Services Group; and Staples Commercial Advantage. The Company is also a supplier to the Office Depot, Staples, and Office Max superstores.

        The Company's product development efforts are focused on developing and providing solutions that are sensitive todeliver quality, aesthetics, style, purposeful design and are focused on reducing the cost to manufacture existing products.

        An important element of the Company's success has been its member-owner culture, which has enabled it to attract, develop, retain, and retainmotivate skilled, experienced and efficient members. Each of the Company's eligible members own stock in the Company through a number of stock-based plans, including a member stock purchase plan and a profit-sharing retirement plan, which drives a unique level of commitment to the Company's success throughout the entire workforce. In addition, most production members are eligible for incentive bonuses.

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        For further financial-related information with respect to acquisitions, dispositions,restructuring, and Company operations in general, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and the following captions included in the Notes to Consolidated Financial Statements, which are filed as part of this report: Nature of Operations, Business Combinations, and Operating Segment Information.

Industry

        According to the Business and Institutional Furniture Manufacturer's Association ("BIFMA"), U.S. office furniture industry shipments are estimated to be approximately $8,890,000,000$8,505,000,000 in 2002,2003, a decrease of 19.0%4.3% compared to 2001,2002, which was a 17.4%19.0% decrease from 20002001 levels. The Company believes that the decrease was due to lower corporate profits and prevailing economic conditions.

        The U.S. office furniture market consists of two primary segments—the project or contract segment and the commercial segment. The project segment has traditionally been characterized by sales of office furniture and services to large corporations, such as for new office facilities, relocations, or department or office redesigns, which are frequently customized to meet specific client and designer preferences. Project furniture is generally purchased through office furniture dealers who typically prepare a custom-designed office layout emphasizing image and design. The selling process is often complex and lengthy and generally has several manufacturers competing for the same projects.

        The commercial 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 furniture and products dealers publish periodic catalogs that display office furniture and products from various manufacturers.

        The Company also competes in the domestic hearth industry, where it is a market leader. Hearth products are typically purchased by builders during the construction of new homes and homeowners during the renovation of existing homes. Both types of purchases involve seasonality with retrofit activity being concentrated in the September to December time frame. Distribution is primarily accomplished through independent dealers, who may buy direct from the manufacturer or from an intermediate distributor. The Company sells approximately 70% of its products to the new construction/builder channel.

Growth Strategy

        The Company's strategy is to build on its position as a leading manufacturer of office furniture and hearth products in North America. The components of this growth strategy are to introduce new products, build brand equity, continually reduce costs, provide outstanding customer satisfaction by

focusing on the end-user, strengthen the distribution network, respond to global competition, pursue complementary strategic acquisitions, and enter markets not currently being served.

Employees/Members

        As of December 28, 2002,January 3, 2004, the Company employed approximately 8,8008,900 persons, 8,500 of whomwho were members and 300400 of whomwho were temporary personnel. Of the approximately 8,800 persons employed by the Company, 4,700 were in the Company's manufacturing operations. The Company employed approximately 400300 members who were members of unions. The Company believes that its labor relations are good.

Products and Solutions

Office Furniture

        The Company designs, manufactures, and markets a broad range of office furniture in four basic categories: (i) storage, including vertical files, lateral files, pedestals, and high density filing; (ii) seating, including task chairs, executive desk chairs, conference/training 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 throughunder the Company's wholly owned subsidiaries—The HON Company, Allsteel Inc.brands—HON®, Maxon Furniture Inc.Allsteel®, The Gunlocke Company,Maxon®, Gunlocke®, Paoli® and Holga Inc.Holga®.

        The following is a description of the Company's major product categories and product lines:

Storage

        The Company offers a variety of storage options designed either to be integrated into the Company's office systems products or to function as freestanding furniture in office applications. The Company sells most of its freestanding storage through independent office products and office furniture dealers, nationwide chains of office products dealers, wholesalers, office products superstores, warehouse clubs, and mail order distributors.

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Seating

        The Company's seating line includes chairs designed for all types of office work. The chairs are available in a variety of frame colors, coverings, and a wide range of price points. Key customer criteria in seating includes superior design, ergonomics, aesthetics, comfort, and quality.

Office Systems

        The Company offers a complete line of office panel systems products in order to meet the needs of a wide spectrum of organizations. Systems may be used for team worksettings,work settings, private offices and open floor plans, and are typically modular and movable workspaces composed of adjustable partitions, work surfaces, desk extensions, storage cabinets and electrical lighting systems which can be moved, reconfigured and reused within the office. Panel systems offer a cost-effective and flexible alternative to traditional drywall office construction. A typical installation of office panels often includes associated sales of seating, storage, 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 its office system products.

Desks and Related Products

        The Company's collection of desks and related products include stand-alone steel, laminate and wood furniture items, such as desks, bookshelves, credenzas and mobile desking, and are available in a

range of designs and price points. 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 tables designed for use in conference rooms, private offices, training areas, team worksettingswork settings and open floor plans.

Hearth Products

        The Company is the largest U.S. manufacturer and marketer of metal prefabricated fireplaces and related products, primarily for the home, which it sells under the widely recognized Heatilator, Heat-N-Glo,Heatilator®, Heat-N-Glo®, and Quadra-FireQuadra-Fire® brand names.

        The Company's line of hearth products includes electric, wood-, pellet-, and gas-burning fireplaces and stoves, fireplace inserts, chimney systems, and related accessories. HeatilatorHeatilator® and Heat-N-GloHeat-N-Glo® are brand leaders in the two largest segments of the home fireplace market: vented-gas and wood fireplaces. The Company is the leader in "direct vent" fireplaces, which replace the chimney-venting system used in traditional fireplaces with a less expensive vent through an outer wall. See Business—Intellectual Property for additional details.

Manufacturing

        The HON Company manufactures office furniture in Alabama, California, Georgia, Iowa, Kentucky, New York, North Carolina, Virginia, Washington, and Monterrey, Mexico. Allsteel Inc. manufactures office furniture in Iowa, Pennsylvania, and Tennessee. Holga Inc. manufactures office furniture in California. The Gunlocke Company manufactures office furniture in New York. Maxon Furniture Inc. manufactures office furniture in North Carolina and Washington. Hearth & Home Technologies Inc. manufactures hearth products in Iowa, Maryland, Minnesota, and Washington.

        The Company purchases raw materials and components from a variety of suppliers, and generally most items are available from multiple sources. Major raw materials and components include coil steel, bar stock, castings, lumber, veneer, particle board,particleboard, fabric, paint, lacquer, hardware, plastic products, and shipping cartons.

        Since its inception, the Company has focused on making its manufacturing facilities and processes more flexible while at the same time reducing costs and improving product quality. In 1992, the Company adopted the principles of RCI, which focus on developing flexible and efficient design, manufacturing and administrative processes that remove excess cost. To achieve flexibility and attain efficiency goals, the Company has adopted a variety of production techniques including cellular manufacturing, focused factories, just-in-time inventory management, value engineering, business simplification, and 80/20 principles. The application of the RCI process has increased productivity by reducing set-up and processing times, square footage, inventory levels, product costs and delivery times, while improving quality and enhancing member safety. The Company's RCI process involves production and administrative employees, management, customers and suppliers. The Company has facilitators,

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coaches and consultants dedicated to the RCI process and strives to involve all members in the RCI process. In addition, the Company has organized a group that designs, fabricates, tests and installs proprietary manufacturing equipment. Manufacturing also plays a key role in the Company's concurrent product development process that primarily seeks to design new products for ease of manufacturability.

Product Development

        The Company's product development efforts are primarily focused on developing end-user solutions that are sensitive to quality, aesthetics, style, purposeful design, and on reducing the cost to manufacture existing products. The Company accomplishes this through improving existing products, extending product lines, applying ergonomic research, improving manufacturing processes, applying alternative materials and providing engineering support and training to its operating units. The Company conducts its product development efforts at both the corporate and operating unit level. At the corporate level, the staff at the Company's Stanley M. Howe Technical Center, working in conjunction with operating staff, seeks breakthrough developments in product design, manufacturability and materials usage. At the operating unit level, development efforts are focused on achieving incremental improvements in product features

and manufacturing processes. The Company invested approximately $25.8 million, $21.4$25.8 million and $18.9$21.4 million, in product development during fiscal 2003, 2002, 2001, and 2000,2001, respectively, and has budgeted in excess of $25$28 million for product development in fiscal 2003.2004.

Intellectual Property

        As of December 28, 2002,January 3, 2004, the Company owned 245263 U.S. and 118221 foreign patents and had applications pending for 7875 U.S. and 113104 foreign patents. In addition, the Company holds registrations for 145154 U.S. and 208233 foreign trademarkstrademark registrations and hashave applications pending for 3526 U.S. and 4150 foreign trademarks.

        The Company's principal office furniture products do not require frequent technical changes. The majority of the Company's office furniture patents are design patents which expire at various times depending on the patent's date of issuance. The Company believes that neither any individual office furniture patent nor the Company's office furniture patents in the aggregate are material to the Company's business as a whole.

        The Company's patents covering its hearth and home products, protect various technical innovations and expire at various times, depending upon each patent's date of filing. While the acquisition of patents reflects Hearth & Home Technologies Inc'sInc.'s position in the market as an innovation leader, the Company believes that neither any individual hearth and home product's patent nor the Company's hearth and home patents in the aggregate are material to the Company's business as a whole.

        The Company applies for patent protection when it believes the expense of doing so is justified, and the Company believes that the duration of its registered patents is adequate to protect these rights. The Company also pays royalties in certain instances for the use of patents on products and processes owned by others.

        The Company actively protects its trademarks that it believes have significant value.

Sales and Distribution: Customers

        In 2002,2003, the Company's ten largest customers represented approximately 37%36% of its consolidated net sales. The substantial purchasing power exercised by large customers may adversely affect the prices at which the Company can successfully offer its products. In addition, there can be no assurance that the Company will be able to maintain its customer relationships as consolidation of its customers occur.

        The Company today sells its products through six principal distribution channels. The first channel, independent, local office furniture and office products dealers, specialize in the sale of a broad range of office furniture and office furniture systems, mostly to small- and medium-sized businesses, branch offices of large corporations, and home office owners.

        The second distribution channel comprises nationwide chains of office products dealers, or "mega-dealers,"national supply dealers," including Boise Cascade Corporation; Corporate Express Inc., A Buhrmann Company; Office Depot Business Services Group; and Staples Commercial Advantage. Many of the independent dealers and mega-dealernational supply dealer locations assist their customers with the evaluation of office space requirements, systems layout and product selection, and design and office solution services provided by professional designers.

        The third distribution channel, corporate accounts, is where the Company has the direct selling relationship with the end-user. Installation is normally provided through a dealer.

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        The fourth distribution channel, wholesalers, serve as distributors of the Company's products to independent dealers, mega-dealersnational supply dealers and superstores. The Company sells to the nation's largest wholesalers, United Stationers and S.P. Richards, as well as to regional wholesalers. Wholesalers maintain inventory of standard product lines for resale to the various retailers. They also special order

products from the Company in customer-selected models and colors. The Company's wholesalers maintain warehouse locations throughout the United States, which enable the Company to make its products available for rapid delivery to retailers anywhere in the country. One customer, United Stationers, accounted for approximately 14%13% of the Company's consolidated net sales in 2003, and 14% in 2002 2001, and 2000.2001.

        The fifth distribution channel is retail stores, which include office products superstores such as Office Depot, Office Max, and Staples and warehouse clubs like Costco and Sam's Club.

        The sixth distribution channel consists of government-focused dealers that sell the Company's products to federal, state and local government offices.

        The Company's office furniture sales force consists of regional sales managers, salespersons, and firms of independent manufacturers' representatives who collectively provide national sales coverage. Sales managers and salespersons are compensated by a combination of salary and incentive bonus.

        Office products dealers, national wholesalers and retailers market their products over the internetInternet and through catalogs published periodically. These catalogs are distributed to existing and potential customers. The Company believes that the inclusion of the Company's product lines in customer catalogs and e-business offers strong potential for increased sales of the listed product items due to the exposure provided.

        The Company also makes export sales through HON International Inc. to office furniture dealers and wholesale distributors serving select foreign markets. Distributors are principally located in Latin America and the Caribbean. Sales outside of the United States and Canada represented approximately 1% of net sales in fiscal 2002.2003.

        Limited quantities of select finished goods inventories built to order awaiting shipment are at the Company's principal manufacturing plants and at its various distribution centers.

        Hearth & Home Technologies Inc. sells its fireplace and stove products through dealers, distributors and Company-owned retail outlets. The Company has a field sales organization of regional sales managers, salespersons, and firms of independent manufacturers' representatives.

        As of December 28, 2002,January 3, 2004, the Company had an order backlog of approximately $87.1$94.1 million which will be filled in the ordinary course of business within the first few weeks of the current fiscal year. This compares with $87.1 million as of December 28, 2002, and $93.9 million as of December 29, 2001, and $111.2 million as of December 30, 2000.2001. Backlog, in terms of percentage of net sales, was 5.1%5.4%, 5.2%5.1%, and 5.4%5.2%, for fiscal years 2003, 2002, 2001, and 2000,2001, respectively. The Company's products are manufactured and shipped within a few weeks following receipt of order. The dollar amount of the Company's order backlog is therefore not considered by management to be a leading indicator of the Company's expected sales in any particular fiscal period.

        For a discussion of the seasonal nature of the Company's sales, see Operating Segment Information in the Notes to Consolidated Financial Statements.

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 and unsurpassed customer service. 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. (a Canadian company); Kimball Office Furniture Co.; Chromcraft; Paoli; and Teknion (a Canadian company), as well as Asianglobal imports. Second, the Company competes with the large office furniture manufacturers which control a substantial portion of the market share in the project-oriented

office furniture market, such as Steelcase Inc.; Haworth, Inc.; Herman Miller, Inc.; and Knoll, Inc. Products and brands offered by these project-oriented office furniture market participants have strong acceptance in the market place and have developed, and may continue to develop product designs to compete with the Company. The Company also faces significant price competition from its competitors and may encounter competition from new market entrants. There can be no assurance that the Company will be able to compete successfully in its markets in the future.

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        Hearth products, consisting of prefabricated fireplaces and related products, are manufactured by a number of national and regional competitors. The Company competes primarily against the other large manufacturers which include CFM Majestic Inc. (a Canadian company) and Lennox Industries Inc.

        Both office furniture and hearth products compete on the basis of performance, quality, price, and complete and on-time delivery to the customer, and customer service and support. The Company believes that it competes principally by providing compelling value products designed to be among the best in their price range for product quality and performance, superior customer service, and short lead-times. This is made possible, in part, by the Company's significant on-going investment in product development, highly efficient and low cost manufacturing operations, and an extensive distribution network.

        The Company is one of the largest office furniture manufacturers in the United States, and believes that it is the largest manufacturerprovider of middle-market furniture.furniture to small and medium sized workplaces. The Company is also the largest manufacturer and marketer of fireplaces in the United States.

        For further discussion of the Company's competitive situation, refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Effects of Inflation

        Certain business costs may, from time to time, increase at a rate exceeding the general rate of inflation. The Company's objective is to offset the effect of inflation on its costs primarily through productivity increases in combination with certain adjustments to the selling price of its products as competitive market and general economic conditions permit.

        Investments are routinely made in modernizing plants, equipment, support systems, and for RCI programs. These investments collectively focus on business simplification and increasing productivity which helps to offset the effect of rising material and labor costs. Ongoing cost control disciplines are also routinely employed. In addition, the last-in, first-out (LIFO) valuation method is used for most of the Company's inventories, which ensures the changing material and labor costs are recognized in reported income; and more importantly, these costs are recognized in pricing decisions.

Environmental

        The Company is subject to a variety of environmental laws and regulations governing discharges of air and water; the handling, storage, and disposal of hazardous or solid waste materials; and the remediation of contamination associated with releases of hazardous substances. Although the Company believes it is in material compliance with all of the various regulations applicable to its business, there can be no assurance that requirements will not change in the future or that the Company will not incur material costs to comply with such regulations. The Company has trained staff responsible for monitoring compliance with environmental, health, and safety requirements. The Company's environmental professionals work with responsible personnel at each manufacturing facility, the Company's environmental legal counsel, and consultants on the management of environmental, health and safety issues. The Company's ultimate goal is to reduce and, when practical, eliminate the creation of hazardous waste in its manufacturing processes.

        Compliance with federal, state, and local environmental regulations has not had a material effect on the capital expenditures, earnings, or competitive position of the Company to date. The Company does not anticipate that financially material capital expenditures will be required during fiscal year 20032004 for environmental control facilities. It is management's judgment that compliance with current regulations should not have a material effect on the Company's financial condition or results of operations. However, the uncertainty of new environmental legislation and technology in this area makes it impossible to know with confidence.

Business Development

        The development of the Company's business during the fiscal years ended January 3, 2004, December 28, 2002, and December 29, 2001, and December 30, 2000, is discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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Available Information

        Information regarding the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at the Company's internet website atwww.honi.com,, as soon as reasonably practicable after the Company electronically files such reports with or furnishes them to the Securities and Exchange Commission.

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ITEM 2. PROPERTIES

        The Company maintains its corporate headquarters in Muscatine, Iowa, and conducts its operations at locations throughout the United States, Canada, and Mexico which house manufacturing, distribution, and retail operations and offices totaling an aggregate of approximately 8.68.2 million square feet. Of this total, approximately 2.11.7 million square feet are leased, including approximately 0.3 million square feet under a capital lease.

        Although the plants are of varying ages, the Company believes they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. The Company has sufficient capacity to increase output at most locations by increasing the use of overtime and/or number of production shifts employed.

        The Company's principal manufacturing and distribution facilities (100,000 square feet in size or larger) are as follows:

(1)

Also includes a regional warehouse/distribution center

(2)

A capital lease

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        Other Company facilities, under 100,000 square feet in size, are located in various communities throughout the United States and Canada. These facilities total approximately 1,127,0001,369,000 square feet with approximately 247,000436,000 square feet used for the manufacture and distribution of office furniture and approximately 880,000933,000 square feet for hearth products. Of this total, approximately 836,000843,000 square feet are leased. In addition, the Company has two facilities that have been vacated. One is marketed for sale and the other is a leased facility. The Company also leases sales showroom space in office furniture market centers in several major metropolitan areas.

        The Company has a 40,000 square foot leased plant in Savage, Minnesota, and a 10,000 square foot leased plantfacility in Wilmington, North Carolina, which areis subleased.

        There are no major encumbrances on Company-owned properties. Refer to the Property, Plant, and Equipment note in the Notes to Consolidated Financial Statements for related cost, accumulated depreciation, and net book value data.

ITEM 3. LEGAL PROCEEDINGS

        The Company is involved in various kinds of disputes and legal proceedings whichthat have arisen in the course of its business, including pending litigation, preferential payment claims in customer bankruptcies, environmental remediation, taxes, and other claims. The Company currently has one preferential paymenta claim outstanding totalingfor approximately $7.6 million.million pending against it arising out of the bankruptcy of a customer filed in 2001. The Company was named a critical vendor by the bankruptcy court and, accordingly, was paid in full for all outstanding receivables. The claim alleges that the Company received preferential payments from the customer during the ninety days before the customer filed for bankruptcy protection. The claim was brought in February 2003. The Company has recorded an accrual with respect to this contingency, in an amount substantially less than the full amount of the claim, which represents the best estimate within the range of likely exposure and intends to vigorously contestdefend against the claim. Given the nature of this claim, however,it is possible that the ultimate outcome or likelihood of this specific claim cannot be determined at this time.could differ from the recorded amount. It is our opinion, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on our financial condition, although such matters could have a material effect on our quarterly or annual operating results and cash flows when resolved in a future period.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

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PART I, TABLE I

EXECUTIVE OFFICERS OF THE REGISTRANT
January 3, 2004

December 28, 2002

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's common stock is listed for trading on the New York Stock Exchange (NYSE), trading symbol HNI. The Company moved to the NYSE, effective July 2, 1998, from the Nasdaq National Market System where the stock had traded under the symbol HONI. As of year-end 2002,2003, the Company had 6,7776,416 stockholders of record.

        Computershare Investor Services, L.L.C., Chicago, Illinois, serves as the Company's transfer agent and registrar of its common stock. Shareholders may report a change of address or make inquiries by writing or calling: Computershare Investor Services, L.L.C., P.O. Box 1689, Chicago, IL 60690-1689 or telephone 312/588-4991.

        Common Stock Market Prices and Dividends (Unaudited) and Common Stock Market Price and Price/Earnings Ratio (Unaudited) are presented in the Investor Information section which follows the Notes to Consolidated Financial Statements filed as part of this report.

        The Company expects to continue its policy of paying regular quarterly cash dividends. Dividends have been paid each quarter since the Company paid its first dividend in 1955. The average dividend payout percentage for the most recent three-year period has been 31%32% of prior year earnings. Future dividends are dependent on future earnings, capital requirements, and the Company's financial condition.

13        The following table provides information as of January 3, 2004, about the Company's securities which may be issued under the Company's equity-based compensation plans.

(THIS PAGE INTENTIONALLY LEFT BLANK)

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ITEM 6. SELECTED FINANCIAL DATA—ELEVEN-YEAR SUMMARY

(a)

Per SFAS No. 142 "Goodwill and Other Intangible Assets," the Company has ceased recording of goodwill and indefinite-lived Intangible amortization.

(b)

Includes acquisitions completed during year.

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(a)

Per SFAS No. 142 "Goodwill and Other Intangible Assets," the Company has ceased recoding of goodwill and indefinite-lived Intangible amortization.

(b)

Includes acquisitions completed during year.

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

        The following discussion of the Company's historical results of operations and of its liquidity and capital resources should be read in conjunction with the Consolidated Financial Statements of the Company and related notes.

Overview

        The Company has two reportable core operating segments: office furniture and hearth products. The Company is the second largest office furniture manufacturer in the United States and the nation's leading manufacturer and marketer of gas- and wood-burning fireplaces.

        From 2000 to 2003, the office furniture industry experienced an unprecedented three-year decline due to the challenging economic environment. In 2003, this decline negatively impacted the Company's office furniture segment. In contrast, the housing market was at record high levels during 2003, which positively impacted the Company's hearth segment. The Company outperformed its peers in both segments in which it competes. The Company gained market share by providing strong brands, innovative products and services and greater value to its end-users. Fiscal 2003 also included an extra week of activity due to the Company's 52/53-week fiscal year.

        Net sales were $1.8 billion in 2003 as compared to $1.7 billion in 2002. The increase in net sales reflects the 9% increase in the hearth segment and the additional week of business activity. In 2003 and 2002 the Company recorded restructuring charges and accelerated depreciation related to the closure and consolidation of office furniture facilities totaling $15.2 million and $3.0 million respectively. Gross margins increased to 36.4% in 2003 from 35.4% in 2002 due to benefits from restructuring initiatives and its rapid continuous improvement program, new products, and increased price realization. The Company also invested aggressively in brand building and selling initiatives in 2003. Net income was $98.1 million or $1.68 per diluted share in 2003 as compared to $91.4 million or $1.55 per diluted share in 2002.

        The Company generated $141.3 million in cash flow from operating activities and increased its cash position, including short-term investments, by $48.6 million to $204.2 million. The Company paid dividends of $30.3 million and repurchased $21.5 million of its common stock, while investing $35.7 million in net capital expenditures and repaying $20.2 million of debt.

Critical Accounting Policies and Estimates

General

        Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon the Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions.

        An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.

Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

Fiscal year end—The Company's fiscal year ends on the Saturday nearest December 31. Fiscal year 2003, the year ended January 3, 2004, contained 53 weeks while fiscal year 2002, the year ended December 28, 2002 and fiscal year 2001, the year ended December 29, 2001 contained 52 weeks. A 53-week year occurs approximately every sixth year.

Revenue recognition—Revenue is normally recognized upon shipment of goods to customers. In certain circumstances revenue is not recognized until the goods are received by the customer or upon installation and customer acceptance based on the terms of the sale agreement. Revenue includes freight charged to customers; related costs are included in selling and administrative expense. Rebates, discounts, and other marketing program expenses directly related to the sale are recorded as a reduction to net sales. Marketing program accruals require the use of management estimates and the consideration of contractual arrangements subject to interpretation. Customer sales that reach certain award levels can affect the amount of such estimates, and actual results could differ from these estimates. Future market conditions may require increased incentive offerings, possibly resulting in an incremental reduction in net sales at the time the incentive is offered.

Allowance for doubtful accounts receivable—The allowance for receivables is based on several factors including overall customer credit quality, historical write-off experience and specific account analysis that project the ultimate collectibility of the account. As such, these factors may change over time causing the reserve level to adjust accordingly.

        When it is determined that a customer is unlikely to pay, a charge is recorded to bad debt expense in the income statement and the allowance for doubtful accounts is increased. When it becomes certain the customer cannot pay, the receivable is written off by removing the accounts receivable amount and reducing the allowance for doubtful accounts accordingly.

        At January 3, 2004, there was approximately $192 million in outstanding accounts receivable and $11 million recorded in the allowance for doubtful accounts to cover all potential future customer non-payments. However, if economic conditions deteriorate significantly or one of our large customers were to declare bankruptcy, a larger allowance for doubtful accounts might be necessary. The allowance for doubtful accounts was approximately $10 million and $17 million at year end 2002 and 2001, respectively.

Inventory valuation—The Company values 96% of its inventory by the last-in, first-out (LIFO) method. Additionally, the Company evaluates inventory reserves in terms of excess and obsolete exposure. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate product sales value. As such, these factors may change over time causing the reserve level to adjust accordingly.

Long-lived assets—Long-lived assets are reviewed for impairment as events or changes in circumstances occur indicating that the amount of the asset reflected in the Company's balance sheet may not be recoverable. An estimate of undiscounted cash flows produced by the asset, or the appropriate group of assets, is compared to the carrying value to determine whether impairment exists. The estimates of future cash flows involve considerable management judgment and are based upon assumptions about future operating performance. The actual cash flows could differ from management's estimates due to changes in business conditions, operating performance, and economic conditions. Asset impairment charges associated with the Company's restructuring activities are discussed in the Restructuring Related Charges note.

        The Company's continuous focus on improving the manufacturing process tends to increase the likelihood of assets being replaced; therefore, the Company is constantly evaluating the expected useful lives of its equipment which can result in accelerated depreciation. Additionally, the Company recorded

losses on the disposal of assets in the amount of $1 million and $5 million in 2003 and 2002, respectively, as a result of its rapid continuous improvement initiatives.

Goodwill and other intangibles—In accordance with the Statement of Financial Accounting Standards ("SFAS") No. 142, the Company evaluates its goodwill for impairment on an annual basis based on values at the end of third quarter or whenever indicators of impairment exist. The Company has evaluated its goodwill for impairment and has determined that the fair value of the reporting units exceeded their carrying value, so no impairment of goodwill was recognized. Goodwill of approximately $192 million is shown on the consolidated balance sheet as of the end of fiscal 2003.

        Management's assumptions about future cash flows for the reporting units require significant judgment and actual cash flows in the future may differ significantly from those forecasted today. We believe our assumptions used in discounting future cash flows would have no impact on the reported carrying amount of goodwill. The estimated future cash flow for any reporting unit could be reduced by 50% without decreasing the fair value to less than the carrying value.

        The Company also determines the fair value of an indefinite lived trademark on an annual basis or whenever indication of impairment exist. The Company has evaluated its trademark for impairment and has determined that the fair market value of the trademark exceeds its carrying value, so no impairment was recognized. The carrying value of the trademark was approximately $8 million at the end of fiscal 2003.

Self-insurance reserves—The Company is partially self-insured for general liability, product liability, workers' compensation, and certain employee health benefits. The general, product, and workers' compensation liabilities are managed using a wholly owned insurance captive; the related liabilities are included in the accompanying financial statements. The Company's policy is to accrue amounts in accordance with the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as claims, medical costs, and changes in actual experience could cause these estimates to change in the near term.

Stock-based compensation—The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results in no charge to earnings when options are issued at fair market value. SFAS No. 123, "Accounting for Stock-Based Compensation" issued subsequent to APB No. 25 and amended by SFAS No. 148 "Accounting for Stock Based Compensation—Transition and Disclosure" defines a fair value based method of accounting for employee stock options but allows companies to continue to measure compensation cost for employee stock options using the intrinsic value based method described in APB No. 25.

        The Company has no immediate plans at this time to voluntarily change its accounting policy to the fair value based method; however, the Company continues to evaluate this alternative. In accordance with SFAS No. 148, the Company has been disclosing in the Notes to the Consolidated Financial Statements the impact on net income and earnings per share had the fair value based method been adopted. If the fair value method had been adopted net income for 2003, 2002, and 2001 would have been $3 million, $2.2 million, and $1.4 million lower than reported and earnings per share would have been reduced approximately $0.06, $0.04 and $0.02 per diluted share, respectively.

Recent Accounting Pronouncements

        See the Notes to the Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial conditions.

Results of Operations

        The following table sets forth the percentage of consolidated net sales represented by certain items reflected in the Company's statements of income for the periods indicated.

        The Company has two reportable core operating segments: office furniture and hearth products. The Operating Segment Information note included in the Notes to Consolidated Financial Statements provides more detailed financial data with respect to these two segments.

Fiscal Year Ended December 28, 2002, Compared to Fiscal Year Ended December 29, 2001

Net Sales

        Net sales onincreased 3.7% in 2003 and decreased 5.6% in 2002. The increase in 2003 was due to the extra week in 2003 as a consolidated basis, decreased by 5.6% to $1.69 billionresult of the Company's 52/53-week fiscal year and strong performance in the hearth products segment. The decrease in 2002 from $1.79 billionwas due to the decline in 2001. Officethe office furniture market due to unstable economic conditions and the deletion of less profitable product lines in the hearth products segment.

Gross Profit

        Gross profit as a percent of net sales decreased 6.4%improved 1.0 percentage point in 2003 as compared to fiscal 2002 and 1.3 percentage points in 2002 to $1.28 billion from $1.37 billion in 2001. The decline in sales occurred in all sectors. The Business and Institutional Furniture Manufacturer's Association (BIFMA) reported a decrease in shipments of 19% in 2002as compared to 2001. The Company's share of the market based on reported office furniture shipments increased to 14.4% versus 12.4% in 2001. Net sales of hearth products decreased 2.9% to $.41 billion in 2002 from $.43 billion in 2001. The decrease was mainly due to the effect of pruning out less profitable product lines.

Gross Profit

        Gross profit dollars decreased 2% to $599.9 million in 2002 from $611.3 million in the prior year. The gross margin percentage increased to 35.4% for 2002 from 34.1% in 2001 despite a negative impact from increased steel prices, due to steel tariffs, of approximately $5 million during the second half of the year. The improvement in gross marginboth periods was a direct result of the continued net benefits of rapid continuous improvement, restructuring initiatives, business simplification, new product introductions,products, and restructuring initiatives. During 2002, theimproved price realization. Included in 2003 gross profit was $6.7 million of accelerated depreciation, which reduced gross profits 0.4 percentage points. The Company recognized a loss on asset disposals into cost of products soldexpects to mitigate any future increases in the amount of approximately $5.0 million in relation tomaterial costs through various initiatives, including alternative materials and suppliers and its continued rapid continuous improvement initiatives.program.

Selling and Administrative Expenses

        Selling and administrative expenses, excluding restructuring charges, increased 5.8% in 2003 and decreased by 2% to $454.2 million2.2% in 2002 from $464.2 million2002. The increase in 2001. Selling and administrative expenses, as a percent of net sales, increased to 26.8% in 2002 from 25.9% in the prior year. This increase2003 was due to additional investment of approximately $14 million in brand building and selling initiatives, and increased freight costs of $7 million due to rate increases, fuel surcharges and volume. The decrease in 2002 was due to no longer amortizing goodwill and certain other intangible assets of approximately $9 million and lower overall sales volume, offset by increased investment in brand equity building and new product development of approximately $7 million, and increased incentive compensation of which a portionapproximately $4 million was for a debenture earn out related to a prior acquisition. Included in 2001 was $9 million of goodwill and certain other intangible amortization that is not included in 2002 due to a change in accounting standards effective December 30, 2001.

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        Selling and administrative expenses include freight expense for shipments to customers, product development costs, and amortization expense of intangible assets. The Selling and Administrative Expenses note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items.

Restructuring Related Charges

        During 2003, the Company closed two office furniture facilities and consolidated production into other U.S. manufacturing locations to increase efficiencies, streamline processes and reduce overhead costs. The two facilities were located in Hazleton, Pennsylvania and Milan, Tennessee. In connection with the closures, the Company recorded $15.7 million of pre-tax charges or $0.17 per diluted share. These charges included $6.7 million of accelerated depreciation of machinery and equipment which was recorded in cost of sales, $3.4 million of severance and $5.6 million of facility exit, production relocation, and other costs which were recorded as restructuring costs. A total of 316 members were terminated and received severance due to these shutdowns. The closures are substantially complete. The Company anticipates additional costs of $0.3 to $0.5 million during the first quarter of 2004 related to these closures.

        The Hazleton, Pennsylvania facility is an owned facility and has been reclassified to current assets as it is currently being held as available for sale. It is included in the "Prepaid expenses and other current assets" in the January 3, 2004, condensed consolidated balance sheet at its carrying value of $2.1 million. The Milan, Tennessee facility is a leased facility that is no longer being used in the production of goods. The restructuring expense for 2003 included $1.4 million of costs that will continue to be incurred under the lease contract reduced by estimated sublease rentals that could be reasonably obtained.

        During 2002, the Company recorded a pre-taxpretax charge of approximately $5.4 million due to the shutdown of an office furniture facility in Jackson, Tennessee. A total of 125 members were terminated and received severance due to this shutdown. During the second quarter of 2003, a restructuring credit of approximately $0.6 million or $0.01 per diluted share was taken back into income relating to this charge. This was due to the fact that the Company was able to exit a lease with the lessor at more favorable terms than previously estimated.

        During the second quarter of 2001, the Company recorded a pretax charge of $24 million or $0.26 per diluted share for a restructuring plan that involved consolidating physical facilities, discontinuing low-volume product lines, and reductions of workforce. Included in the charge was the closedown of three of its office furniture facilities located in Williamsport, Pennsylvania; Tupelo, Mississippi; and Santa Ana, California. Approximately 500 members were terminated and received severance due to the closedown of these facilities. During the second quarter of 2002, a restructuring credit of approximately $2.4 million was taken back into income relating to a restructuring charge of $24.0 million that was recorded in second quarter 2001 for a restructuring plan that included consolidating physical facilities, discontinuing low volume product lines, and reducing the workforce.this charge. This credit was mainly due to the fact that the Company was able to exit a lease with a lessor at more favorable terms than originally estimated and the Company's ability to minimize the number of members terminated as compared to the original plan. The Restructuring Related Charges note included in the Notes to Consolidated Financial Statements provides further information.

Operating Income

        Operating income increased 5% in 2003 and 16% to $142.7 million in 2002, from $123.1 millionrespectively. The increase in 2001.    This2003 is due to the additional week, strong sales volume in the hearth segment, and improved gross margins in both segments, offset by increased restructuring charges due to additional plant closures and consolidations, increased investment in brand building and selling initiatives, and increased freight costs. The increase isin 2002 was due to a $24 million restructuring charge in 2001 compared to a $3 million restructuring charge in 2002 and goodwill and indefinite-lived intangibles amortization of $9 million incurred in 2001 that is not included in 2002 due to a change in accounting standards. Operating profit in the office furniture segment increased in 2002 as a percent of net sales to 10.2% compared to 8.2% in 2001. The increase is due to cost reduction, new product introductions, and restructuring initiatives. Operating profit in the hearth products segment as a percent of sales increased to 10.8% compared to 9.2% in 2001 due to discontinuance of goodwill and indefinite-lived intangible amortization of approximately $7 million.

Net Income

        Net income increased by7% in 2003 and 23% to $91.4 million in 2002, from $74.4 millionrespectively. Net income in the prior year. Included in 20012003 was $5.8 million of goodwill and other intangible amortization expense that was not included in 2002favorably impacted by increased interest income due to a changeincreased investments and decreased interest expense due to reduction in accounting standards effective December 30, 2001. Also included in 2001 was an after tax restructuring charge of $15.4 million.debt. Net income in 2002 was favorably impacted by a decrease in interest expense and a decrease in the effective tax rate in the fourth quarter to 35% in 2002 from 36% in 2001 due to tax benefits associated with various federal and state tax credits. The Company currently expects the effectiveanticipates that its tax rate will increase to remain at this level for 2003; however the resolution of certain36% in 2004 due to increased state taxes and a reduced benefit from federal and state tax credits could further affect the rate.credits. Net income per commondiluted share increased by 8% to $1.68 in 2003 and by 23% to $1.55 in 2002, from $1.26respectively. Due to the appreciation in 2001.the Company's stock price, outstanding options had a dilutive impact of $0.01 per share in 2003.

Fiscal Year Ended December 29, 2001, Compared to Fiscal Year Ended December 30, 2000Office Furniture

Net Sales

        Office furniture comprised 74% of consolidated net sales for 2003 and 76% of consolidated net sales for 2002 and 2001. Net sales on a consolidated basis,for office furniture increased 2% in 2003 and decreased by 12%6% in 2002. The increase in 2003 is due to $1.8 billion in 2001the increased week from $2.0 billion in 2000. Office furniture net sales decreased 17% in 2001 to $1.37 billion from $1.65 billion in 2000. The decline in sales occurred in the retail, commercial and contract sectors.Company's⁵²/53-week fiscal year. The office furniture industry has experienced an unprecedented three-year decline in shipments. The Business and Institutional Furniture Manufacturer's Association (BIFMA) reported a decrease2003 shipments down over 5% and 2002 shipments down 19%. The Company's estimated share of the market based on reported office furniture shipments increased to 15.3% in shipments of 17% in 20012003 compared to 2000. Net sales of hearth14.4% in 2002 and 12.4% in 2001. This increase was achieved by providing strong brands, innovative products increased 8%and services and greater value to $.43 billion in 2001 from $.40 billion in 2000.

Gross Profitend-users.

        GrossOperating profit dollars decreased 8% to $611.3 million in 2001 from $665.9 million in the prior year. The gross margin percentage increased to 34.1% for 2001 from 32.5% in 2000. The improvement in gross margin percentage is due to new product introductions, and rapid continuous improvement, cost containment and business simplification initiatives.

Selling and Administrative Expenses

        Selling and administrative expenses decreased by 5% to $464.2 million in 2001 from $487.8 million in the prior year. Selling and administrative expenses, as a percent of net sales increased to 25.9%was 10.0% in 2001 from 23.8%

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2003, 10.2% in 2000. This increase was due to lower overall sales volume, development of new products,2002, and continued investment8.2% in sales and marketing expenses associated with the Company's business simplification, end-user focus and branding strategies.

        Selling and administrative expenses include freight expense for shipments to customers, product development costs, and amortization expenses of intangible assets. The Selling and Administrative Expenses note included in the Notes to Consolidated Financial Statements provides further information regarding the comparative expense levels for these major expense items.

Restructuring Related Charges

        During the second quarter of 2001, the Company recorded a pretax charge of $24.0 million, $15.4 million after tax or $0.26 per common share for a restructuring plan that involved consolidating physical facilities, discontinuing low volume product lines, and reduction of workforce.2001. Included in this charge was2003 were $15.2 million of net pre-tax charges related to the closedownclosure of three of itstwo office furniture facilities locatedwhich impacted operating margins by 1.1 percentage points. Included in Williamsport, Pennsylvania, Tupelo, Mississippi, and Santa Ana, California. The charge included $16.2 million of asset impairments for manufacturing equipment that will be disposed of and $7.82002 were $3.0 million of restructuring expenses. Includedcharges which impacted operating margins by 0.2 percentage points and 2001 included $22.5 million of restructuring charges which impacted operating margins by 1.7 percentage points. The increase in the $7.8 million is $3.1 million for severance arising from the elimination of approximately 600 plant member positions, $0.8 million for other member-related costs, and $3.9 million for certain other expenses associated with the closing of facilities. The Restructuring Related Charges note included in the Notes to Consolidated Financial Statements provides further information.

Operating Income

        Operating income decreased almost 31% to $123.1 million in 2001 from $178.0 million in 2000. This decreaseoperating margins is due to lower overallincreased gross profit from the benefits of restructuring initiatives, rapid continuous improvement program and increased price realization, offset by additional investments in brand building and selling initiatives and increased freight expense.

Hearth Products

        Hearth products sales volume, increased selling9% in 2003 and administrative expenses,decreased 3% in 2002, respectively. The growth in 2003 was attributable to strong housing starts, growth in market share in both the new construction and a $24.0 million restructuring charge.retail channels, strengthening alliances with key distributors and dealers, as well as focused new product introductions. The decrease in 2002 was mainly due to pruning out less profitable product lines.

        Operating profit in the office furniture segment decreased in 2001 as a percent of net sales to 8.2%in 2003 was 12.1% compared to 10.4%10.8% and 9.2% in 2000.2002 and 2001, respectively. The decrease is due to lower overallimproved profitability in 2003 was the result of leveraging fixed costs over a higher sales volume and a $22.5 million restructuring charge. Operating profitincreased sales through company-owned distribution offset by increased freight costs and higher labor costs from increased use of overtime and temporary labor to meet record level of demand. The increase in the hearth products segment increased in 2001 as a percent of net sales to 9.2% compared to 7.6% in the prior year. This improvement is2002 was mainly due to increased sales volume, simplificationdiscontinuance of the business structuregoodwill and cost containment offset by a $1.5indefinite-lived intangible amortization of approximately $7 million restructuring charge.

Net Income

        Net income decreased by 30% to $74.4 million in 2001 from $106.2 million in the prior year. The decrease is due to lower overall sales volume, increased selling and administrative expenses, and an after-tax restructuring chargethe adoption of $15.4 million offset by reduced interest expense.SFAS No.142.

        Net income per common share decreased by 29% to $1.26 in 2001 from $1.77 for 2000. The Company's net income per share performance for 2001 benefited from the Company's common stock repurchase program.

Liquidity and Capital Resources

        During 2002,2003, cash flow from operations was $202.4$141.3 million, which along with funds from stock option exercises under employee stock plans, provided the funds necessary to meet working capital needs, invest in capital improvements, repay long-term debt, repurchase common stock and pay increased dividends.

Cash Management

        Cash, cash equivalents, and short-term investments totaled $204.2 million at the end of 2003 compared to $155.5 million inat the end of 2002 compared toand $78.8 million at the end of 2001 and $3.22001. The Company used approximately $80 million at the end of 2000.cash to acquire Paoli, Inc. on January 5, 2004. These remaining funds, coupled with cash from future operations and additional long-term debt, if needed, are expected to be adequate to finance operations, planned improvement,improvements, and internal growth. The Company is not aware of any known trends or demands, commitments, events, or uncertainties that are reasonably likely to result in its liquidity increasing or decreasing in any material way.

        The Company places special emphasis on the management and reduction of its working capital with a particular focus on trade receivables and inventory levels. The success achieved in managing receivables is in large part a result of doing business with quality customers and maintaining close communicationscommunication with them. Trade receivables decreased from year-end 2000 levels due to decreased sales volume. The increase at year-end 2002 is due to increased sales volume in2003 were virtually unchanged from the fourth quarter compared to fourth quarter 2001.prior year. Trade receivable days outstanding have averaged approximately 37 to 38 days over the past three

years. Inventory levels also decreased from year-end 2000 levels due to decreased sales volume. However,The Company's inventory turns were 23, 23, and 18 for 2003, 2002, and 2001, respectively. Increased imports of raw materials and finished goods may negatively affect inventory turns in the future but the Company is ableconstantly looking for ways to continueadd efficiency to improve on

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inventory levels and turns as a result of a more efficientits supply chain. Inventory turns were 23, 18, and 17 for 2002, 2001, and 2000, respectively. The increasedecrease in accounts payable and accrued expenses is due to increased accruals for warranty,timing of vendor and marketing programs,program payments and incentive based compensation.the payment of additional purchase consideration and debenture earn out related to a prior acquisition. The Company also funded the retiree medical portion of its postretirement benefit obligation in 2003.

Investments

        The Company acquiredhas investments in 2002 that consist of investment grade equity and debt securities. Management classifies investments in marketable securities at the time of purchase and reevaluates such classification at each balance sheet date. Equity securities are classified as available-for-sale and are stated at current market value with unrealized gains and losses included as a separate component of equity, net of any related tax effect. Debt securities are classified as held-to-maturity and are stated at amortized cost. A table of holdings as of year endyear-end 2003 and 2002 is included in the Cash, Cash Equivalents, and Investments note included in the Notes to Consolidated Financial Statements.

Capital Expenditure Investments

        Capital expenditures were $34.8 million in 2003, $25.9 million in 2002, and $36.9 million in 2001, and $59.8 million in 2000.2001. Expenditures during 2003, 2002, 2001, and 20002001 have been consistently focused on machinery and equipment that is needed to support new products, process improvements, cost-savings initiatives, and creating more efficient production and warehousing capacity.cost savings initiatives. Expenditures in 2003 also included the purchase from a related party of a previously leased hearth products plant for $3.6 million.

Acquisitions

        During 2001, the Company completed the acquisition of three small hearth productproducts distributors for a total purchase price of approximately $7.6 million. The acquisitions were accounted for using the purchase method, and the results of the three distributors have been included in the Company's financial statements since the date of acquisition.

        On February 29, 2000,January 5, 2004, the Company completed the acquisition of two leading hearth products distributors, American Fireplace Company (AFC)Paoli, Inc., a provider of wood case goods and seating, for approximately $80 million. The acquisition will be accounted for using the Allied Group (Allied), establishing the Company as the leading manufacturer and distributor in the hearth products industry, for a purchase price of approximately $135 million.method.

Long-Term Debt

        Long-term debt, including capital lease obligations, was 2%1% of total capitalization at January 3, 2004, 2% at December 28, 2002, and 12% at December 29, 2001, and 18% at December 30, 2000.2001. The reductionreductions in long-term debt during 2003 and 2002 waswere due to debentures from an acquisition now being classified as current liabilities based on current due date and the retirement of Industrial Revenue Bonds and Urban Development Action Grants.Bonds. The Company does not expect future capital resources to be a constraint on planned growth. Additional borrowing capacity of $136 million, less amounts used for designated letters of credit, is available through a revolving bank credit agreement in the event cash generated from operations should be inadequate to meet future needs. Certain of the Company's credit agreements include covenants that limit the assumption of additional debt and lease obligations. The Company has been, and currently is, in compliance with the covenants related to the debt agreements.

Contractual Obligations

        The following table discloses the Company's obligations and commitments to make future payments under contracts:

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        Other long-term obligations include $14,537,000 of future minimum payments under a transportation service contract, $266,000 of financial guarantees with customers, $9,757,000includes $2,959,000 earn-out on convertible debentures included in current liabilities, $69,000 of financial guarantees with customers, and $7,796,000$8,865,000 of payments included in long-term liabilities, due to members who are participants in the Company's salary deferral program.

Related Party Transactions

        The Company has convertible debentures, with earn-out features, in the amount of $40.4 million that are payable to former owners of businesses that were acquired by the Company. These individuals remain as members of the Company following the acquisitions. The obligation associated with the earn-out provision is approximately $9.8 million at December 28, 2002.

        The Company has operating leases for office and production facilities with annual rentals totaling $450,000 with the former owners of a business acquired in 1996. One of these individuals continues as an officer of a subsidiary of the Company following the acquisition.

Cash Dividends

        Cash dividends were $0.50$0.52 per common share for 2003, $0.50 for 2002, and $0.48 for 2001, and $0.44 for 2000.2001. Further, the Board of Directors announced a 4.0%7.7% increase in the quarterly dividend from $0.13 to $0.14 per common share effective with the March 1, 2004, dividend payment for shareholders of record at the close of business February 20, 2004. The previous quarterly dividend increase was from $0.125 to $0.13, per common share effective with the February 28, 2003, dividend payment for shareholders of record at the close of business on February 21, 2003. The previous quarterly dividend increase was from $0.12 to $0.125, effective with the March 1, 2002, dividend payment for shareholders of record at the close of business February 22, 2002. A cash dividend has been paid every quarter since April 15, 1955, and quarterly dividends are expected to continue. The average dividend payout percentage for the most recent three-year period has been 31%32% of prior year earnings.

Common Share Repurchases

        During 2003, the Company repurchased 762,300 shares of its common stock at a cost of approximately $21.5 million, or an average price of $28.22 per share. During 2002, the Company repurchased 614,580 shares of its common stock at a cost of approximately $15.7 million, or an average price of $25.60. The Board of Directors authorized an additional $100.0 million on February 14, 2001, for repurchases of the Company's common stock. As of December 28, 2002, approximately $62.8 million remained unspent.$25.60 per share. During 2001, the Company repurchased 1,472,937 shares at a cost of approximately $35.1 million, or an average price of $23.80. During 2000, the Company repurchased 837,552 shares at a cost of approximately $18.0 million, or an average price of $21.46.$23.80 per share.

Litigation and Uncertainties

        The Company has contingent liabilities that have arisen in the course of its business, including pending litigation, preferential paymentpayments claims in customer bankruptcies, environmental remediation, taxes and other claims. The Company currently has one preferential paymenta claim outstanding totalingfor approximately $7.6 million.million pending against it arising out of the bankruptcy of a customer filed in 2001. The Company was named a critical vendor by the bankruptcy court and, accordingly, was paid in full for all outstanding receivables. The claim alleges that the Company received preferential payments from the customer during the ninety days before the customer filed for bankruptcy protection. The claim was brought in February 2003. The Company has recorded an accrual with respect to this contingency, in an amount substantially less than the full amount of the claim, which represents the best estimate within the range of likely exposure and intends to vigorously contestdefend against the claim. Given the nature of this claim, however,it is possible that the ultimate outcome or likelihood of this specific claim cannot be determined at this time.could differ from the recorded amount. It is our opinion, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on our financial condition, although such matters could have a material effect on our quarterly or annual operating results and cash flows when resolved in a future period.

Critical Accounting PoliciesLooking Ahead

        The Company's critical accounting policies include:Company is encouraged by indications that the economy is recovering and is cautiously optimistic that the office furniture industry will begin to rebound in the second half of 2004. Global Insight, BIFMA's forecasting consultant, increased its estimate for the industry shipment growth from 2.4% to 5.6% in 2004 with first quarter flat and improving as the year progresses.

        Revenue recognition—The Company normally recognizes revenue upon the shipment of goods. In certain circumstances revenuehearth segment is not recognized until the goods are receivedimpacted by the customer or upon installationhousing market, which may experience a slight decline from record high levels, but is expected to remain at healthy levels. Management believes its strong brand recognition and customer acceptance based on the terms of the sale agreement. Revenue includes freight chargednew innovative product introductions in addition to customers; related costs are included in selling and administrative expense. Rebates, discounts, and other marketing program expenses that are directly relatedstrengthening distribution will allow it to the sale are recorded as a deduction to net sales. Marketing program accruals require the use of management estimates and the consideration of contractual arrangements that are subject to interpretation. Customer sales that reach certain award levels can affect the amount of such estimates and actual results could differ from these estimates.grow its hearth segment.

        Allowance for doubtful accounts—The allowance for receivables is developed based on several factors including overall customer credit quality, historical write-off experience and specific account analyses that project

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the ultimate collectibility of the account. As such, these factors may change over time causing the reserve level to adjust accordingly. Additionally, in certain circumstancesOn January 5, 2004, the Company may be subject to preferential payment claims that arise in customer bankruptcies, for whichcompleted the ultimate outcome cannot be estimatedacquisition of Paoli, Inc., a leading provider of wood case goods and for which an estimated loss cannot be recorded until it is determined to be probable and reasonably estimable.

        Inventory valuation—The Company values its inventory at the lower of cost or market primarily by the last in, first out (LIFO) method. Additionally, the Company evaluates its inventory reserves in terms of excess and obsolete exposures. This evaluation includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate product sales value. As such, these factors may change over time causing the reserve level to adjust accordingly.

        Long-lived assets—Long-lived assets are reviewed for impairment as events or changes in circumstances occur indicating that the amount of the asset reflected in the Company's balance sheet may not be recoverable. An estimate of undiscounted cash flows produced by the asset, or the appropriate group of assets, is compared to the carrying value to determine whether impairment exists. The estimates of future cash flows involve considerable management judgement and are based upon assumptions about expected future operating performance. The actual cash flows could differ from management's estimates due to changes in business conditions, operating performance, and economic conditions.

        Goodwill and other intangibles—The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" on December 30, 2001, the beginning of its 2002 fiscal year. The Company has determined that the fair value of its reporting units exceeds the carrying values and therefore, no impairment of goodwill was recorded. The impairment tests performed require that the Company determine the fair market value of its trademarks and the fair market value of its reporting units for comparison to the carrying value of such net assets to assess whether an impairment exists. The methodologies used to estimate fair market value involve the use of estimates and assumptions, including projected cash flows, royalty rates and discount rates. Also pursuant to the standard, the Company has ceased recording goodwill and indefinite-lived intangibles amortization in 2002.

        Self-insurance reserves—The Company is partially self-insured for general liability, workers' compensation, and certain employee health benefits. The general and workers' compensation liabilities are managed through a wholly owned insurance captive; the related liabilities are included in the accompanying financial statements. The Company's policy is to accrue amounts equal to the actuarially determined liabilities. The actuarial valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical costs, and changes in actual experience could cause these estimates to change in the near term.

Recent Accounting Pronouncements

        During, 2002 the Financial Accounting Standards Board finalized SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" for exit and disposal activities that are initiated after December 31, 2002. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.

        The Financial Accounting Standards Board also issued SFAS No. 148 "Accounting for Stock-Based Compensation—Transition and Disclosure" during 2002. This Statement amends SFAS No. 123 "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the disclosure requirements of this statement as of December 28, 2002.

        The Financial Accounting Standards Board also issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others". FIN 45 clarifies the requirements of SFAS No. 5 "Accounting for Contingencies" relating to the guarantor's accounting for and disclosure of the issuance of certain types of guarantees. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. The disclosure provisions are effective for financial statements with years ending after December 15, 2002. The Company has included these disclosures in the Warranty and the Commitments and Contingencies notes.

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        During 2001, the Financial Accounting Standards Board finalized SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company adopted Statement No. 144 on December 30, 2001, the beginning of its 2002 fiscal year.seating. The Company intends to adopt Statement No. 143continue to build on December 29, 2002,Paoli's strong position in the beginningmarket and excellent selling capabilities while leveraging its lean enterprise practices to achieve greater cost efficiencies and improved customer performance.

        The Company's strategy is to grow its business through aggressive investment in building its brands, enhancing its strong member-owner culture and remaining focused on its rapid continuous improvement program to continue to build best total cost. The Company plans to reinvest a large portion of its 2003 fiscal year. The adoptioncost savings from plant consolidations and its rapid continuous improvement program to continue to build brands, product solutions, and selling models.

        Because of SFAS No. 143 is not expected to have a material impact onthe following factors, as well as other variables affecting the Company's operating results, past financial statements.

Looking Ahead

        Global Insight (formerly DRI-WEFA), the Businessperformance may not be a reliable indicator of future performance, and Institutional Furniture Manufacturer's Association (BIFMA) forecasting consultant, is projectinghistorical trends should not be used to anticipate results or trends in future periods.

•

competition within the office furniture industry to be up over 5% in 2003 compared to 2002, with a 2% declineand fireplace industries, including competition from imported products and competitive pricing;



•

increases in the first quartercost of raw materials, including steel, which is the Company's largest raw material category;



•

increases in its forecast dated January 15, 2003. The Company expectsthe cost of health care benefits provided by the Company;



•

reduced demand for the Company's storage products caused by changes in office technology; including the change from paper record storage to continue to outperform electronic record storage;



•

the industry, however, management anticipates that the unstable political andeffects of economic conditions will continue to challenge growthon demand for office furniture, customer insolvencies and profitability duringrelated bad debts and claims against the first halfCompany that it received preferential payments;



•

changes in demand and order patterns from the Company's customers, particularly its top ten customers, which represented approximately 36% of 2003.

        The two primary channels for hearth products are net sales in 2003;



•

issues associated with acquisitions and integration of acquisitions;



•

the new home construction channel and the remodel/retail channel. Indications are that the housing market will remain at the current healthy level while the retail side, which is dependent on consumer confidence, is being hampered by the political instability. The Company feels that the first halfability of the year will be challenging for this segment as well. The Company is optimistic about to realize cost savings and productivity improvements from its cost containment and business simplification initiatives;



•

the growth opportunitiesability of the Company to realize financial benefits from investments in new productsproducts;



•

the ability of the Company's distributors and brand extensions into new markets. These markets include outdoor living products such as outdoor cooking systemsdealers to successfully market and healthy home products such as a heat recovery systemsell the Company's products; and a central vacuum system.

        The Company continues



•

the availability and cost of capital to see pressure on gross margins due to increased steel prices as a result of steel tariffs that were enacted in 2002. The Company continues to work to mitigate the potential negative impact through various initiatives, including alternative materials and suppliers.

        The Company continues to focus on long-term shareholder value by making investments for the future. These investments include new products, building brand equity, investigating new markets and expanding distribution.

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finance planned growth.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company has no material financial exposure to the various financial instrument market risks covered under this rule. Currently, the Company has no derivative financial instruments or off-balance

sheet financing arrangements. For information related to the Company's long-term debt, refer to the Long-Term Debt disclosure in the Notes to Consolidated Financial Statements filed as part of this report.

        We are subject to interest rate risk on our investment portfolio. In 2002,2003, an interest rate movement of 10% from our actual 20022003 weighted-average interest rate would not have had a significant effect on the value of our interest sensitive investments, financial position, results of operations and cash flows as 85%63% of the investment portfolio are investments with maturities of 90 days or less.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The financial statements listed under Item 14 (a)15(a)(1) and (2) are filed as part of this report.

        The Summary of Unaudited Quarterly Results of Operations follows the Notes to Consolidated Financial Statements filed as part of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        HON INDUSTRIES Inc., (the "Company")The Company dismissed Arthur Andersen LLP, its independent auditors, effective May 7, 2002.

        The reports of Arthur Andersen LLP on the financial statements for the fiscal year ended December 29, 2001 contained no adverse opinion or disclaimer of opinion and were not modified as to uncertainty, audit scope or principle. In connection with its audit for the audits of the two most recent fiscal years,year ended December 29, 2001 and during the interim period prior to dismissal,through May 7, 2002, there were no disagreements with the former auditorsArthur Andersen LLP on any matter of accounting principles or accounting principle or practice,practices, financial statement disclosure or auditing scope or procedure.

        The former auditor's report on the financial statements of the Company for each of the past two fiscal years was unqualified.

        The Company engaged PricewaterhouseCoopers LLP as its new independent auditor effective with the dismissal of its former auditors. During the Company's two most recent fiscal years and during the interim period prior to the engagement,appointment, there were no consultations with the newly engaged auditors with regard to either the application of accounting principleprinciples as to any specific transaction, either completed or proposed; the type of audit opinion that would be rendered on the Company's financial statements; or any mattermatters of disagreementsdisagreement with the former auditors.

        The Company's Audit Committee recommended and the Company's Board of Directors approved management's recommendation to change auditors.

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        Under the supervision and with the participation of management, the chief executive officer and chief financial officer of the Company have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures as of January 3, 2004, and, based on their evaluation, the chief executive officer and chief financial officer have concluded that these controls and procedures are effective. There were no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act as recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms.

        Disclosure controls and procedures are also designed to ensure that information is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information under the caption "Election of Directors" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2003,4, 2004, is incorporated herein by reference. For information with respect to executive officers of the Company, see Part I, Table I "Executive Officers of the Registrant."

Audit Committee Financial Expert

        The Board of Directors of the Company has determined that each of Cheryl A. Francis, Chair of the Audit Committee, and Audit Committee members Dennis J. Martin and Ronald V. Waters, III, is an audit committee financial expert as defined by Item 401(h) of Regulations S-K of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

Audit Committee

        The Company has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Cheryl A. Francis, (Chair), Dennis J. Martin, and Ronald V. Waters, III.

Code of Ethics

        The Company has adopted a code of business conduct and ethics for directors, officers, and members. The Code of Conduct is available on the Company's website athttp://www.honi.com/corporategovernance. Shareholders may request a free copy of the Code of Conduct from:

HON INDUSTRIES Inc.
Attention: Investor Relations
414 East Third Street
Muscatine, IA 52761
(563)264-7400

Corporate Governance Guidelines

        The Company has adopted Corporate Governance Guidelines, which are available on the Company's website athttp://www.honi.com/corporategovernance/governance_guidelines.htm. Shareholders may request a free copy of the Corporate Governance Guidelines from the address and phone number set forth above under "Code of Ethics."

Section 16(a) Beneficial Ownership Reporting Compliance

        The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2003,4, 2004, is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

        The information under the captions "Election of Directors" and "Executive Compensation" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2003,4, 2004, is incorporated herein by reference.

ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information under the captions "Election of Directors" and "Beneficial Owners of Common Stock" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2003,4, 2004, is incorporated herein by reference.

        The information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance"See Part II, Item 5 of the Company's Proxy Statementreport for the Annual Meeting of Shareholders to be held on May 5, 2003, is incorporated herein by reference.information regarding "Securities Authorized for Issuance under Equity Compensation Plans."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information under the caption "Certain Relationships and Related Transactions" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2003,4, 2004, is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information under the caption "Fees Incurred for PricewaterhouseCoopers LLP" of the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 2004, is incorporated herein by reference.

PART IV

ITEM 14.    CONTROLS AND PROCEDURES

        As of February 19, 2003, the Company's Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 28, 2002. Additionally, there has been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to December 28, 2002, including any corrective actions with regard to significant deficiencies and material weaknesses.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)    Financial Statements

        The following consolidated financial statements of HON INDUSTRIES Inc. and Subsidiaries included in the Company's 20022003 Annual Report to Shareholders are filed as a part of this report pursuant to Item 8:

		Page
ReportsReport of Independent AccountantsRegistered Public Accounting Firm and Report of Independent Auditors		33
Consolidated Statements of Income for the Years Ended December 28, 2002; December 29, 2001; and December 30, 2000		35
Consolidated Balance Sheets—January 3, 2004; December 28, 2002; and December 29, 2001		35
Consolidated Balance Sheets—January 3, 2004; December 28, 2002; and December 29, 2001; and December 30, 2000		36
Consolidated Statements of Shareholders' Equity for the Years Ended January 3, 2004; December 28, 2002; and December 29, 2001; and December 30, 20002001		37
Consolidated Statements of Cash Flows for the Years Ended January 3, 2004; December 28, 2002; and December 29, 2001; and December 30, 20002001		38
Notes to Consolidated Financial Statements		39
Investor Information		57 60

        (2)   Financial Statement Schedules

        The following consolidated financial statement schedule of the Company and subsidiaries is attached pursuant to Item 14(d)15(d):

Schedule II

Valuation and Qualifying Accounts for the Years Ended January 3, 2004; December 28, 2002; and December 29, 2001; and December 30, 20002001

6062

        All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

(b)

Reports on Form 8-K

        There are no reportsThe Company filed a periodic report on Form 8-K dated October 22, 2003, to furnish the Company's earnings release for the third fiscal quarter ended October 4, 2003. The Company filed duringa periodic report on Form 8-K dated December 17, 2003, to furnish the last quarterCompany's news release relating to signing a purchase agreement to acquire certain assets of the period covered by this report.Paoli, Inc. and Orleans Corporate Services, Inc.

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(c)

Exhibits

        An exhibit index of all exhibits incorporated by reference into, or filed with, this Form 10-K appears on Page 63. The following exhibits are filed herewith:

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the Company's Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

        Pursuant to the requirements of the Securities Exchange Act of 1934, this reportAmendment No. 1 to the Company's Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each Director whose signature appears below authorizes and appoints Jack D. Michaels as his or her attorney-in-fact to sign and file on his or her behalf any and all amendments and post-effective amendments to this report.