................................. 12 (b) U.S. Option Securities.................................................................. 13 (c) Payment................................................................................. 13 (d) Denominations; Registration............................................................. 14 SECTION 3. Covenants of the Company................................................................ 14 (a) Compliance with Securities Regulations and Commission Requests.......................... 14 (b) Filing of Amendments.................................................................... 15 (c) Delivery of Registration Statements..................................................... 15 (d) Delivery of Prospectuses................................................................ 15 (e) Continued Compliance with Securities Laws............................................... 15 (f) Blue Sky Qualifications................................................................. 16 (g) Rule 158................................................................................ 16 (h) Use of Proceeds......................................................................... 16 (i) Listing................................................................................. 17 (j) Restriction on Sale of Securities....................................................... 17 (k) Reporting Requirements.................................................................. 17 SECTION 4. Payment of Expenses..................................................................... 17 (a) Expenses................................................................................ 17 (b) Expenses of Bandag and the Selling Shareholder.......................................... 18 (c) Termination of Agreement................................................................ 18 (d) Allocation of Expenses.................................................................. 18 SECTION 5. Conditions of Underwriters' Obligations................................................. 18 (a) Effectiveness of Registration Statement; Filing of Registration Statement............... 19 (b) Opinion of Counsel for Company.......................................................... 19 (c) Opinion of Counsel for Bandag and the Selling Shareholder............................... 19 (d) Opinion of Counsel for U.S. Underwriters................................................ 19 (e) Officers' Certificate................................................................... 19 (f) Certificate of Bandag and the Selling Shareholder....................................... 20 (g) Accountant's Comfort Letter............................................................. 20 (h) Bring-down Comfort Letter............................................................... 20 (i) Approval of Listing..................................................................... 20 (j) No Objection............................................................................ 20 (k) Purchase of Initial International Securities............................................ 20 (l) Lock-up Agreements...................................................................... 21 (m) Conditions to Purchase of U.S. Option Securities........................................ 21
ii
(n) Additional Documents.................................................................... 21 (o) Termination of Agreement................................................................ 22 SECTION 6. Indemnification......................................................................... 22 (a) Indemnification of U.S. Underwriters by the Company..................................... 22 (b) Indemnification of U.S. Underwriters and the Company by Bandag and the Selling Shareholder..................................................................... 23 (c) Indemnification of Company, Directors and Officers, Bandag and the Selling Shareholder..................................................................... 23 (d) Actions against Parties; Notification................................................... 24 (e) Settlement without Consent if Failure to Reimburse...................................... 24 (f) Other Agreements with Respect to Indemnification........................................ 25 SECTION 7. Contribution............................................................................ 25 SECTION 8. Representations, Warranties and Agreements to Survive Delivery.......................... 26 SECTION 9. Termination of Agreement................................................................ 26 (a) Termination; General.................................................................... 26 (b) Liabilities............................................................................. 27 SECTION 10. Default by One or More of the U.S. Underwriters........................................ 27 SECTION 11. Default by the Selling Shareholder or the Company...................................... 28 SECTION 12. Notices................................................................................ 28 SECTION 13. Parties................................................................................ 28 SECTION 14. Governing Law and Time................................................................. 29 SECTION 15. Effect of Headings..................................................................... 29
iii
SCHEDULES Schedule A - List of Underwriters......................................................... Sch A-1 Schedule B - Shares to be sold by the Company and the Selling Shareholder................. Sch B-1 Schedule C - Pricing Information.......................................................... Sch C-1 Schedule D - List of Subsidiaries......................................................... Sch D-1 Schedule E - Persons Executing Lock-up Agreements......................................... Sch E-1 EXHIBITS Exhibit A-1 - Form of Opinion of Company's In-House Counsel................................... A-1 Exhibit A-2 - Form of Opinion of Company's Counsel............................................ A-2 Exhibit A-3 - Form of Opinion of Company's Counsel............................................ A-3 Exhibit B - Form of Opinion of Bandag's and Selling Shareholder's Counsel..................... B-1 Exhibit C - Form of Opinion of Counsel for U.S. Underwriters.................................. C-1 Exhibit D - Form of Lock-up Letter............................................................ D-1 ANNEXES Annex A - Form of Accountant's Comfort Letter................................................. A-1
iv HON INDUSTRIES INC. (an Iowa corporation) 3,395,000 Shares of Common Stock (Par Value $1.00 Per Share) U.S. PURCHASE AGREEMENT ----------------------- October 23, 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated McDonald & Company Securities, Inc. as Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: HON INDUSTRIES Inc., an Iowa corporation (the "Company"), and Bandag, Incorporated, an Iowa corporation ("Bandag"), and BTC, Inc., a Delaware corporation (the "Selling Shareholder"), confirm their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch and William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (in such capacity, the "U.S. Representatives"), with respect to (i) the sale by the Company and the Selling Shareholder, acting severally and not jointly, and the purchase by the U.S. Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $1.00 per share, of the Company ("Common Stock") set forth in Schedules A and B hereto and (ii) the grant by the Company to the U.S. Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 407,400 additional shares of Common Stock solely to cover over- allotments, if any. The aforesaid 2,716,000 shares of Common Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or any part of the 407,400 shares of Common Stock subject to the option described in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called, collectively, the "U.S. Securities". It is understood that the Company, Bandag and the Selling Shareholder are concurrently entering into an agreement dated the date hereof (the "International Purchase Agreement") providing for the offering by the Company and the Selling Shareholder acting severally and not jointly of an aggregate of 679,000 shares of Common Stock (the "Initial International Securities") through arrangements with certain underwriters outside the United States and Canada (the "International Managers") for which Merrill Lynch International and William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as lead managers (the "Lead Managers") and the grant by the Company to the International Managers, acting severally and not jointly, of an option to purchase all or any part of the International Managers' pro rata portion of up to 101,850 additional shares of Common Stock solely to cover overallotments, if any (the "International Option Securities" and, together with the U.S. Option Securities, the "Option Securities"). The Initial International Securities and the International Option Securities are hereinafter called the "International Securities". It is understood that neither the Company nor the Selling Shareholder is obligated to sell, and the U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities unless all of the Initial International Securities are contemporaneously purchased by the International Managers. The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters", the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities", and the U.S. Securities and the International Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co. (in such capacity, the "Global Coordinator"). The Company, Bandag and the Selling Shareholder understand that the U.S. Underwriters propose to make a public offering of the U.S. Securities as soon as the U.S. Representatives deem advisable after this Agreement has been executed and delivered. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-36433) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of 2 Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting" and the inclusion in the Form of International Prospectus of a section under the caption "United States Taxation of Foreign Shareholders." The information included in such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and Form of International Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and the Final Form of International Prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the form first furnished to the Underwriters for use in connection with the offering of the Securities is herein called the "U.S. Prospectus" and the "International Prospectus", respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "U.S. Prospectus" and "International Prospectus" shall refer to the preliminary U.S. Prospectus dated October 3, 1997 and preliminary International Prospectus dated October 3, 1997, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of the Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "disclosed," "contained," "referred to," "included" or "stated" in the Registration Statement, any preliminary prospectus (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses, as the case 3 may be; and all references in this Agreement to amendments or supplements to the Registration Statement, any preliminary prospectus or the Prospectuses shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the Registration Statement, such preliminary prospectus or the Prospectuses, as the case may be. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter, as follows: (i) Compliance with Registration Requirements. The Company meets the requirements for use of Form S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither the Prospectuses nor any amendments or supplements thereto, at the time the Prospectuses or any amendments or supplements were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434. The representations and warranties in this subsection shall not apply to information stated in or omitted from the Registration Statement or U.S. Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement or the U.S. Prospectus. 4 Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Incorporated Documents. The documents incorporated or deemed to be incorporated by reference in the Registration Statement and the Prospectuses, at the time they were or hereafter are filed with the Commission (assuming for purposes hereof that the Company's Annual Report on Form 10-K for the year ended December 28, 1996 (the "Form 10-K") included, at the time such Form 10-K was originally filed, the information set forth in the Company's Form 10-K/A filed with the Commission on October 6, 1997), complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, as modified, superseded and read together with the other information in the Prospectuses, at the time the Registration Statement became effective, at the time the Prospectuses were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (iii) Independent Accountants . The accountants who certified the financial statements and supporting schedules, if any, included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements . The financial statements included in the Registration Statement and the Prospectuses, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules, if any, included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. (v) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its 5 subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the Common Stock in amounts per share that are consistent with the current dividend policy and past practice of the Company, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Iowa and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of Subsidiaries. Each of the entities listed on Schedule D hereto (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company that constitute "significant subsidiaries" of the Company (as such term is defined in Rule 1-02 of Regulation S-X) are the subsidiaries listed on Schedule D hereto. (viii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee or director benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company, including 6 the Securities to be purchased by the Underwriters from the Selling Shareholder, have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company, including the Securities to be purchased by the Underwriters from the Selling Shareholder, was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (ix) Authorization of Agreement. This Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company. (x) Authorization and Description of Securities. The Securities to be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the U.S. Underwriters pursuant to this Agreement and the International Managers pursuant to the International Purchase Agreement and, when issued and delivered by the Company pursuant to this Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth herein and the International Purchase Agreement, respectively, will be validly issued and fully [CAPTION] paid and non-assessable; the Common Stock conforms in all material respects to all statements relating thereto contained in the Prospectuses and such description conforms in all material respects to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (xi) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in this Agreement, the International Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and compliance by the Company with its obligations under this Agreement and the International Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances or Repayment Events that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the 7 Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations (except for any such violation as would not reasonably be expected to result in a Material Adverse Effect). As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xii) Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xiii) Absence of Proceedings. Except as otherwise disclosed in the Registration Statement, there is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement, or which might reasonably be expected to result in a Material Adverse Effect, or which may reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement and the International Purchase Agreement or the performance by the Company of its obligations hereunder or thereunder; all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject, including ordinary routine litigation incidental to the business, are, in the aggregate, not reasonably likely to result in a Material Adverse Effect. (xiv) Accuracy of Exhibits. There are no contracts or documents which are required to be described in the Registration Statement, the Prospectuses or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required (assuming for purposes hereof that the Form 10-K included, at the time such Form 10-K was originally filed, the information set forth in the Company's Form 10-K/A filed with the Commission on October 6, 1997). (xv) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on in all material respects, the business now operated by them, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid 8 or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xvi) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement and the International Purchase Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations or any foreign or state securities laws. (xvii) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, and are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure to possess such Governmental Licenses or to so comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xviii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them and which are material to the business of the Company and its subsidiaries, considered as one enterprise, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. 9 (xix) Absence of Manipulation. The Company has not taken, and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of, and neither the Company nor any affiliated purchaser (as such term is defined in Rule 100 under Regulation M) has or will, directly or indirectly, bid for, purchased or attempted to induce any person to bid for or purchase, any security of the Company to facilitate the sale or resale of the Securities. (xx) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxi) Environmental Laws. Except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (C) there are no events or circumstances that may reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (b) Representations and Warranties by Bandag and the Selling Shareholder. Bandag and the Selling Shareholder each represents and warrants to each U.S. Underwriter as of the date hereof and as of the Closing Time and agrees with each U.S. Underwriter, as follows: (i) Accurate Disclosure. To the best knowledge of Bandag and the Selling Shareholder, the representations and warranties of the Company contained in Section 1(a) hereof are true and correct; each of Bandag and the Selling Shareholder has reviewed and is familiar with the Registration Statement and the Prospectuses and neither the Prospectuses nor any amendments or supplements thereto includes any untrue statement of a material fact or omits 10 to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided, that this representation and warranty shall only apply to statements in or omissions from the Registration Statement and the Prospectuses made in reliance upon and in conformity with information furnished to the Company in writing by Bandag or the Selling Shareholder expressly for use in the Registration Statement and the Prospectuses); the Selling Shareholder is not prompted to sell the Securities to be sold by the Selling Shareholder hereunder by any information concerning the Company or any subsidiary of the Company which is not set forth in the Prospectuses. (ii) Authorization of Agreements. Each of Bandag and the Selling Shareholder has the full right, power and authority to enter into this Agreement and the International Purchase Agreement and to sell, transfer and deliver the Securities to be sold by the Selling Shareholder under this Agreement and the International Purchase Agreement. The execution and delivery of this Agreement and the International Purchase Agreement and the sale and delivery of the Securities to be sold by the Selling Shareholder and the consummation of the transactions contemplated herein and under the International Purchase Agreement and compliance by each of Bandag and the Selling Shareholder with its obligations hereunder and under the International Purchase Agreement have been duly authorized by each of Bandag and the Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by the Selling Shareholder or any property or assets of Bandag or the Selling Shareholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which Bandag or the Selling Shareholder is a party or by which Bandag or the Selling Shareholder may be bound, or to which any of the property or assets of Bandag or the Selling Shareholder is subject, nor will such action result in any violation of the provisions of the charter or by-laws or other organizational instrument of Bandag or the Selling Shareholder, if applicable, or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over Bandag or the Selling Shareholder or any of its properties. (iii) Good and Marketable Title. The Selling Shareholder has and will at the Closing Time have good and marketable title to the Securities to be sold by the Selling Shareholder hereunder and under the International Purchase Agreement, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement and the International Purchase Agreement; and upon delivery of such Securities and payment of the purchase price therefor as herein contemplated, assuming each such Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from the Selling 11 Shareholder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. (iv) Absence of Manipulation. Neither Bandag nor the Selling Shareholder has taken, and neither will take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of, and none of Bandag, the Selling Shareholder or any affiliated purchaser (as such term is defined in Rule 100 under Regulation M) has or will, directly or indirectly, bid for, purchased or attempted to induce any person to bid for or purchase, any security of the Company to facilitate the sale or resale of the Securities. (v) Absence of Further Requirements. No filing with, or consent, approval, authorization, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by either Bandag or the Selling Shareholder of their respective obligations hereunder or under the International Purchase Agreement, or in connection with the sale and delivery of the Securities hereunder or under the International Purchase Agreement or the consummation of the transac tions contemplated by this Agreement or the International Purchase Agreement, except such as may have previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (vi) No Association with NASD. Except for Edgar D. Jannotta, Senior Director at William Blair & Company, L.L.C. and a director of Bandag, none of Bandag, the Selling Stockholder nor any of its affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(m) of the By-laws of the National Association of Securities Dealers, Inc.), any member firm of the National Association of Securities Dealers, Inc. (c) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company to each U.S. Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of Bandag or the Selling Shareholder as such and delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters pursuant to the terms of this Agreement shall be deemed a representation and warranty by Bandag or the Selling Shareholder, as the case may be, to each U.S. Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to U.S. Underwriters; Closing. (a) Initial U.S. Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, (i) the Company and (ii) Bandag and the Selling Shareholder, severally and not jointly, each agrees to sell to each U.S. Underwriter, severally and not jointly, and each U.S. Underwriter, 12 severally and not jointly, agrees to purchase from the Company and Bandag and the Selling Shareholder, at the price per share set forth in Schedule C, that proportion of the number of Initial U.S. Securities set forth in Schedule B opposite the name of the Company or the Selling Shareholder, as the case may be, which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter, plus any additional number of Initial U.S. Securities which such U.S. Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial U.S. Securities, subject, in each case, to such adjustments among the U.S. Underwriters as the U.S. Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional securities. (b) U.S. Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the U.S. Underwriters, severally and not jointly, to purchase up to an additional 407,400 shares of Common Stock, as set forth in Schedule B, at the price per share set forth in Schedule C, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities (but only if the Company establishes a record date for such dividend or distribution which is prior to the Date of Delivery (as defined below) for the U.S. Option Securities). The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial U.S. Securities upon notice by the Global Coordinator to the Company setting forth the number of U.S. Option Securities as to which the several U.S. Underwriters are then exercising the option and the time and date of payment and delivery for such U.S. Option Securities. Any such time and date of delivery (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the U.S. Option Securities, each of the U.S. Underwriters, acting severally and not jointly, will purchase that proportion of the total number of U.S. Option Securities then being purchased which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter bears to the total number of Initial U.S. Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial U.S. Securities shall be made at the offices of Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or at such other place as shall be agreed upon by the Global Coordinator, the Company, Bandag and the Selling Shareholder, at 9:00 A.M. (Eastern time) on the third business day (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day business day) after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator, the Company and Bandag and the Selling Shareholder (such time and date of payment and delivery being herein called "Closing Time"). 13 In addition, in the event that any or all of the U.S. Option Securities are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company and the Selling Shareholder by wire transfer of immediately available funds to the bank accounts designated by the Company and the Selling Shareholder, as the case may be, against delivery to the U.S. Representatives for the respective accounts of the U.S. Underwriters of certificates for the U.S. Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the U.S. Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial U.S. Securities and the U.S. Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the U.S. Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased by any U.S. Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such U.S. Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, shall be in such denominations and registered in such names as the U.S. Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, will be made available for examination and packaging by the U.S. Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of 14 the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the U.S. Underwriters shall reasonably object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the U.S. Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the U.S. Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each U.S. Underwriter, without charge, as many copies of each preliminary prospectus as such U.S. Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each U.S. Underwriter, without charge, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments or supplements thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act 15 Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the International Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the U.S. Underwriters or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the U.S. Underwriters such number of copies of such amendment or supplement as the U.S. Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the U.S. Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may reasonably designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds". 16 (i) Listing. The Company will use its best efforts to effect the quotation of the Securities on the Nasdaq National Market. (j) Restriction on Sale of Securities. During a period of 90 days from the date of the Prospectus, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act (other than on Form S-8) with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the International Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option, right or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses, (C) any shares of Common Stock, or other securities convertible into or exercisable or exchangeable for Common Stock, issued or options or contracts to purchase Common Stock granted or entered into pursuant to existing employee benefit plans of the Company referred to in the Prospectuses or (D) any shares of Common Stock, or other securities convertible into or exercisable or exchangeable for Common Stock, issued or options or contracts to purchase Common Stock pursuant to any non- employee director stock plan or dividend reinvestment plan or the Company's shareholder rights plan. (k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. SECTION 4. Payment of Expenses (a) Expenses. The Company and Bandag and the Selling Shareholder will pay or cause to be paid all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters 17 and the transfer of the Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, if any, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities and (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the inclusion of the Securities being issued by the Company in the Nasdaq National Market. It is understood, however, that except as provided in this Section and Section 6 hereof, the Underwriters will pay all their own costs and expenses, including the fees and disbursements of their counsel, and any advertisement expenses connected with any offers they may make. (b) Expenses of Bandag and the Selling Shareholder. Bandag and the Selling Shareholder will pay all expenses incident to the performance of their obligations under, and the consummation of the transactions contemplated by this Agreement, including (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities to the Underwriters, and their transfer between the Underwriters pursuant to an agreement between such Underwriters, and (ii) the fees and disbursements of their counsel and accountants. (c) Termination of Agreement. If this Agreement is terminated by the U.S. Representatives in accordance with the provisions of Section 5, Section 9(a)(i) or Section 11 hereof, the Company and Bandag and the Selling Shareholder shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the U.S. Underwriters. (d) Allocation of Expenses. The provisions of this Section 4 shall not affect any agreement that the Company and Bandag and the Selling Shareholders may make for the sharing of such costs and expenses. SECTION 5. Conditions of Underwriters' Obligations. The obligations of the several U.S. Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company and Bandag and the Selling Shareholder contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company or Bandag or the Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company and Bandag and the Selling Shareholder of their respective covenants and other obligations hereunder, and to the following further conditions: 18 (a) Effectiveness of Registration Statement; Filing of Prospectus. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Stanley, Lande & Hunter, counsel for the Company, Jones, Day, Reavis & Pogue, counsel for the Company, and James I. Johnson, Vice President, General Counsel and Secretary of the Company, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of each such letter for each of the other U.S. Underwriters to the effect set forth in Exhibits A-1, A-2 and A-3 hereto, respectively. (c) Opinion of Counsel for Bandag and the Selling Shareholder. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Foley & Lardner, counsel for Bandag and the Selling Shareholder, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit B hereto. (d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Sidley & Austin, counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters with respect to the matters set forth in Exhibit C. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the U.S. Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (e) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the U.S. Representatives shall 19 have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are threatened by the Commission. (f) Certificate of Bandag and the Selling Shareholder. At Closing Time, the U.S. Representatives shall have received certificates of a duly authorized officer of each of Bandag and the Selling Shareholder, dated as of Closing Time, to the effect that (i) the representations and warranties of each of Bandag and the Selling Shareholder contained in Section 1(b) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of Closing Time and (ii) the Selling Shareholder has complied in all material respects with all agreements and all conditions on its part to be performed under this Agreement at or prior to Closing Time. (g) Accountant's Comfort Letter. At the time of the execution of this Agreement, the U.S. Representatives shall have received from Arthur Andersen LLP a letter dated such date, in form and substance satisfactory to the U.S. Representatives to the effect set forth in Annex A hereto, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (h) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from Arthur Andersen LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (g) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (i) Approval of Listing. At Closing Time, the Securities to be issued by the Company shall have been approved for inclusion in the Nasdaq National Market, subject only to official notice of issuance. (j) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (k) Purchase of Initial International Securities. Contemporaneously with the purchase by the U.S. Underwriters of the Initial U.S. Securities under this Agreement, the 20 International Managers shall have purchased the Initial International Securities under the International Purchase Agreement. (l) Lock-up Agreements. At the date of this Agreement, the U.S. Representatives shall have an agreement substantially in the form of Exhibit D hereto signed by the persons listed on Schedule E hereto. (m) Conditions to Purchase of U.S. Option Securities. In the event that the U.S. Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the U.S. Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives shall have received: (i) Officers' Certificate. A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery. (ii) Opinion of Counsel for Company. The favorable opinion of Stanley, Lande & Hunter, counsel for the Company, Jones, Day, Reavis & Pogue, counsel for the Company, and James I. Johnson, Vice President, General Counsel and Secretary of the Company, in form and substance satisfactory to counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinions required by Section 5(b) hereof. (iv) Opinion of Counsel for U.S. Underwriters. The favorable opinion of Sidley & Austin, counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof. (v) Bring-down Comfort Letter. A letter from Arthur Andersen LLP, in form and substance satisfactory to the U.S. Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the U.S. Representatives pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (n) Additional Documents. At Closing Time and at each Date of Delivery counsel for the U.S. Underwriters shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the 21 Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and Bandag and the Selling Shareholder in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the U.S. Representatives and counsel for the U.S. Underwriters. (o) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of U.S. Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several U.S. Underwriters to purchase the relevant U.S. Option Securities, may be terminated by the U.S. Representatives by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. (a) Indemnification of U.S. Underwriters by the Company. The Company agrees to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, 22 preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense (i) to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto) and (ii) with respect to any preliminary prospectus to the extent that any such loss, liability, claim, damage or expense of such U.S. Underwriter results solely from the fact that such U.S. Underwriter sold Securities to a person as to whom the Company shall establish that there was not sent by commercially reasonable means, at or prior to the written confirmation of such sale, a copy of the appropriate Prospectus in any case where such delivery is required by the 1933 Act, if the Company has previously furnished copies thereof in sufficient quantity to such U.S. Underwriter and the loss, claim, damage or liability of such U.S. Underwriter results from an untrue statement or omission of a material fact contained in a preliminary prospectus that was corrected in the appropriate Prospectus (not including the documents incorporated by reference therein). (b) Indemnification of U.S. Underwriters and the Company by Bandag and the Selling Shareholder. Bandag and the Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the Company and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by Bandag or the Selling Shareholder expressly for use therein; and will reimburse each U.S. Underwriter and the Company for any legal or other expenses reasonably incurred by such U.S. Underwriter or the Company in connection with investigating or defending any such action or claim as such expenses are incurred. (c) Indemnification of Company, Directors and Officers and Bandag and the Selling Shareholder. Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who 23 controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and Bandag and the Selling Shareholder and each person, if any, who controls either Bandag or the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto). (d) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) or 6(b) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(c) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. An indemnifying party may, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), if such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (e) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have 24 requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. (f) Other Agreements with Respect to Indemnification. The provisions of this Section shall not affect any agreement among the Company and Bandag and the Selling Shareholder with respect to indemnification. SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Bandag and the Selling Shareholder on the one hand and the U.S. Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Bandag and the Selling Shareholder on the one hand and of the U.S. Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and Bandag and the Selling Shareholder on the one hand and the U.S. Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the U.S. Securities pursuant to this Agreement (before deducting expenses) received by the Company and Bandag and the Selling Shareholder and the total underwriting discount received by the U.S. Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet bear to the aggregate initial public offering price of the U.S. Securities as set forth on such cover. The relative fault of the Company and Bandag and the Selling Shareholder on the one hand and the U.S. Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or Bandag and the Selling Shareholder or by the U.S. Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Bandag or the Selling Shareholder and the U.S. Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the U.S. Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses 25 incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such U.S. Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company, Bandag or the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or Bandag and the Selling Shareholder, as the case may be. The U.S. Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial U.S. Securities set forth opposite their respective names in Schedule A hereto and not joint. The provisions of this Section shall not affect any agreement among the Company and Bandag and the Selling Shareholder with respect to contribution. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries or Bandag and the Selling Shareholder submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter or controlling person, or by or on behalf of the Company or Bandag and the Selling Shareholder, and shall survive delivery of the Securities to the U.S. Underwriters. SECTION 9. Termination of Agreement. (a) Termination; General. The U.S. Representatives may terminate this Agreement, by notice to the Company and Bandag and the Selling Shareholder, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the U.S. Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets 26 in the United States, any outbreak of hostilities or escalation of any existing hostilities or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the U.S. Representatives, impracticable to market the U.S. Securities or to enforce contracts for the sale of the U.S. Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the Nasdaq National Market, or if trading generally on the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by such exchange or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the U.S. Underwriters. If one or more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting U.S. Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the U.S. Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of U.S. Securities to be purchased on such date, each of the non- defaulting U.S. Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting U.S. Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of U.S. Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the U.S. Underwriters to purchase and of the Company to sell the U.S. Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting U.S. Underwriter. No action taken pursuant to this Section shall relieve any defaulting U.S. Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the U.S. Underwriters to purchase and the Company to sell the relevant U.S. 27 Option Securities, as the case may be, either (i) the U.S. Representatives or (ii) the Company or Bandag and the Selling Shareholder shall have the right to postpone Closing Time, or the Company or the U.S. Representatives shall have the right to postpone the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "U.S. Underwriter" includes any person substituted for an Underwriter under this Section 10. SECTION 11. Default by Bandag and the Selling Shareholder or the Company. (a) If Bandag and the Selling Shareholder shall fail at Closing Time to sell and deliver the number of Securities which the Selling Shareholder is obligated to sell hereunder, then the U.S. Underwriters may, at the option of the U.S. Representatives, by notice from the U.S. Representatives to the Company and Bandag and the Selling Shareholder, either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the Company has agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve Bandag and the Selling Shareholder from liability, if any, in respect of such default. In the event of a default by Bandag and the Selling Shareholder as referred to in this Section 11, each of the U.S. Representatives and the Company shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectus or in any other documents or arrangements. (b) If the Company shall fail at Closing Time or at the Date of Delivery to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non- defaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. SECTION 12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the U.S. Underwriters shall be directed to the U.S. Representatives at 233 South Wacker Drive, 5500 Sears Tower, Chicago, Illinois 60606, attention of Michael G. O'Grady; notices to the Company shall be directed to it at 414 East Third Street, P.O. Box 1109, Muscatine, Iowa 52761-7109, attention of General Counsel; notices to Bandag shall be directed to it at 2905 North Highway 61, Muscatine, Iowa 52761, attention of Warren W. Heidbreder, Vice President, Finance; and notices to the Selling Shareholder shall be directed to it c/o Bandag, Incorporated at 2905 North Highway 61, Muscatine, Iowa 52761, attention of Frank B. Hall, Secretary. SECTION 13. Parties. This Agreement shall each inure to the benefit of and be binding upon the U.S. Underwriters, the Company and Bandag and the Selling Shareholder and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the U.S. Underwriters, the Company and Bandag and the Selling Shareholder and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or 28 equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the U.S. Underwriters, the Company and Bandag and the Selling Shareholder and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any U.S. Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 29 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company, Bandag and the Selling Shareholder a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the U.S. Underwriters, the Company and Bandag and the Selling Shareholder in accordance with its terms. Very truly yours, HON INDUSTRIES INC. By_________________________________ Title: BANDAG, INCORPORATED By_________________________________ Title: BTC, INC. By_________________________________ Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED WILLIAM BLAIR & COMPANY, L.L.C. ROBERT W. BAIRD & CO. INCORPORATED MCDONALD & COMPANY SECURITIES, INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: __________________________ Authorized Signatory For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule A hereto. 30 SCHEDULE A Name of U.S. Underwriter Number of - ------------------------ Initial U.S. Securities ---------- Merrill Lynch, Pierce, Fenner & Smith Incorporated......................................... William Blair & Company, L.L.C.......................... Robert W. Baird & Co. Incorporated...................... McDonald & Company Securities, Inc...................... ---------- Total................................................... ========== Sch A-1 SCHEDULE B Number of Initial U.S. Maximum Number of U.S. Securities to be Sold Option Securities to Be Sold ---------------------- ---------------------------- HON INDUSTRIES INC. 800,000 407,400 BANDAG, 1,916,000 INCORPORATED ________________ _______________ Total 2,716,000 407,400 =============== ================ Sch B-1 SCHEDULE C HON INDUSTRIES INC. 3,395,000 Shares of Common Stock (Par Value $1.00 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $______. 2. The purchase price per share for the U.S. Securities to be paid by the several U.S. Underwriters shall be $___, being an amount equal to the initial public offering price set forth above less $______ per share; provided that the purchase price per share for any U.S. Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities (but only if the Company establishes a record date for such dividend or distribution which is prior to the Date of Delivery for the U.S. Option Securities). Sch C-1 SCHEDULE D Hearth Technologies, Inc. Holga Inc. BPI Inc. The Gunlocke Company T.M. Export Inc. Allsteel, Inc. Sch D-1 SCHEDULE E Jack D. Michaels David C. Stuebe Melvin L. McMains Jeffrey D. Fick James I. Johnson George J. Koenigsaecker III Robert W. Cox W. James Farrell Stanley M. Howe Robert L. Katz Lee Liu Celeste Michalski Michael S. Plunkett Herman J. Schmidt Richard H. Stanley Lorne R. Waxlax Sch E-1 Exhibit A-1 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) FORM OF OPINION OF STANLEY, LANDE & HUNTER ------------------------------------------- A1-1 Exhibit A-2 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) FORM OF OPINION OF JONES, DAY, REAVIS & POGUE --------------------------------------------- A2-1 Exhibit A-3 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) FORM OF OPINION OF JAMES I. JOHNSON ----------------------------------- A3-1 Exhibit B FORM OF OPINION OF COUNSEL FOR BANDAG AND THE SELLING SHAREHOLDER TO BE DELIVERED PURSUANT TO SECTION 5(c) B-1 Exhibit C FORM OF OPINION OF COUNSEL FOR THE U.S. UNDERWRITERS Exhibit C-1 Exhibit D [Form of lock-up from directors and executive officers pursuant to Section 5(l)] October __, 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated McDonald & Company Securities, Inc. as Representatives of the several Underwriters to be named in the within-mentioned U.S. Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 MERRILL LYNCH INTERNATIONAL William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated McDonald & Company Securities, Inc. as Lead Managers of the several International Managers to be named in the within-mentioned International Purchase Agreement c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY England Re: Proposed Public Offering by HON INDUSTRIES Inc. ----------------------------------------------- Dear Sirs: D-1 The undersigned, a stockholder and an officer and/or director of HON INDUSTRIES Inc., an Iowa corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), William Blair & Co., L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. propose to enter into a U.S. Purchase Agreement and an International Purchase Agreement (collectively, the "Purchase Agreements") with the Company, Bandag, Incorporated and the Selling Shareholder (as defined in the Purchase Agreements) providing for the public offering of shares (the "Securities") of the Company's common stock, par value $1.00 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder and an officer and/or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreements that, during a period of 90 days from the date of the Purchase Agreements, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, in any open market transaction (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: ___________________________ Print Name: __________________________ D-2 Annex A [FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(g)] We are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (i) in our opinion, the audited financial statements and the related financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company for the three month periods ended March 29, 1997 and March 29, 1996, the three and six month periods ended June 28, 1997 and June 29, 1996, included or incorporated by reference in the Registration Statement and the Prospectuses (collectively, the "10-Q Financials"), a reading of the minutes of all meetings of the stockholders and directors of the Company and its subsidiaries and the committees of the Company's Board of Directors and any subsidiary committees since January 1, 1997, inquiries of certain officials of the Company and its subsidiaries responsible for financial and accounting matters, a review of interim financial information in accordance with standards established by the American Institute of Certified Public Accountants in Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), with respect to the description of relevant periods and such other inquiries and procedures as may be specified in such letter, nothing came to our attention that caused us to believe that: (A) the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectuses do not comply as to form in all material respects with the applicable accounting requirements of the 1934 Act and the 1934 Act Regulations applicable to unaudited financial statements included in Form 10-Q or any material modifications should be made to the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectuses for them to be in conformity with generally accepted accounting principles; A-1 (B) at a specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock of the Company and its subsidiaries or any decrease in the consolidated net current assets or shareholders' equity of the Company and its subsidiaries or any increase in the long-term debt of the Company and its subsidiaries, in each case as compared with amounts shown in the latest balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from June 28, 1997 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in consolidated net sales, total or per share amounts of income before extraordinary items or of net income, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; (iii) based upon the procedures set forth in clause (ii) above and a reading of the Selected Consolidated Financial and Operating Data included in the Registration Statement, nothing came to our attention that caused us to believe that the Selected Financial and Operating Data included in the Registration Statement do not comply as to form in all material respects with the disclosure requirements of Item 301 of Regulation S-K of the 1933 Act; (iv) we have compared the information in the Registration Statement under selected captions with the disclosure requirements of Regulation S-K of the 1933 Act and, on the basis of limited procedures specified herein. nothing came to our attention that caused us to believe that this information does not comply as to form in all material respects with the disclosure requirements of Items 302, 402 and 503(d), respectively, of Regulation S-K; ::ODMA\PCDOCS\CHICAGO4\449314\6 October 23, 1997 (1:25am) A-2 EX-1.2 3 INTERNATIONAL UNDERWRITING AGREEMENT Draft of 10/23/97 ================================================================================ HON INDUSTRIES INC. (an Iowa corporation) 3,395,000 Shares of Common Stock INTERNATIONAL PURCHASE AGREEMENT Dated: October 23, 1997 ================================================================================ TABLE OF CONTENTS INTERNATIONAL PURCHASE AGREEMENT..................................................... 1 SECTION 1. Representations and Warranties........................................... 4 (a) Representations and Warranties by the Company............................ 4 (i) Compliance with Registration Requirements........................ 4 (ii) Incorporated Documents........................................... 5 (iii) Independent Accountants.......................................... 5 (iv) Financial Statements............................................. 6 (v) No Material Adverse Change in Business........................... 6 (vi) Good Standing of the Company..................................... 6 (vii) Good Standing of Subsidiaries.................................... 7 (viii) Capitalization................................................... 7 (ix) Authorization of Agreement....................................... 7 (x) Authorization and Description of Securities...................... 7 (xi) Absence of Defaults and Conflicts................................ 8 (xii) Absence of Labor Dispute......................................... 9 (xiii) Absence of Proceedings........................................... 9 (xiv) Accuracy of Exhibits............................................. 9 (xv) Possession of Intellectual Property.............................. 9 (xvi) Absence of Further Requirements.................................. 10 (xvii) Possession of Licenses and Permits............................... 10 (xviii) Title to Property................................................ 10 (xix) Absence of Manipulation.......................................... 11 (xx) Investment Company Act........................................... 11 (xxi) Environmental Laws............................................... 11 (b) Representations and Warranties by Bandag and the Selling Shareholder..... 12 (i) Accurate Disclosure.............................................. 12 (ii) Authorization of Agreements...................................... 12 (iii) Good and Marketable Title........................................ 13 (iv) Absence of Manipulation.......................................... 13 (v) Absence of Further Requirements.................................. 13 (vi) No Association with NASD......................................... 14 (c) Officer's Certificates................................................... 14 SECTION 2. Sale and Delivery to International Managers; Closing..................... 14
i (a) Initial International Securities......................................... 14 (b) International Option Securities.......................................... 15 (c) Payment.................................................................. 15 (d) Denominations; Registration.............................................. 16 SECTION 3. Covenants of the Company................................................. 16 (a) Compliance with Securities Regulations and Commission Requests........... 16 (b) Filing of Amendments..................................................... 17 (c) Delivery of Registration Statements...................................... 17 (d) Delivery of Prospectuses................................................. 17 (e) Continued Compliance with Securities Laws................................ 18 (f) Blue Sky Qualifications.................................................. 18 (g) Rule 158................................................................. 19 (h) Use of Proceeds.......................................................... 19 (i) Listing.................................................................. 19 (j) Restriction on Sale of Securities........................................ 19 (k) Reporting Requirements................................................... 20 SECTION 4. Payment of Expenses...................................................... 20 (a) Expenses................................................................. 20 (b) Expenses of Bandag and the Selling Shareholder........................... 21 (c) Termination of Agreement................................................. 21 (d) Allocation of Expenses................................................... 21 SECTION 5. Conditions of International Managers' Obligations........................ 21 (a) Effectiveness of Registration Statement; Filing of Prospectus............ 21 (b) Opinion of Counsel for Company........................................... 22 (c) Opinion of Counsel for Bandag and the Selling Shareholder................ 22 (d) Opinion of Counsel for International Managers............................ 22 (e) Officers' Certificate.................................................... 22 (f) Certificate of Bandag and the Selling Shareholder........................ 23 (g) Accountant's Comfort Letter.............................................. 23 (h) Bring-down Comfort Letter................................................ 23 (i) Approval of Listing...................................................... 23 (j) No Objection............................................................. 24 (k) Purchase of Initial U.S. Securities...................................... 24 (l) Lock-up Agreements....................................................... 24 (m) Conditions to Purchase of International Option Securities................ 24 (i) Officers' Certificate.............................................. 24
ii (ii) Opinion of Counsel for Company..................................... 24 (iii) Opinion of Counsel for International Managers...................... 25 (iv) Bring-down Comfort Letter.......................................... 25 (n) Additional Documents..................................................... 25 (o) Termination of Agreement................................................. 25 SECTION 6. Indemnification.......................................................... 26 (a) Indemnification of International Managers by the Company................. 26 (b) Indemnification of International Managers by Bandag and the Selling Shareholder............................................. 27 (c) Indemnification of Company, Directors and Officers, Bandag and the Selling Shareholder............................................. 28 (d) Actions against Parties; Notification.................................... 28 (e) Settlement without Consent if Failure to Reimburse....................... 29 (f) Other Agreements with Respect to Indemnification......................... 29 SECTION 7. Contribution............................................................. 29 SECTION 8. Representations, Warranties and Agreements to Survive Delivery........... 31 SECTION 9. Termination of Agreement................................................. 31 (a) Termination; General..................................................... 31 (b) Liabilities.............................................................. 32 SECTION 10. Default by One or More of the International Managers..................... 32 SECTION 11. Default by Bandag and the Selling Shareholder or the Company............. 33 SECTION 12. Notices.................................................................. 34 SECTION 13. Parties.................................................................. 34 SECTION 14. Governing Law And Time................................................... 34 SECTION 15. Effect of Headings....................................................... 34
iii SCHEDULES Schedule A - List of Underwriters............................................ Sch A-1 Schedule B - Shares to be sold by the Company and the Selling Shareholder.... Sch B-1 Schedule C - Pricing Information............................................. Sch C-1 Schedule D - List of Subsidiaries............................................ Sch D-1 Schedule E - Persons Executing Lock-up Agreements............................ Sch E-1 EXHIBITS Exhibit A-1 - Form of Opinion of Company's Vice President, Human Resources... A-1 Exhibit A-2 - Form of Opinion of Company's Counsel........................... A-2 Exhibit A-3 - Form of Opinion of Selling Shareholder's Counsel............... A-3 Exhibit B - Form of Opinion of Bandag's and Selling Shareholder's Counsel.... B-1 Exhibit C - Form of Opinion of Counsel for the International Managers........ C-1 Exhibit D - Form of Lock-up Letter........................................... D-1 ANNEXES Annex A - Form of Accountant's Comfort Letter................................ A-1
iv HON INDUSTRIES INC. (an Iowa corporation) 3,395,000 Shares of Common Stock (Par Value $1.00 Per Share) INTERNATIONAL PURCHASE AGREEMENT MERRILL LYNCH INTERNATIONAL Dated: October 23, 1997 William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated McDonald & Company Securities, Inc. as Lead Managers of the several International Managers c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY England Ladies and Gentlemen: HON INDUSTRIES Inc., an Iowa corporation (the "Company"), and Bandag, Incorporated, an Iowa corporation ("Bandag"), and BTC, Inc., a Delaware corporation (the "Selling Stockholder") confirm their respective agreements with Merrill Lynch International ("Merrill Lynch") and each of the other international underwriters named in Schedule A hereto (collectively, the "International Managers", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch and William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (in such capacity, the "Lead Managers"), with respect to (i) the issue and sale by the Company and the Selling Shareholder, acting severally and not jointly, and the purchase by the International Managers, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $1.00 per share, of the Company ("Common Stock") set forth in Schedules A and B hereto, and (ii) the grant by the Company to the International Managers, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of 101,850 additional shares of Common Stock to cover over-allotments, if any. The aforesaid 679,000 shares of Common Stock (the "Initial International Securities") to be purchased by the International Managers and all or any part of the 101,850 shares of Common Stock subject to the option described in Section 2(b) hereof (the "International Option Securities") are hereinafter called, collectively, the "International Securities". It is understood that the Company, Bandag and the Selling Shareholder are concurrently entering into an agreement dated the date hereof (the "U.S. Purchase Agreement") providing for the offering by the Company and the Selling Shareholder of an aggregate of 2,716,000 shares of Common Stock (the "Initial U.S. Securities") through arrangements with certain underwriters in the United States and Canada (the "U.S. Underwriters") for which Merrill Lynch, Pierce, Fenner & Smith Incorporated and William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as representatives (the "U.S. Representatives") and the grant by the Company to the U.S. Underwriters, acting severally and not jointly, of an option to purchase all or any part of the U.S. Underwriters' pro rata portion of up to 407,400 additional shares of Common Stock solely to cover over allotments, if any (the "U.S. Option Securities" and, together with the International Option Securities, the "Option Securities"). The Initial U.S. Securities and the U.S. Option Securities are hereinafter called the "U.S. Securities". It is understood that neither the Company nor the Selling Shareholder is obligated to sell, and the International Managers are not obligated to purchase, any Initial International Securities unless all of the Initial U.S. Securities are contemporaneously purchased by the U.S. Underwriters. The International Managers and the U.S. Underwriters are hereinafter collectively called the "Underwriters", the Initial International Securities and the Initial U.S. Securities are hereinafter collectively called the "Initial Securities", and the International Securities, and the U.S. Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company, Bandag and the Selling Shareholder understand that the International Managers propose to make a public offering of the International Securities as soon as the Lead Managers deem advisable after this Agreement has been executed and delivered. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-36433) covering the registration of the Securities 2 under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the International Securities (the "Form of International Prospectus") and one relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting" and the inclusion in the Form of International Prospectus of a section under the caption "United States Taxation of Foreign Shareholders." The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of International Prospectus and Form of U.S. Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of International Prospectus and the final Form of U.S. Prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "International Prospectus" and the "U.S. Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "International Prospectus" and "U.S. Prospectus" shall refer to the preliminary International Prospectus dated October 3, 1997 and preliminary U.S. Prospectus dated October 3, 1997, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the International Prospectus, the U.S. Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). 3 All references in this Agreement to financial statements and schedules and other information which is "disclosed," "contained," "referred to," "included" or "stated" in the Registration Statement, any preliminary prospectus (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, any preliminary prospectus or the Prospectuses shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the Registration Statement, such preliminary prospectus or the Prospectuses, as the case may be. SECTION 1. Representations and Warranties. (a) Representations and Warranties by the Company. The Company represents and warrants to each International Manager as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each International Manager, as follows: (i) Compliance with Registration Requirements. The Company meets the requirements for use of Form S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or 4 necessary to make the statements therein not misleading. Neither of the Prospectuses nor any amendments or supplements thereto, at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434. The representations and warranties in this subsection shall not apply to information stated in or omitted from statements in or omissions from the Registration Statement or the International Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any International Manager through the Lead Managers expressly for use in the Registration Statement or the International Prospectus. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Incorporated Documents. The documents incorporated or deemed to be incorporated by reference in the Registration Statement and the Prospectuses, at the time they were or hereafter are filed with the Commission (assuming for purposes hereof that the Company's Annual Report on Form 10-K for the year ended December 28, 1996 (the "Form 10-K") included, at the time such Form 10-K was originally filed, the information set forth in the Company's Form 10-K/A filed with the Commission on October 6, 1997), complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, as modified, superseded and read together with the other information in the Prospectuses, at the time the Registration Statement became effective, at the time the Prospectuses were issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 5 (iii) Independent Accountants. The accountants who certified the financial statements and supporting schedules, if any, included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements. The financial statements included in the Registration Statement and the Prospectuses, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules, if any, included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. (v) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the Common Stock in amounts per share that are consistent with the current dividend policy and past practice of the Company, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Iowa and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of 6 business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of Subsidiaries. Each of the entities listed on Schedule D hereto (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company that constitute "significant subsidiaries" of the Company (as such term is defined in Rule 1-02 of Regulation S-X) are the subsidiaries listed on Schedule D hereto. (viii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee or director benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company. (ix) Authorization of Agreement. This Agreement and the U.S. Purchase Agreement have been duly authorized, executed and delivered by the Company. (x) Authorization and Description of Securities. The Securities to be purchased by the International Managers and the U.S. Underwriters from the Company have been duly 7 authorized for issuance and sale to the International Managers pursuant to this Agreement and the U.S. Underwriters pursuant to the U.S. Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to this Agreement and the U.S. Purchase Agreement, respectively, against payment of the consideration set forth herein and the U.S. Purchase Agreement, respectively, will be validly issued, fully paid and non- assessable; the Common Stock conforms in all material respects to all statements relating thereto contained in the Prospectuses and such description conforms in all material respects to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (xi) Absence of Defaults and Conflicts. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the U.S. Purchase Agreement and the consummation of the transactions contemplated in this Agreement, the U.S. Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and compliance by the Company with its obligations under this Agreement and the U.S. Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances or Repayment Events that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations (except for any such violation as would not reasonably be expected to result in a Material Adverse Effect). As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such 8 holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xii) Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any subsidiary's principal suppliers, manufacturers, customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Effect. (xiii) Absence of Proceedings. Except as otherwise disclosed in the Registration Statement, there is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement, or which might reasonably be expected to result in a Material Adverse Effect, or which may reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement and the U.S. Purchase Agreement or the performance by the Company of its obligations hereunder or thereunder; all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, are, in the aggregate, not reasonably likely to result in a Material Adverse Effect. (xiv) Accuracy of Exhibits. There are no contracts or documents which are required to be described in the Registration Statement, the Prospectuses or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required (assuming for purposes hereof that the Form 10-K included, at the time such Form 10-K was originally filed, the information set forth in the Company's Form 10-K/A filed with the Commission on October 6, 1997). (xv) Possession of Intellectual Property. The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpainted and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on, in all material respects, the business now operated by them, and neither 9 the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xvi) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities under this Agreement and the U.S. Purchase Agreement or the consummation of the transactions contemplated by this Agreement and the U.S. Purchase Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or any foreign or state securities or blue sky laws. (xvii) Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them and are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure to possess such Governmental Licenses or to so comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xviii) Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by the Company and its subsidiaries and good title to all other properties owned by them and which are material to the business of the Company and its subsidiaries, considered as one enterprise, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially 10 affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xix) Absence of Manipulation. The Company has not taken, and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of, and neither the Company nor any affiliated purchaser (as such term is defined in Rule 100 under Regulation M) has or will, directly or indirectly, bid for, purchased or attempted to induce any person to bid for or purchase, any security of the Company to facilitate the sale or resale of the Securities. (xx) Investment Company Act. The Company is not, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxi) Environmental Laws. Except as described in the Registration Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) there are no pending or threatened administrative, regulatory or judicial actions, 11 suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (C) there are no events or circumstances that may reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (b) Representations and Warranties by Bandag and the Selling Shareholder. Bandag and the Selling Shareholder each represents and warrants to each International Manager as of the date hereof and as of the Closing Time and agrees with each International Manager, as follows: (i) Accurate Disclosure. To the best knowledge of Bandag and the Selling Shareholder, the representations and warranties of the Company contained in Section 1(a) hereof are true and correct; each of Bandag and the Selling Shareholder has reviewed and is familiar with the Registration Statement and the Prospectuses and neither the Prospectuses nor any amendments or supplements thereto includes any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided, that this representation and warranty shall only apply to statements in or omissions from the Registration Statement and the Prospectuses made in reliance upon and in conformity with the information furnished to the Company in writing by Bandag or the Selling Shareholder expressly for use in the Registration Statements and the Prospectuses); the Selling Shareholder is not prompted to sell the Securities to be sold by the Selling Shareholder hereunder by any information concerning the Company or any subsidiary of the Company which is not set forth in the Prospectuses. (ii) Authorization of Agreements. Each of Bandag and the Selling Shareholder has the full right, power and authority to enter into this Agreement and the U.S. Purchase Agreement and to sell, transfer and deliver the Securities to be sold by the Selling Shareholder under this Agreement and the U.S. Purchase Agreement. The execution and delivery of this Agreement and the U.S. Purchase Agreement and the sale and delivery of the Securities to be sold by the Selling Shareholder and the consummation of the transactions contemplated herein and under the U.S. Purchase Agreement and compliance by each of Bandag and the Selling Shareholder with its obligations hereunder and under the U.S. Purchase Agreement have been duly authorized by each of Bandag and the Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or 12 constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by the Selling Shareholder or any property or assets of Bandag or the Selling Shareholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which Bandag or the Selling Shareholder is a party or by which Bandag or the Selling Shareholder may be bound, or to which any of the property or assets of Bandag or the Selling Shareholder is subject, nor will such action result in any violation of the provisions of the charter or by-laws or other organizational instrument of Bandag or the Selling Shareholder, if applicable, or any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over Bandag or the Selling Shareholder or any of its properties. (iii) Good and Marketable Title. The Selling Shareholder has and will at the Closing Time have good and marketable title to the Securities to be sold by the Selling Shareholder hereunder and under the U.S. Purchase Agreement, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind, other than pursuant to this Agreement and the U.S. Purchase Agreement; and upon delivery of such Securities and payment of the purchase price therefor as herein contemplated, assuming each such Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from the Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, charge, claim, equity or encumbrance of any kind. (iv) Absence of Manipulation. Neither Bandag nor the Selling Shareholder has taken, and neither will take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of, and none of Bandag, the Selling Shareholder or any affiliated purchaser (as such term is defined in Rule 100 under Regulation M) has or will, directly or indirectly, bid for, purchased or attempted to induce any person to bid for or purchase any security of the Company to facilitate the sale or resale of the Securities. (v) Absence of Further Requirements. No filing with, or consent, approval, authorization, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by either Bandag or the Selling Shareholder of their respective obligations hereunder or under the U.S. Purchase Agreement, or in connection with the sale and delivery of the Securities hereunder or under the U.S. Purchase Agreement or the consummation of the transactions 13 contemplated by this Agreement or the U.S. Purchase Agreement, except such as may have previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (vi) No Association with NASD. Except for Edgar D. Janotta, Senior Director at William Blair & Co., L.L.C. and a director of Bandag, none of Bandag, the Selling Stockholder nor any of their respective affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(m) of the By- laws of the National Association of Securities Dealers, Inc.), any member firm of the National Association of Securities Dealers, Inc. (c) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Global Coordinator, the Lead Managers or to counsel for the International Managers shall be deemed a representation and warranty by the Company to each International Manager as to the matters covered thereby; and any certificates signed by or on behalf of Bandag or the Selling Shareholder as such and delivered to the Global Coordinator, the Lead Managers or to counsel for the International Managers pursuant to the terms of this Agreement shall be deemed a representation or warranty by Bandag or the Selling Shareholder, as the case may be, to each International Manager as to the matters covered thereby. SECTION 2. Sale and Delivery to International Managers; Closing. (a) Initial International Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, (i) the Company and (ii) Bandag and the Selling Shareholder, severally and not jointly, each agrees to sell to each International Manager, severally and not jointly, and each International Manager, severally and not jointly, agrees to purchase from the Company and Bandag and the Selling Shareholder , at the price per share set forth in Schedule C, that proportion of the number of Initial International Securities set forth in Schedule B opposite the name of the Company or the Selling Shareholder, as the case may be, which the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager, plus any additional number of Initial International Securities which such International Manager may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial International Securities subject, in each case, to such adjustments among the International Managers as the Lead Managers in their sole discretion shall make to eliminate any sales or purchasers of fractional securities. 14 (b) International Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the International Managers, severally and not jointly, to purchase up to an additional 101,850 shares of Common Stock at the price per share set forth in Schedule B, at the price per share set forth in Schedule C less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities (but only if the Company establishes a record date for such dividend or distribution which is prior to the Date of Delivery (as defined below) for the International Option Securities). The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial International Securities upon notice by the Global Coordinator to the Company setting forth the number of International Option Securities as to which the several International Managers are then exercising the option and the time and date of payment and delivery for such International Option Securities. Any such time and date of delivery for the International Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the International Option Securities, each of the International Managers, acting severally and not jointly, will purchase that proportion of the total number of International Option Securities then being purchased which the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager bears to the total number of Initial International Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or at such other place as shall be agreed upon by the Global Coordinator, the Company, Bandag and the Selling Shareholder, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator, the Company and Bandag and the Selling Shareholder (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the International Option Securities are purchased by the International Managers, payment of the purchase price for, and delivery of certificates for, such 15 International Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company and the Selling Shareholder by wire transfer of immediately available funds to a bank account designated by the Company and the Selling Shareholder, as the case may be, against delivery to the Lead Managers for the respective accounts of the International Managers of certificates for the International Securities to be purchased by them. It is understood that each International Manager has authorized the Lead Managers, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial International Securities and the International Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the International Managers, may (but shall not be obligated to) make payment of the purchase price for the Initial International Securities or the International Option Securities, if any, to be purchased by any International Manager whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such International Manager from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial International Securities and the International Option Securities, if any, shall be in such denominations and registered in such names as the Lead Managers may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial International Securities and the International Option Securities, if any, will be made available for examination and packaging by the Lead Managers in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each International Manager as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the 16 Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the International Managers shall reasonably object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Lead Managers and counsel for the International Managers, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Lead Managers, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the International Managers. The copies of the Registration Statement and each amendment thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each International Manager, without charge, as many copies of each preliminary prospectus as such International Manager reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each International Manager, without charge, during the period when the International Prospectus is required to 17 be delivered under the 1933 Act or the 1934 Act, such number of copies of the International Prospectus (as amended or supplemented) as such International Manager may reasonably request. The International Prospectus and any amendments or supplements thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the International Managers or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the International Managers such number of copies of such amendment or supplement as the International Managers may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the International Managers, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may reasonably designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such 18 jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds". (i) Listing. The Company will use its best efforts to effect the quotation of the Securities on the Nasdaq National Market. (j) Restriction on Sale of Securities. During a period of 90 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act (other than on Form S-8) with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the U.S. Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option, right or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses, (C) any shares of Common Stock, or other securities convertible into or exercisable or exchangeable for Common Stock, issued or options or contracts to purchase Common Stock granted or entered into pursuant to existing employee benefit plans of the Company referred to in the Prospectuses or (D) any shares of Common Stock, or other securities convertible into or exercisable or exchangeable for Common Stock, issued or options or contracts to purchase Common Stock pursuant to any non-employee director stock plan or dividend reinvestment plan or the Company's shareholder rights plan. 19 (k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. SECTION 4. Payment of Expenses. (a) Expenses. The Company and Bandag and the Selling Shareholder will pay or cause to be paid all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters and the transfer of the Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, if any, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities and (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the inclusion of the Securities being issued by the Company in the Nasdaq National Market. It is understood, however, that except as provided in this Section and Section 6 hereof, the Underwriters will pay all their own costs and expenses, including the fees and disbursements of their counsel, and any advertisement expenses connected with any offers they may make. 20 (b) Expenses of Bandag and the Selling Shareholder. Bandag and the Selling Shareholder will pay all expenses incident to the performance of its obligations under, and the consummation of the transactions contemplated by this Agreement, including (i) any stamp duties, capital duties and stock transfer taxes, if any, payable upon the sale of the Securities to the Underwriters, and their transfer between the Underwriters pursuant to an agreement between such Underwriters, and (ii) the fees and disbursements of their counsel and accountants. (c) Termination of Agreement. If this Agreement is terminated by the Lead Managers in accordance with the provisions of Section 5, Section 9(a)(i) or Section 11 hereof, the Company and Bandag and the Selling Shareholder shall reimburse the International Managers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the International Managers. (d) Allocation of Expenses. The provisions of this Section shall not affect any agreement that the Company and Bandag and the Selling Shareholder may make for the sharing of such costs and expenses. SECTION 5. Conditions of International Managers' Obligations. The obligations of the several International Managers hereunder are subject to the accuracy of the representations and warranties of the Company and Bandag and the Selling Shareholder contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company or Bandag and the Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company and Bandag and the Selling Shareholder of their respective covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement; Filing of Prospectus. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the International Managers. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the 21 requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the Lead Manager(s) shall have received the favorable opinion, dated as of Closing Time, of Stanley, Lande & Hunter, counsel for the Company, Jones, Day, Reavis & Pogue, counsel for the Company, and James I. Johnson, Vice President, General Counsel and Secretary of the Company, in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibits A-1, A-2 and A-3 hereto. (c) Opinion of Counsel for Bandag and the Selling Shareholder. At the Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of Foley & Lardner, counsel for Bandag and the Selling Shareholder, in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibit B hereto. (d) Opinion of Counsel for International Managers. At Closing Time, the Lead Manager(s) shall have received the favorable opinion, dated as of Closing Time, of Sidley & Austin, counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers with respect to the matters set forth in Exhibit C. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal law of the United States, upon the opinions of counsel satisfactory to the Lead Managers. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (e) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Lead Manager(s) shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to 22 the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or are threatened by the Commission. (f) Certificate of Bandag and the Selling Shareholder. At Closing time, the Lead Managers shall have received a certificate of a duly authorized officer of each of Bandag and the Selling Shareholder, dated as of Closing Time, to the effect that (i) the representations and warranties of each of Bandag and the Selling Shareholder contained in Section 1(b) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of Closing Time and (ii) each of Bandag and the Selling Shareholder has complied in all material respects with all agreements and all conditions on its part to be performed under this Agreement at or prior to Closing Time. (g) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Lead Managers shall have received from Arthur Andersen LLP a letter dated such date, in form and substance satisfactory to the Lead Managers to the effect set forth in Annex A hereto, together with signed or reproduced copies of such letter for each of the other International Managers containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (h) Bring-down Comfort Letter. At Closing Time, the Lead Manager(s) shall have received from Arthur Andersen LLP a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (g) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (i) Approval of Listing. At Closing Time, the Securities shall have been approved for inclusion in the Nasdaq National Market, subject only to official notice of issuance. 23 (j) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (k) Purchase of Initial U.S. Securities. Contemporaneously with the purchase by the International Managers of the Initial International Securities under this Agreement, the U.S. Underwriters shall have purchased the Initial U.S. Securities under the U.S. Purchase Agreement. (l) Lock-up Agreements. At the date of this Agreement, the Lead Managers shall have an agreement substantially in the form of Exhibit D hereto signed by the persons listed on Schedule E hereto. (m) Conditions to Purchase of International Option Securities. In the event that the International Managers exercise their option provided in Section 2(b) hereof to purchase all or any portion of the International Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Lead Managers shall have received: (i) Officers' Certificate. A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(e) hereof remains true and correct as of such Date of Delivery. (ii) Opinion of Counsel for Company. The favorable opinion of Stanley, Lande and Hunter, counsel for the Company, Jones, Day, Reavis & Pogue, counsel for the Company, and James I. Johnson, Vice President, General Counsel and Secretary of the Company, in form and substance satisfactory to counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. 24 (iii) Opinion of Counsel for International Managers. The favorable opinion of Sidley & Austin, counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof. (iv) Bring-down Comfort Letter. A letter from Arthur Andersen LLP, in form and substance satisfactory to the Lead Managers and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Lead Managers pursuant to Section 5(g) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (n) Additional Documents. At Closing Time and at each Date of Delivery counsel for the International Managers shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and Bandag and the Selling Shareholder in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Lead Managers and counsel for the International Managers. (o) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of International Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several International Managers to purchase the relevant Option Securities may be terminated by the Lead Manager(s) by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. 25 SECTION 6. Indemnification. (a) Indemnification of International Managers by the Company. The Company agrees to indemnify and hold harmless each International Manager and each person, if any, who controls any International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; 26 provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense (i) to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any International Manager through the Lead Manager(s) expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the International Prospectus (or any amendment or supplement thereto) and (ii) with respect to any preliminary prospectus to the extent that any such loss, liability, claim, damage or expense of such International Manager results solely from the fact that such International Manager sold Securities to a person as to whom the Company shall establish that there was not sent by commercially reasonably means, at or prior to the written confirmation of such sale, a copy of the appropriate Prospectus in any case where such delivery is required by the 1933 Act, if the Company has previously furnished copies thereof in sufficient quantity to such International Manager and the loss, claim, damage or liability of such International Manger results from an untrue statement or omission of a material fact contained in a preliminary prospectus that was corrected in the appropriate Prospectus (not including documents incorporated by reference therein). (b) Indemnification of International Managers and the Company by Bandag and the Selling Shareholder. Bandag and the Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each International Manager and each person, if any, who controls any International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the Company and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by Bandag or the Selling Shareholder expressly for use therein; and will reimburse each International Manager and the Company for any legal or other expenses reasonably incurred by such International Manager or the Company in 27 connection with investigating or defending any such action or claim as such expenses are incurred. (c) Indemnification of Company, Directors and Officers and Bandag and the Selling Shareholder. Each International Manager severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and Bandag and the Selling Shareholder and each person, if any, who controls either Bandag or the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary international prospectus or the International Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such International Manager through the Lead Managers expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the International Prospectus (or any amendment or supplement thereto). (d) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Sections 6(a) and 6(b) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(c) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. An indemnifying party may, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim 28 whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), if such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (e) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. Notwithstanding the immediately preceding sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, an indemnifying party shall not be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. (f) Other Agreements with Respect to Indemnification. The provisions of this Section shall not affect any agreements among the Company and Bandag and the Selling Shareholder with respect to indemnification. SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Bandag and the Selling Shareholder on the one hand and the International Managers on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Bandag and the Selling Shareholder on the one hand and of the International Managers on the other hand in connection with the statements or omissions 29 which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and Bandag and the Selling Shareholder on the one hand and the International Managers on the other hand in connection with the offering of the International Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the International Securities pursuant to this Agreement (before deducting expenses) received by the Company and Bandag and the Selling Shareholder and the total underwriting discount received by the International Managers, in each case as set forth on the cover of the International Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the International Securities as set forth on such cover. The relative fault of the Company and Bandag and the Selling Shareholder on the one hand and the International Managers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company and Bandag and the Selling Shareholder or by the International Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, Bandag, the Selling Shareholder and the International Managers agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the International Managers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no International Manager shall be required to contribute any amount in excess of the amount by which the total price at which the International Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such International Managers has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. 30 No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an International Managers within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such International Manager, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company, Bandag or the Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or Bandag and the Selling Shareholder, as the case may be. The International Managers' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial International Securities set forth opposite their respective names in Schedule A hereto and not joint. The provisions of this Section shall not affect any agreement among the Company and Bandag and the Selling Shareholder with respect to contribution. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries or Bandag and the Selling Shareholder submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any International Manager or controlling person, or by or on behalf of the Company or Bandag and the Selling Shareholder, and shall survive delivery of the Securities to the International Managers. SECTION 9. Termination of Agreement. (a) Termination; General. The Lead Managers may terminate this Agreement, by notice to the Company and Bandag and the Selling Shareholder, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the International Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation of any existing hostilities or other calamity or crisis or any change or development involving a prospective change 31 in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Lead Managers, impracticable to market the International Securities or to enforce contracts for the sale of the International Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the Nasdaq National Market, or if trading generally on the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by such exchange or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the International Managers. If one or more of the International Managers shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Lead Managers shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting International Managers, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Lead Managers shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of International Securities to be purchased on such date, each of the non-defaulting International Managers shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting International Managers, or (b) if the number of Defaulted Securities exceeds 10% of the number of International Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the International Managers to purchase and of the Company to sell the Option Securities to be purchased and 32 sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting International Manager. No action taken pursuant to this Section shall relieve any defaulting International Manager from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the International Managers to purchase and the Company to sell the relevant International Option Securities, as the case may be, either (i) the Lead Managers or (ii) the Company or Bandag and the Selling Shareholder shall have the right to postpone Closing Time, or the Company or the Lead Managers shall have the right to postpone the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "International Manager" includes any person substituted for an International Manager under this Section 10. SECTION 11. Default by Bandag and the Selling Shareholder or the Company. (a) If Bandag and the Selling Shareholder shall fail at Closing Time to sell and deliver the number of Securities which the Selling Shareholder is obligated to sell hereunder, then the International Managers may, at the option of the Lead Managers, by notice from the Lead Managers to the Company and Bandag and the Selling Shareholder, either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the Company has agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve Bandag and the Selling Shareholder from liability, if any, in respect of such default. In the event of a default by Bandag and the Selling Shareholder as referred to in this Section 11, each of the Lead Managers and the Company shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectus or in any other documents or arrangements. (b) If the Company shall fail at Closing Time or at the Date of Delivery to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non- defaulting party; provided, however, that the provisions of Section 1, 33 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. SECTION 12. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the International Managers shall be directed to the Lead Managers at 233 South Wacker Drive, 5500 Sears Tower, Chicago, Illinois 60606, attention of Michael G. O'Grady; notices to the Company shall be directed to it at 414 East Third Street, P.O. Box 1109, Muscatine, Iowa 52761-7109, attention of General Counsel; notices to Bandag shall be directed to it at 2905 North Highway 61, Muscatine, Iowa 52761, attention of Warren W. Heidbreder, Vice President, Finance; and notices to the Selling Shareholder shall be directed to it c/o Bandag, Incorporated at 2905 North Highway 61, Muscatine, Iowa 52761, attention of Frank B. Hall, Secretary. SECTION 13. Parties. This Agreement shall each inure to the benefit of and be binding upon the International Managers, the Company and Bandag and the Selling Shareholder and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the International Managers, the Company and Bandag and the Selling Shareholder and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the International Managers, the Company and Bandag and the Selling Shareholder and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any International Manager shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 34 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company, Bandag and the Selling Shareholder a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the International Managers, the Company and Bandag and the Selling Shareholder in accordance with its terms. Very truly yours, HON INDUSTRIES INC. By: ____________________________________ Title: BANDAG, INCORPORATED By: ____________________________________ Title: BTC, INC. By: ___________________________________ Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH INTERNATIONAL WILLIAM BLAIR & COMPANY, L.L.C. ROBERT W. BAIRD & CO. INCORPORATED MCDONALD & COMPANY SECURITIES, INC. By: MERRILL LYNCH INTERNATIONAL By _______________________________ Authorized Signatory For themselves and as Lead Managers of the other International Managers named in Schedule A hereto. 35 SCHEDULE A
Number of Initial Name of International Manager International Securities - ----------------------------- ------------------------ Merrill Lynch International.......... William Blair & Co., L.L.C........... Robert W. Baird & Co. Incorporated... McDonald & Company Securities, Inc... Total ===========
Sch A-1 SCHEDULE B
Number of Initial Maximum Number of International International Option Securities to be Sold Securities to be Sold --------------------- --------------------- HON INDUSTRIES INC. 200,000 101,850 BANDAG, INCORPORATED 479,000 _______ _______ Total 679,000 101,850 ======= =======
Sch B-1 SCHEDULE C HON INDUSTRIES INC. 3,395,000 Shares of Common Stock (Par Value $1.00 Per Share) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $_______. 2. The purchase price per share for the International Securities to be paid by the several International Managers shall be $_______, being an amount equal to the initial public offering price set forth above less $_______ per share; provided that the purchase price per share for any International Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities (but only if the Company establishes a record date for such dividend or distribution which is prior to the Date of Delivery for the International Option Securities). Sch C-1 SCHEDULE D Hearth Technologies, Inc. Holga Inc. BPI Inc. The Gunlocke Company HON Export Limited T.M. Export Inc. Allsteel, Inc. Sch D-1 SCHEDULE E Jack D. Michaels David C. Stuebe Melvin L. McMains Jeffrey D. Fick James I. Johnson George J. Koenigsaecker III Robert W. Cox W. James Farrell Stanley M. Howe Robert L. Katz Lee Liu Celeste Michalski Michael S. Plunkett Herman J. Schmidt Richard H. Stanley Lorne R. Waxlax Sch E-1 Exhibit A-1 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) FORM OF OPINION OF STANLEY, LANDE & HUNTER ------------------------------------------ A1-1 Exhibit A-2 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) FORM OF OPINION OF JONES, DAY, REAVIS & POGUE --------------------------------------------- A2-1 Exhibit A-3 FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) FORM OF OPINION OF JAMES I. JOHNSON ----------------------------------- A3-1 Exhibit B FORM OF OPINION OF COUNSEL FOR BANDAG AND THE SELLING SHAREHOLDER TO BE DELIVERED PURSUANT TO SECTION 5(c) B-1 Exhibit C FORM OF OPINION OF COUNSEL FOR THE INTERNATIONAL MANAGERS C-1 Exhibit D [Form of lock-up from directors and executive officers pursuant to Section 5(1)] October __, 1997 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated McDonald & Company Securities, Inc. as Representatives of the several Underwriters to be named in the within-mentioned U.S. Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 MERRILL LYNCH INTERNATIONAL William Blair & Company, L.L.C. Robert W. Baird & Co. Incorporated McDonald & Company Securities, Inc. as Lead Managers of the several International Managers to be named in the within-mentioned International Purchase Agreement c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY England Re: Proposed Public Offering by HON INDUSTRIES Inc. Dear Sirs: The undersigned, a stockholder and an officer and/or director of HON INDUSTRIES Inc., an Iowa corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), William Blair & Company, D-1 L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. propose to enter into a U.S. Purchase Agreement and an International Purchase Agreement (collectively, the "Purchase Agreements") with the Company, Bandag, Incorporated and the Selling Shareholder (as defined in the Purchase Agreements) providing for the public offering of shares (the "Securities") of the Company's common stock, par value $1.00 per share (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder and an officer and/or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreements that, during a period of 90 days from the date of the Purchase Agreements, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, in any open market transaction (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: ___________________________ Print Name: _________________________ D-2 Annex A [FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(g)] We are independent public accountants with respect to the Company within the meaning of the 1933 Act and the applicable published 1933 Act Regulations. (i) in our opinion, the audited financial statements and the related financial statement schedules included or incorporated by reference in the Registration Statement and the Prospectuses comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder; (ii) on the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim consolidated financial statements of the Company for the three month periods ended March 29, 1997 and March 29, 1996, the three and six month periods ended June 28, 1997 and June 29, 1996, included or incorporated by reference in the Registration Statement and the Prospectuses (collectively, the "10-Q Financials"), a reading of the minutes of all meetings of the stockholders and directors of the Company and its subsidiaries and the committees of the Company's Board of Directors and any subsidiary committees since January 1, 1997, inquiries of certain officials of the Company and its subsidiaries responsible for financial and accounting matters, a review of interim financial information in accordance with standards established by the American Institute of Certified Public Accountants in Statement on Auditing Standards No. 71, Interim Financial Information ("SAS 71"), with respect to the description of relevant periods and such other inquiries and procedures as may be specified in such letter, nothing came to our attention that caused us to believe that: (A) the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectuses do not comply as to form in all material respects with the applicable accounting requirements of the 1934 Act and the 1934 Act Regulations applicable to unaudited financial statements included in Form 10-Q or any material modifications should be made to the 10-Q Financials incorporated by reference in the Registration Statement and the Prospectuses for them to be in conformity with generally accepted accounting principles; (B) at a specified date not more than five days prior to the date of this Agreement, there was any change in the capital stock of the Company and its subsidiaries or any decrease in the consolidated net current assets or Annex A-1 shareholders' equity of the Company and its subsidiaries or any increase in the long-term debt of the Company and its subsidiaries, in each case as compared with amounts shown in the latest balance sheet included in the Registration Statement, except in each case for changes, decreases or increases that the Registration Statement discloses have occurred or may occur; or (C) for the period from June 28, 1997 to a specified date not more than five days prior to the date of this Agreement, there was any decrease in consolidated net sales, total or per share amounts of income before extraordinary items or of net income, in each case as compared with the comparable period in the preceding year, except in each case for any decreases that the Registration Statement discloses have occurred or may occur; (iii) based upon the procedures set forth in clause (ii) above and a reading of the Selected Consolidated Financial and Operating Data included in the Registration Statement, nothing came to our attention that caused us to believe that the Selected Financial and Operating Data included in the Registration Statement do not comply as to form in all material respects with the disclosure requirements of Item 301 of Regulation S-K of the 1933 Act; (iv) we have compared the information in the Registration Statement under selected captions with the disclosure requirements of Regulation S-K of the 1933 Act and, on the basis of limited procedures specified herein. nothing came to our attention that caused us to believe that this information does not comply as to form in all material respects with the disclosure requirements of Items 302, 402 and 503(d), respectively, of Regulation S-K; Annex A-2 EX-23.2 4 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a point of in this registration statement. /s/ Arthur Andersen LLP Chicago, Illinois October 20, 1997 EX-23.3 5 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 30, 1996, in Amendment No. 2 to the Registration Statement (Form S-3 No. 333-36433) and related Prospectus of HON INDUSTRIES Inc. for the registration of 3,395,000 shares of its common stock. We also consent to the incorporation by reference therein of our report dated January 30, 1996 with respect to the financial statement schedule of HON INDUSTRIES Inc. for the years ended December 30, 1995 and December 31, 1994, included in the Annual Report (Form 10-K) for 1996 filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Chicago, Illinois October 20, 1997 -----END PRIVACY-ENHANCED MESSAGE-----