HON INDUSTRIES INC, S-3/A, 1997-10-23

HON INDUSTRIES INC
S-3/A, 1997-10-23
OFFICE FURNITURE (NO WOOD)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1997
REGISTRATION NO. 333-36433
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------

AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
HON INDUSTRIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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IOWA
(STATE OR OTHER JURISDICTION OF 42-0617510
(I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
414 EAST THIRD STREET
P.O. BOX 1109
MUSCATINE, IOWA 52761-7109
(319) 264-7400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
JAMES I. JOHNSON
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
HON INDUSTRIES INC.
414 EAST THIRD STREET
P.O. BOX 1109
MUSCATINE, IOWA 52761-7109
(319) 264-7400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ELIZABETH C. KITSLAAR, ESQ. DEIRDRE M. VON MOLTKE, ESQ.
JONES, DAY, REAVIS & POGUE SIDLEY & AUSTIN
77 WEST WACKER DRIVE ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60601 CHICAGO, ILLINOIS 60603
(312) 782-3939 (312) 853-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, please check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
AGGREGATE AMOUNT OF
OFFERING PRICE REGISTRATION
TITLE OF SHARES TO BE REGISTERED (1)(2) FEE
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<S> <C> <C>
Common Stock, $1.00 par value (including
Preferred Share Purchase Rights to purchase
shares of Series A Junior Participating
Preferred Stock, $1.00 par value)............. $213,025,640.63 $64,553.22
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</TABLE>
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(1) Includes 509,250 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) The registration fee was paid on September 25, 1997.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED OCTOBER 23, 1997

PROSPECTUS

3,395,000 SHARES

HON INDUSTRIES INC.

COMMON STOCK

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Of the 3,395,000 shares of Common Stock of HON INDUSTRIES Inc., an Iowa
corporation (the "Company"), offered hereby, 1,000,000 shares are being offered
by the Company and 2,395,000 shares are being offered by a certain shareholder
(the "Selling Shareholder"). The Company will not receive any of the proceeds
of shares sold by the Selling Shareholder. See "Selling Shareholder."

Of the 3,395,000 shares of Common Stock of the Company offered, 2,716,000
shares are being offered inside the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 679,000 shares are being offered in a
concurrent international offering outside the United States and Canada by the
International Managers (the "International Offering" and together with the U.S.
Offering, the "Offerings"). The price to the public and the aggregate
underwriting discount per share will be identical for both offerings. See
"Underwriting."

The Common Stock is quoted on the Nasdaq National Market under the symbol
"HONI." On October 1, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $59 5/8 per share. See "Market Price of and
Dividends on Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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<TABLE>
<CAPTION>
PROCEEDS TO
SELLING
PRICE TO UNDERWRITING PROCEEDS TO SHAREHOLDER
PUBLIC DISCOUNT (1) COMPANY (2) (2)
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
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Total (3) $ $ $ $
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</TABLE>
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(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deduction of expenses, estimated at $500,000, which are payable by
the Company. The Selling Shareholder will not be paying any of the expenses
of the Offerings, other than the expenses of its counsel.
(3) The Company has granted the U.S. Underwriters and the International
Managers options, exercisable within 30 days of the date hereof, to
purchase up to an aggregate of 407,400 and 101,850, respectively,
additional shares of Common Stock on the same terms set forth above, to
cover over-allotments, if any. If the over-allotment options are exercised
in full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."

-----------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Company, counsel for the
Selling Shareholder and counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made against payment therefor in New York,
New York on or about , 1997.

-----------

MERRILL LYNCH & CO. WILLIAM BLAIR & COMPANY
ROBERT W. BAIRD & CO. MCDONALD & COMPANY
INCORPORATED SECURITIES, INC.

-----------

The date of this Prospectus is , 1997.
<PAGE>

[Pictures of filing cabinets, seating and office systems appear here.]

CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SHARES OF COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE SHARES OF COMMON STOCK OF THE COMPANY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."

HON(R), Concensys(R), Every-Day(R), Regent(R) and Solutions Seating(R) are
registered trademarks of the Company.

2
<PAGE>

PROSPECTUS SUMMARY

The following is a summary of certain information in this Prospectus. This
summary is not intended to be complete and should be read in conjunction with,
and is qualified in its entirety by, the more detailed information and
financial statements appearing elsewhere in this Prospectus or incorporated
herein by reference. Investors should consider carefully the information set
forth in "Risk Factors" before making any decision to invest in the Common
Stock. Except as otherwise noted, all information in this Prospectus assumes
that the Underwriters' over-allotment options are not exercised. Unless the
context otherwise requires, the term "Company" means HON INDUSTRIES Inc. and
its subsidiaries and "fiscal 1992," "fiscal 1993," "fiscal 1994," "fiscal
1995," and "fiscal 1996" mean the fiscal years ended January 2, 1993, January
1, 1994, December 31, 1994, December 30, 1995 and December 28, 1996,
respectively, and "fiscal 1997" means the fiscal year ending January 3, 1998.

THE COMPANY

The Company is a leading designer and manufacturer of value-priced office
furniture and furniture systems in the United States. The Company's products
are marketed through multiple distribution channels primarily to small- and
medium-sized businesses and home offices on the basis of price, quality,
selection and quick delivery. The Company maintains its leadership position by
offering "compelling value" to its customers through a broad line of quality
office furniture, including filing cabinets, seating, office systems, desks and
related products, at attractive price points, with quick delivery. The
Company's low-cost manufacturing capabilities, extensive distribution network,
innovative product development and unique employee ("member") culture enable it
to provide compelling value to its customers. In addition to its core office
furniture business, the Company, through its Hearth Technologies Inc.
subsidiary ("Hearth Technologies"), is the leading manufacturer of wood- and
gas-burning fireplaces, stoves and related accessories in the United States.
The Company markets its hearth products through the widely-recognized
"Heatilator" and "Heat-N-Glo" brand names. In fiscal 1996, the Company had net
sales of $998.1 million, of which $887.3 million was attributable to office
furniture products and $110.8 million was attributable to hearth products.

A key driver of the Company's success has been its highly-efficient and low-
cost manufacturing operations. Since its inception, the Company has been
committed to constant improvement in manufacturing and in 1992 introduced its
process improvement approach known as Rapid Continuous Improvement ("RCI")
which focuses on streamlining design, manufacturing and administrative
processes. The Company's RCI program, in which most members participate, has
significantly contributed to increased productivity, lower manufacturing costs,
and improved product quality and workplace safety. As a result of RCI,
productivity, as measured by annual revenue per member, has increased 50% over
the last five years. In addition, the Company's RCI efforts enable it to offer
short average lead times of two to four weeks, from receipt of order to
shipment, for most of its products.

The Company distributes its products through an extensive network of
independent office furniture dealers, office products dealers, wholesalers and
retailers. The Company is one of the top two suppliers of office furniture to
each of the largest national office products dealers, which are Boise Cascade
Corporation, BT Office Products International, Inc., U.S. Office Products
Company, Corporate Express Inc., Office Depot Inc.--Business Services Division
and Staples Commercial Advantage ("mega-dealers"), and to the Office Depot and
Office Max superstores. The Company offers reduced freight costs and complete
order delivery, regardless of the order size or combination of products, by
manufacturing at multiple locations and cross-docking products throughout the
United States. The Company believes that more of its products are available for
immediate delivery, through over 135 nationwide wholesaler customer locations,
than those of any of its competitors.

The Company's product development efforts are primarily focused on reducing
the cost to manufacture existing products and designing new products that
provide additional features and better quality. The Company's ability to apply
RCI techniques to reduce manufacturing costs and enhance value allows its
products to be sold

3
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at prices lower than those offered for competing products. For example, in 1996
the Company redesigned its leading line of file cabinets to add features while
lowering the Company's costs and maintaining prices. As a result of the
Company's aggressive product development efforts, approximately 45% of the
Company's 1996 sales volume consisted of products introduced within the last
three fiscal years.

An important element of the Company's success has been its ability to
attract, develop and retain skilled, experienced and efficient members. Each of
the Company's eligible members owns stock in the Company through a number of
stock-based plans, including a member stock ownership plan, and participates in
the Company's qualified profit sharing plan. In addition, most production
members are eligible for incentive bonuses.

According to industry sources, U.S. office furniture shipments, which totaled
approximately $10 billion in 1996, have grown at a compound annual growth rate
of approximately 7% over the three-year period ended December 31, 1996. The
U.S. office furniture market consists of two primary segments--the contract
segment and the transactional segment. The contract segment has traditionally
been characterized by one-time sales of large quantities of office furniture to
large corporations, such as for new office facilities, relocations or
department or office redesigns, which are frequently customized to meet
specific client and designer preferences. The transactional segment of the
market, in which the Company is a leader, primarily represents smaller orders
of office furniture purchased by businesses and home office users on the basis
of price, quality, selection and quick delivery.

Over the last several years, as competition in the contract segment has
intensified, dealers have sought to provide their clients with moderately-
priced alternatives to premium-priced contract furniture. In addition, small-
and medium-sized businesses with less complex needs have sought out affordable
office furniture that can be delivered quickly. In response to these trends,
the Company, as well as some of its competitors, have developed value-priced
alternatives to contract furniture lines. The Company believes that this
portion of the contract segment will continue to expand with the proliferation
of small- and medium-sized businesses, growth in home offices, commoditization
of office furniture and consolidation in the office furniture distribution
network.

GROWTH STRATEGY

The Company's strategy is to build on its position as a leading manufacturer
of value-priced office furniture and hearth products in North America. The
components of this growth strategy are to:

Introduce New Value-Priced Products. The Company has been increasingly
successful in developing compelling value alternatives to premium-priced office
furniture and intends to expand and further enhance its product offerings by
developing new products. The Company's development efforts emphasize the design
of products that are easily manufactured, and the use and development of
alternative materials that enhance quality and reduce product development
cycles and manufacturing costs. The Company conducts market research of end-
users to assess evolving customer demands. The Company offers its products in
many new models, sizes, alternative materials, designs, fabrics and finishes.
Areas in which the Company intends to expand its product offerings include
computer furniture, ready-to-assemble furniture, folding chairs and tables,
fire-proof files and school furniture.

Continually Improve Productivity. The Company intends to strengthen its low-
cost manufacturing position by continuing to apply RCI, designing special
machines and tooling to enhance proprietary processes, evaluating vertical
integration opportunities and improving information systems. Lower costs allow
the Company to enhance product features at no additional cost to the customer.
As successfully demonstrated in 1996 and the first half of 1997, lower
manufacturing costs also allow the Company to reduce prices on certain existing
products in order to increase volume and market share while maintaining
operating margins. The Company intends to implement proven RCI tools to realize
productivity gains in acquired operations.

4
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Leverage Distribution Network. The changing dynamics of distribution in the
office furniture industry present an opportunity for the Company to benefit
from its extensive distributor network and its flexible operating structure.
Due to consolidation among office furniture distributors, fewer and larger
distributors exist and these distributors, such as office products and
furniture dealers, wholesalers and large, national retail chains, are reducing
their vendor bases and seeking stronger suppliers who offer more complete
product lines. As one of the top two suppliers of office furniture to each of
the mega-dealers and the Office Depot and Office Max superstores, the Company
believes that it is well-positioned to capitalize on this consolidation trend
due to its excellent reputation for price, quality, quick delivery and broad
product lines. In addition, the Company's commitment to providing distributors
with excellent customer service has helped to strengthen existing relationships
as well as develop new distribution channels.

Pursue Complementary Strategic Acquisitions. The Company continues to
evaluate potential acquisitions of complementary businesses that provide
opportunities for increased market penetration, innovative new products,
increased distribution capabilities, enhanced industry expertise and expanded
geographical presence in North America. Acquisition candidates must present
profitable growth opportunities within the Company's core businesses, must be
well managed and must be well respected by its customers. For example, in June
1997, the Company acquired Allsteel Inc. ("Allsteel"), a manufacturer of mid-
priced office furniture with 1996 sales of approximately $150 million.
Allsteel, which has a strong distribution network and modern, strategically-
located manufacturing facilities, enables the Company to broaden its customer
base by increasing its market penetration in the value-priced segment of the
office furniture industry.

Further Penetrate Hearth Products Market. The Company's recognized innovation
in direct-vent gas fireplace design and manufacturing coupled with its premier
position in wood-burning products provides it with the most comprehensive
product line and extensive distribution network in the hearth products market.
The Company plans to further enhance its competitive position in the hearth
products market by leveraging synergies with the office furniture business,
such as purchasing, manufacturing and product development.

The Company's principal executive offices are located at 414 East Third
Street, P.O. Box 1109, Muscatine, Iowa 52761-7109. Its telephone number is
(319) 264-7400. The Company's World Wide Web site address is
http://www.honi.com.

THE OFFERINGS

The offering hereby of 2,716,000 shares of common stock, $1.00 par value per
share, of the Company (the "Common Stock"), in the United States and Canada
(the "U.S. Offering") and the concurrent offering of 679,000 shares of common
stock outside of the United States and Canada (the "International Offering")
are collectively referred to as the "Offerings." The closing of each of the
U.S. Offering and the International Offering is conditioned upon the closing of
the other.

<TABLE>
<S> <C>
Common Stock Offered by the Company........... 1,000,000 shares
Common Stock Offered by the Selling 2,395,000 shares
Shareholder..................................
Total....................................... 3,395,000 shares
Common Stock to be Outstanding after the 30,670,610 shares(1)
Offerings....................................
Use of Proceeds............................... General corporate purposes, including the
repayment of indebtedness. See "Use of
Proceeds."
Nasdaq National Market Symbol................. HONI
</TABLE>
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(1) As of September 22, 1997 and excluding shares of Common Stock reserved for
issuance upon the exercise of options under the Company's stock option
plan, of which options to purchase 78,000 shares are currently outstanding
at a weighted average exercise price of $49.48 per share.

5
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

<TABLE>
<CAPTION>
FIRST HALF OF
FISCAL FISCAL
---------------------------------------------- -----------------
1992 1993 1994 1995 1996(A)(B) 1996(A) 1997(B)
-------- -------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $706,550 $780,326 $845,998 $893,119 $998,135 $452,737 $579,426
Gross profit............ 227,371 242,498 272,606 268,419 318,639 142,504 184,263
Operating income........ 62,296 71,450 87,116 66,728 106,193 46,351 59,507
Interest expense (net).. 403 596 778 1,211 926 127 2,283
Income before income
taxes.................. 61,893 70,854 86,338 65,517 105,267 46,224 57,224
Income taxes............ 23,210 26,216 31,945 24,419 37,173 17,103 21,459
Net income.............. 38,683 45,127 54,156 41,098 68,094 29,121 35,765
Net income per common
share.................. $ 1.18 $ 1.41 $ 1.73 $ 1.35 $ 2.26 $ 0.96 $ 1.20
Weighted average shares
outstanding............ 32,759 32,091 31,218 30,496 30,114 30,258 29,696
OPERATING DATA:
Net sales per member
(c).................... $119,229 $124,712 $137,987 $150,534 $163,097 $160,945 $165,456
</TABLE>

<TABLE>
<CAPTION>
JUNE 28, 1997
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AS
ACTUAL ADJUSTED(D)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 94,251 $ 94,251
Total assets............................................... 635,392 635,392
Total debt (e)............................................. 151,610 94,870
Shareholders' equity....................................... 278,819 335,559
</TABLE>
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(a) Includes a $3,200,000 pre-tax gain on the sale of Ring King Visibles, Inc.,
a wholly-owned subsidiary of the Company ("Ring King") (after-tax gain of
$2,000,000 or $.07 per share).
(b) Includes the results of Heat-N-Glo Fireplace Products, Inc. ("Heat-N-Glo")
from October 2, 1996, the date it was acquired.
(c) Net sales per member is equal to net sales for the year divided by the
number of members at year end. First half data are based on annualized net
sales divided by the number of members at the end of the period. The data
for fiscal 1996 does not give effect to the acquisition of Heat-N-Glo in
the fourth quarter of 1996.
(d) Adjusted to reflect the sale by the Company of 1,000,000 shares of the
Common Stock offered hereby and the application of the estimated net
proceeds therefrom (assuming an offering price of $59.625 per share). See
"Use of Proceeds."
(e) Includes current and non-current long-term debt. Also includes current and
non-current capital lease obligations of $7,169,000.

6
<PAGE>

RISK FACTORS

Prospective purchasers of the Common Stock offered hereby should consider
carefully all of the information set forth in this Prospectus, and in
particular, should evaluate the following risks in connection with an
investment in the Common Stock. Statements in this Prospectus that are not
strictly historical, including statements as to plans, objectives and future
performance, are "forward-looking" statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements involve known and unknown risks, which may
cause the Company's actual results in the future to differ materially from
expected results. These risks include, among others, competition within the
office furniture and hearth products industries, the relationship between
supply and demand for value-priced office furniture, and gas- and wood-burning
hearth products, the effects of economic conditions, the issues associated
with the acquisition and integration of recently acquired operations,
including Heat-N-Glo and Allsteel, operating risks, the ability of the
Company's distributors to successfully market and sell the Company's products,
the availability of capital to finance planned growth, and the effect of
consolidation in the office furniture industry, as well as the risks,
uncertainties and other factors described in this Prospectus and from time to
time in the Company's other filings with the Securities and Exchange
Commission.

STRONG COMPETITION

The office furniture industry is highly competitive, with a significant
number of competitors offering similar products. The Company's competitors
include Global Furniture Inc.; Anderson-Hickey Co., Globe Business Furniture
and United Chair, Inc., divisions of Haworth, Inc.; National Office Furniture,
a division of Kimball Office Furniture Co.; and High Point Furniture
Industries, Inc. In addition, the Company competes with certain office
furniture manufacturers which control a substantial portion of the market
share in the contract office furniture market, such as Steelcase Inc., Herman
Miller, Inc., Haworth, Inc. and Knoll, Inc. Products and brands offered by
contract office furniture market participants have strong acceptance in the
marketplace, and such competitors have developed and may continue to develop
value-priced product designs to compete with the Company. The Company also
faces significant price competition from its competitors and may encounter
competition from new market entrants. There can be no assurance that the
Company will be able to compete successfully in its market in the future. See
"Business--Competition."

CONCENTRATION OF CUSTOMER BASE

The Company sells its products through multiple distribution channels,
including through dealers, wholesalers and retailers. These distribution
channels have been consolidating in the past several years and may continue to
consolidate in the future. Such consolidation may result in a greater
proportion of the Company's sales being concentrated in fewer customers. In
1996, the Company's ten largest customers represented approximately 40% of its
consolidated net sales. One customer, United Stationers Inc. ("United
Stationers"), accounted for approximately 12%, 12%, 13% and 13% of the
Company's consolidated net sales in the six months ended June 28, 1997, and in
fiscal 1996, 1995 and 1994, respectively. The increased purchasing power
exercised by larger customers may adversely affect the prices at which the
Company can successfully offer its products. As a result of this
consolidation, changes in the purchase patterns or the loss of a single
customer may have a greater impact on the Company's financial results than
such events would have had prior to such consolidation. In addition, there can
be no assurance that the Company will be able to maintain its customer
relationships as consolidation of its customers occurs. See "Business--Sales,
Marketing and Distribution."

RISKS ASSOCIATED WITH MANAGING GROWTH

As a part of its growth strategy, the Company seeks to increase sales and
market share by introducing innovative new products, further enhancing its
existing line of value-priced products and through complementary acquisitions.
Part of this strategy depends on the Company's ability to increase sales
through its existing customer network, principally office products dealers,
wholesalers and retailers. There can be no assurance that

7
<PAGE>

the Company's distribution facilities will have the capacity to manage and
coordinate the delivery of increased amounts of the Company's products
consistent with current levels of customer service. Furthermore, the ability
to effectuate and manage any growth profitably will depend on the Company's
ability to contain costs, including costs associated with increased sales and
marketing efforts, freight utilization, warehouse capacity, product
development and acquisition efforts.

RISK OF ENVIRONMENTAL LIABILITIES

The past and present operation and ownership by the Company of manufacturing
plants and real property are subject to extensive and changing federal, state
and local environmental laws and regulations, including those relating to
discharges in air, water and land, the handling and disposal of solid and
hazardous waste and the remediation of contamination associated with releases
of hazardous substances. Compliance with environmental regulations has not had
a material effect on the Company's capital expenditures, earnings or
competitive position to date; however, compliance with current laws or more
stringent laws or regulations which may be imposed on the Company in the
future, or stricter interpretation of existing laws, may require additional
expenditures by the Company in the future, some of which may be material.
These risks and uncertainties are referenced in the "Contingencies" note
included in the notes to consolidated financial statements.

ECONOMIC FACTORS AFFECTING THE OFFICE FURNITURE INDUSTRY

Fluctuations in office furniture industry revenues may be driven by a
variety of macroeconomic factors, such as white collar employment levels,
corporate cash flows and commercial construction, as well as industry factors,
such as corporate reengineering and restructuring, technology demands,
ergonomic, health and safety concerns and corporate relocations. There can be
no assurance that current or future economic or industry trends will not
adversely affect the business of the Company. See "Business--Industry."

RECENT DEVELOPMENTS

On October 6, 1997, the Company, AHC Inc., a wholly-owned subsidiary of the
Company ("AHC"), Hunt Manufacturing Co. ("Hunt") and BEVIS Custom Furniture,
Inc., a wholly-owned subsidiary of Hunt ("BEVIS"), entered into an Asset
Purchase Agreement pursuant to which AHC agreed to purchase substantially all
of the assets of BEVIS, including its manufacturing facility located in
Florence, Alabama. Consummation of the transaction is subject to customary
closing conditions, including the expiration of the waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. BEVIS designs,
manufactures and markets a broad line of commercial, high-quality, mid-priced
office furniture, panels, conference and training room tables, computer
furniture, folding tables, utility and reception area tables, bookcases and
seating. For its fiscal year ended December 1, 1996, BEVIS had net sales of
$62 million.

The Company's net sales for the three- and nine-month periods ended October
4, 1997 increased 53% and 37% to $391.3 million and $970.8, respectively, as
compared to the three- and nine-month periods ended September 28, 1996. The
increases were attributable to Company and industry growth and acquisitions.
The Company's operating income for the three- and nine-month periods ended
October 4, 1997 was $42.6 million and $102.1 million, respectively, compared
to $25.2 million and $71.6 million for the three- and nine-month periods ended
September 28, 1996. However, operating income for the nine-month period ended
September 28, 1996 included a $3.2 million gain on the sale of a subsidiary.
The Company's net income for the three- and nine-month periods ended October
4, 1997 was $25.2 million and $61.0 million, respectively, compared to $17.9
million and $47.0 million for the three- and nine-month periods ended
September 28, 1996. For the three- and nine-month periods ended September 28,
1996, net income included one time tax credits of $2.1 million and the nine-
month period also included a $2.0 million after-tax gain on the sale of the
subsidiary previously mentioned.

8
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of 1,000,000 shares of Common
Stock offered hereby, assuming an offering price of $59.625 per share, will be
approximately $56.7 million ($85.9 million if the Underwriters' over-allotment
options are exercised in full), after deducting the underwriting discount and
estimated offering expenses payable by the Company. The Company will not
receive any proceeds from the sale of Common Stock by the Selling Shareholder.
The Company will pay all offering expenses incurred in the offering, except
that the Selling Shareholder will pay the expenses of its counsel.

The Company expects to use the net proceeds of this offering for general
corporate purposes, including the repayment of indebtedness incurred to
finance acquisitions in fiscal 1996 and fiscal 1997, which indebtedness
matures on June 11, 2002 and bears interest at a variable rate (currently
5.9%). The Company intends to use the remaining credit under its revolving
credit line to finance capital expenditures and any future acquisitions. See
"Capitalization."

MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK

The Company's Common Stock is currently traded on the Nasdaq National Market
("Nasdaq") under the symbol "HONI." The following table sets forth, for the
fiscal periods indicated, the high and low sale prices for the Common Stock as
reported by Nasdaq.

<TABLE>
<CAPTION>
COMMON STOCK
------------- DIVIDENDS
HIGH LOW PER SHARE
------ ------ ---------
<S> <C> <C> <C>
1995
First Quarter................................... 30 1/2 23 $.12
Second Quarter.................................. 30 25 3/4 .12
Third Quarter................................... 31 1/4 25 1/2 .12
Fourth Quarter.................................. 29 3/4 23 1/4 .12
1996
First Quarter................................... 24 1/4 18 1/2 .12
Second Quarter.................................. 30 1/2 22 .12
Third Quarter................................... 40 3/4 27 3/4 .12
Fourth Quarter.................................. 42 3/4 30 1/2 .14
1997
First Quarter................................... 43 31 3/4 .14
Second Quarter.................................. 54 1/4 35 .14
Third Quarter (through October 1, 1997)......... 64 1/2 44 1/4 .14
</TABLE>

On October 1, 1997, the closing sale price of the Common Stock on Nasdaq,
was $59.625 per share. As of September 22, 1997, there were 5,315 record
holders of the Common Stock.

9
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
28, 1997, and as adjusted to reflect the sale by the Company of 1,000,000
shares of the Common Stock offered hereby and the application of the estimated
net proceeds therefrom (assuming an offering price of $59.625 per share). See
"Use of Proceeds." This table should be read in conjunction with the
consolidated financial statements of the Company and notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 28, 1997
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Note payable and current maturities of long-term debt...... $ 575 $ 575
======== ========
Long-term debt............................................. $143,866 $ 87,126
Shareholders' equity:
Preferred, $1 par value; 1,000,000 shares authorized; no
shares outstanding...................................... -- --
Common, $1 par value; 100,000,000 shares authorized;
29,689,707 shares issued and outstanding; 30,689,707
shares issued and outstanding as adjusted (a)........... 29,689 30,689
Additional paid-in capital............................... 91 55,831
Retained earnings........................................ 254,080 254,080
Receivable from HON Members Company Ownership Plan....... (5,041) (5,041)
-------- --------
Total shareholders' equity............................. 278,819 335,559
-------- --------
Total capitalization................................... $422,685 $422,685
======== ========
</TABLE>
- --------
(a) Excludes shares of Common Stock reserved for issuance upon the exercise of
options under the Company's stock option plan, of which options to
purchase 78,000 shares are currently outstanding at a weighted average
exercise price of $49.48 per share.

10
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

The following selected financial data for, and as of the end of, the six
months ended June 29, 1996 and June 28, 1997 are derived from the unaudited
condensed consolidated financial statements of the Company and, in the opinion
of management, reflect all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the results for such
periods. The interim results of operations are not necessarily indicative of
results for the entire fiscal year. The selected financial data of the Company
presented below for, and as of the end of, fiscal 1996 are derived from the
consolidated financial statements of the Company, which have been audited by
Arthur Andersen LLP and for, and as of the end of, fiscal 1992, fiscal 1993,
fiscal 1994 and fiscal 1995, are derived from the consolidated financial
statements of the Company, which have been audited by Ernst & Young LLP. The
selected financial data should be read in conjunction with, and are qualified
in their entirety by reference to, the consolidated financial statements and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operation" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FIRST HALF OF
FISCAL FISCAL
----------------------------------------------- -----------------
1992 1993 1994 1995 1996(A)(B) 1996(A) 1997(B)
-------- -------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $706,550 $780,326 $845,998 $893,119 $998,135 $452,737 $579,426
Cost of products sold... 479,179 537,828 573,392 624,700 679,496 310,233 395,163
-------- -------- -------- -------- -------- -------- --------
Gross profit............ 227,371 242,498 272,606 268,419 318,639 142,504 184,263
Selling and
administrative
expenses............... 165,075 171,048 185,490 201,691 215,646 99,353 124,756
Gain on sale of
subsidiary............. -- -- -- -- 3,200 3,200 --
-------- -------- -------- -------- -------- -------- --------
Operating income........ 62,296 71,450 87,116 66,728 106,193 46,351 59,507
Interest expense (net).. 403 596 778 1,211 926 127 2,283
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 61,893 70,854 86,338 65,517 105,267 46,224 57,224
Income taxes............ 23,210 26,216 31,945 24,419 37,173 17,103 21,459
-------- -------- -------- -------- -------- -------- --------
Income before cumulative
effect of accounting
changes................ 38,683 44,638 54,393 41,098 68,094 29,121 35,765
Cumulative effect of
accounting changes..... -- 489 (237) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 38,683 $ 45,127 $ 54,156 $ 41,098 $ 68,094 $ 29,121 $ 35,765
======== ======== ======== ======== ======== ======== ========
Net income per common
share.................. $ 1.18 $ 1.41 $ 1.73 $ 1.35 $ 2.26 $ 0.96 $ 1.20
======== ======== ======== ======== ======== ======== ========
Weighted average number
of common shares
outstanding............ 32,759 32,091 31,218 30,496 30,114 30,258 29,696
OPERATING DATA
(UNAUDITED):
Net sales per member
(c).................... $119,229 $124,712 $137,987 $150,534 $163,097 $160,945 $165,456
BALANCE SHEET DATA:
Working capital......... $ 79,529 $ 77,660 $ 77,717 $ 65,268 $ 52,974 $ 65,735 $ 94,251
Total assets............ 322,746 352,405 372,568 409,518 513,514 409,850 635,392
Total debt (d).......... 56,329 49,840 49,545 46,393 93,849 44,539 151,610
Shareholders' equity.... 163,009 179,553 194,640 216,235 252,397 231,117 278,819
</TABLE>
- --------
(a) Includes a $3,200,000 pre-tax gain on the sale of Ring King (after-tax
gain of $2,000,000 or $.07 per share).
(b) Includes the results of Heat-N-Glo from October 2, 1996, the date it was
acquired.
(c) Net sales per member is equal to net sales for the year divided by the
number of members at year end. First half data are based on annualized net
sales divided by the number of members at the end of the period. The data
for fiscal 1996 does not give effect to the acquisition of Heat-N-Glo in
the fourth quarter of 1996.
(d) Includes current and non-current long-term debt. Also includes current and
non-current capital lease obligations of $7,169,000.

11
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Selected Consolidated Financial and Operating Data and the financial
statements of the Company and related notes thereto appearing elsewhere in
this Prospectus.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FIRST HALF
FISCAL OF FISCAL
------------------- ------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold..................... 67.8 69.9 68.1 68.5 68.2
----- ----- ----- ----- -----
Gross profit.............................. 32.2 30.1 31.9 31.5 31.8
Selling and administrative
expenses................................. 21.9 22.6 21.6 21.9 21.5
Gain on sale of subsidiary................ 0.0 0.0 0.3 0.7 0.0
----- ----- ----- ----- -----
Operating income.......................... 10.3 7.5 10.6 10.3 10.3
Interest expense (net).................... 0.1 0.1 0.1 0.1 0.4
----- ----- ----- ----- -----
Income before income taxes................ 10.2 7.4 10.5 10.2 9.9
Income taxes.............................. 3.8 2.8 3.7 3.8 3.7
----- ----- ----- ----- -----
Net income................................ 6.4% 4.6% 6.8% 6.4% 6.2%
===== ===== ===== ===== =====
</TABLE>

As a result of the Company's October 1996 acquisition of Heat-N-Glo, it now
has two reportable core business segments: office furniture and hearth
products.

SIX MONTHS ENDED JUNE 28, 1997 COMPARED TO SIX MONTHS ENDED JUNE 29, 1996

Net Sales. Net sales increased by 28% to $579.4 million for the six months
ended June 28, 1997 from $452.7 million for the six months ended June 29,
1996, reflecting continued strong demand for office furniture products and
hearth products.

Office furniture products net sales increased by 16% to $484.4 million in
the 1997 period from $417.0 million in the 1996 period as a result of
increased sales volume driven by industry growth and market share gains.
Management believes the Company's market share gain in the office furniture
segment is being driven by its leading position in the faster growing value-
priced office furniture segment, expanding distribution, particularly as a
result of gaining more page count in customer catalog merchandising, and a
steady stream of new product offerings.

Hearth products net sales increased by 166% to $95.0 million in the 1997
period from $35.7 million in the 1996 period primarily as a result of the
Company's October 1996 acquisition of Heat-N-Glo. The Company believes the
market share gain in the hearth products segment can be attributed to the
Company's leadership position in this expanding industry, strong customer
acceptance of its existing fireplace and stove products, especially gas-
burning fireplaces and stoves, and innovative new products.

Gross Profit. Gross profit increased by 29% to $184.3 million for the six
months ended June 28, 1997 from $142.5 million for the six months ended June
29, 1996. Gross profit margin increased to 31.8% for the six months ended June
28, 1997 from 31.5% for the same period in the prior year, due to increased
production unit volume, productivity improvements, and effective cost control
efforts, partially offset by price reductions on many of the Company's
products.

12
<PAGE>

Selling and Administrative Expenses. Selling and administrative expenses
increased by 26% to $124.8 million for the six months ended June 28, 1997 from
$99.4 million for the six months ended June 29, 1996. As a percentage of net
sales, selling and administrative expenses decreased to 21.5% for the six
months ended June 28, 1997 as compared to 21.9% for the same period in the
prior year. This decrease was a result of continued commitment to developing
more efficient business processes, which has improved member productivity,
coupled with stringent control of expenses and increased efficiencies
associated with higher net sales. However, these results were partially offset
by increased freight costs due to growth of unit volume, increased
distribution costs for new warehouse capacity and product handling
technologies that facilitate providing higher level of service to customers,
and the ongoing commitment to developing and marketing new products.

Operating Income. Operating income from continuing operations increased 38%
to $59.5 million for the six months ended June 28, 1997 compared to $43.2
million (excluding a nonrecurring pre-tax gain of $3.2 million) for the six
months ended June 29, 1996. The increase is attributable to increased gross
profit and lower selling and administrative expenses as a percentage of net
sales. In the six months ended June 29, 1996, the Company recognized a pre-tax
gain of $3.2 million on the sale of a subsidiary, Ring King.

Net Income. Net income increased by 32% to $35.8 million for the six months
ended June 28, 1997 compared to $27.1 million (excluding a nonrecurring after-
tax gain of $2.0 million) for the six months ended June 29, 1996. This
increase is a result of the increase in operating income offset partially by
an increase in interest expense and an increase in the Company's effective tax
rate to 37.5% for the six months ended June 28, 1997 compared to 37.0% for the
six months ended June 29, 1996. Interest expense increased to $3.1 million for
the six months ended June 28, 1997 from $1.6 million for the same period in
the prior year due to the additional debt assumed to fund the Heat-N-Glo
acquisition in October 1996.

Net income per common share increased by 35% to $1.20 per share for the six
months ended June 28, 1997 from $0.89 earned from ongoing operations last year
(excluding a nonrecurring after-tax gain of $0.07 per share). Average shares
outstanding decreased to 29.7 million for the six months ended June 28, 1997
from 30.3 million for the six months ended June 29, 1996 due to share
repurchases.

FISCAL YEAR ENDED DECEMBER 28, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
1995

Net Sales. Net sales increased by 12% to $998.1 million in 1996 from $893.1
million in the prior year. The increase in net sales for both core business
segments was due to continued gains in market share, which management believes
resulted from the Company's offering of an ongoing stream of innovative and
quality new products and a commitment to manufacturing excellence. Office
furniture products net sales increased 8% in 1996 to $887.3 million from
$818.9 million in 1995. Hearth products net sales increased 49% in 1996 to
$110.8 million from $74.2 million in 1995 due in part to the Company's October
1996 acquisition of Heat-N-Glo.

Gross Profit. Gross profit increased by 19% to $318.6 million in 1996 from
$268.4 million in the prior year. The increase in gross profit is primarily
attributable to the Company's sales growth in both business segments, which
has been driven by unit sales growth as opposed to pricing growth. Gross
profit margin increased to 31.9% for 1996 compared to 30.1% for 1995. This
increase was a result of the elimination of production inefficiencies
associated with two operations closed during 1995 and increased production
unit volume, productivity improvements, and effective cost control efforts,
partially offset by continued price reductions on many of the Company's
products.

Selling and Administrative Expenses. Selling and administrative expenses
increased by 7% to $215.6 million in 1996 from $201.7 million in the prior
year. Selling and administrative expenses as a percentage of net sales
decreased to 21.6% in 1996 from 22.6% in 1995. This decrease was a result of
continued implementation of the Company's RCI process, which led to more
efficient business processes and increased efficiencies associated with higher
net sales. These decreases were partially offset by more aggressive marketing
programs, greater use of cooperative advertising programs, freight costs
escalating at a more rapid rate than product price increases and additional
costs of pursuing a proactive acquisition strategy.

13
<PAGE>

Operating Income. Operating income increased by 54% to $103.0 million
(excluding a nonrecurring pre-tax gain on the sale of a subsidiary of $3.2
million) in 1996 from $66.7 million in 1995. The increase is a result of the
increase in gross profit and lower selling and administrative expenses as a
percentage of net sales.

Net Income. Net income, excluding the $2.0 million nonrecurring after-tax
gain on the sale of a subsidiary, increased by 61% to $66.1 million in 1996
from $41.1 million in the prior year. This increase is primarily attributable
to increased operating income, lower net interest expense and a lower
effective income tax rate. The effective tax rate was 35.3% for 1996 compared
to 37.3% for 1995. The rate for 1996 was favorably impacted by non-recurring
income tax credits of $2.1 million, or $0.07 per share, recorded in the third
quarter of 1996.

Net income per common share increased by 62% to $2.19 (excluding a
nonrecurring after-tax gain of $0.07 per share) in 1996 from $1.35 for 1995.
The Company's net income per share performance for 1996 benefited from the
Company's common stock repurchase program.

The Company has closed, consolidated, and sold several operations over the
past two years in an effort to concentrate further on its core strengths. In
addition, the Company resolved several litigation uncertainties, reduced its
work force, addressed several asset realization concerns, and benefited from
special tax credits. The net effect of these unusual business events was to
reduce annual net income by $3.3 million, or $0.11 per share, in 1996, and
$4.8 million, or $0.16 per share, in 1995.

FISCAL YEAR ENDED DECEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1994

Net Sales. Net sales increased by 6% to $893.1 million in 1995 from $846.0
million in the prior year. Sales growth in 1995 was impacted by a difficult
market environment which resulted in aggressive product pricing and inventory
adjustments related to some major customers. Office furniture products net
sales increased 6% in 1995 to $818.9 million from $772.3 million in 1994.
Hearth products net sales increased by less than 1% in 1995 to $74.2 million
from $73.7 million in 1994.

Gross Profit. Gross profit decreased by 2% to $268.4 million in 1995 from
$272.6 million in the prior year. The gross profit margin decreased to 30.1%
in 1995 from 32.2% in 1994. This decrease in margin was primarily attributable
to competitive price decreases, inventory adjustments, and production
inefficiencies of two financially marginal operations which were closed or
consolidated during the year. These decreases were partially offset by the
Company's on-going RCI efforts.

Selling and Administrative Expenses. Selling and administrative expenses
increased by 9% to $201.7 million in 1995 from $185.5 million in the prior
year. Selling and administrative expenses as a percentage of net sales
increased to 22.6% in 1995 from 21.9% in 1994. These expenses were adversely
impacted in 1995 by increased sales support and freight costs, acquisition
exploration expenses, temporary business disruption costs resulting from
increasing warehouse capacity, increased investment in new product
development, and nonrecurring expenses of $7.6 million associated with closing
marginal operations and severance payments.

Operating Income. Operating income decreased by 23% to $66.7 million in 1995
from $87.1 million for 1994. The decrease is a result of lower gross profit
and higher selling and administrative expenses.

Net Income. Net income decreased by 24% to $41.1 million in 1995 from $54.4
million in the prior year (excluding a charge for the cumulative effect of an
accounting change). This decrease is primarily attributable to reduced
operating income.

Net income per common share decreased by 22% to $1.35 in 1995 from $1.74 for
1994 (excluding a charge for the cumulative effect of an accounting change).
The Company's net income per share performance for 1996 benefitted from the
Company's common stock repurchase program.

14
<PAGE>

SEASONALITY; QUARTERLY RESULTS OF OPERATIONS

The Company's office furniture business is seasonal with the third (July-
September) and fourth (October-December) fiscal quarters historically having
higher sales than the prior quarters. Hearth products sales tend to have an
even larger concentration of sales in the third and fourth fiscal quarters. In
fiscal 1996, 53% of the Company's consolidated net sales of office furniture
were generated in the third and fourth quarters and 57% of consolidated net
sales of hearth products (pro forma to reflect the Heat-N-Glo acquisition)
were generated in the third and fourth quarters.

The following table presents certain unaudited quarterly financial
information for each of the past ten quarters. In the opinion of the Company's
management, this information has been prepared on the same basis as the
consolidated financial statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial results set forth herein. Results of
operations for any previous quarter are not necessarily indicative of results
for any future period.

<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996(A) FISCAL 1997(A)
--------------------------------------- ---------------------------------------- ------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER(B) QUARTER(C) QUARTER QUARTER(D) QUARTER QUARTER QUARTER
-------- -------- -------- --------- --------- -------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.............. $216,498 $206,604 $228,195 $241,822 $233,477 $219,260 $255,254 $290,144 $282,859 $296,567
Cost of products sold.. 147,556 146,246 160,319 170,579 160,006 150,227 176,403 192,860 194,194 200,969
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit........... 68,942 60,358 67,876 71,243 73,471 69,033 78,851 97,284 88,665 95,598
Selling and
administrative
expenses.............. 48,565 47,688 48,084 57,354 49,846 49,507 53,605 62,688 60,453 64,303
Gain on sale of
subsidiary............ -- -- -- -- 3,200 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income....... 20,377 12,670 19,792 13,889 26,825 19,526 25,246 34,596 28,212 31,295
Interest income
(expense) (net)....... (258) (304) (344) (305) (119) ( 8) 91 (890) (1,142) (1,141)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. 20,119 12,366 19,448 13,584 26,706 19,518 25,337 33,706 27,070 30,154
Income taxes........... 7,544 4,638 7,209 5,028 9,881 7,222 7,430 12,640 10,152 11,307
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income............. $ 12,575 $ 7,728 $ 12,239 $ 8,556 $ 16,825 $ 12,296 $ 17,907 $ 21,066 $ 16,918 $ 18,847
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Net income per common
share................. $ 0.41 $ 0.25 $ 0.41 $ 0.28 $ 0.55 $ 0.41 $ 0.60 $ 0.70 $ 0.57 $ 0.63
Weighted average common
shares outstanding.... 30,644 30,543 30,416 30,379 30,345 30,170 30,063 29,879 29,700 29,692
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit........... 31.8 29.2 29.7 29.5 31.5 31.5 30.9 33.5 31.3 32.2
Selling and
administrative
expenses.............. 22.4 23.1 21.1 23.7 21.3 22.6 21.0 21.6 21.4 21.7
Operating income....... 9.4 6.1 8.7 5.7 11.5 8.9 9.9 11.9 10.0 10.6
Income taxes........... 3.5 2.2 3.2 2.1 4.2 3.3 2.9 4.4 3.6 3.8
Net income............. 5.8% 3.7% 5.4% 3.5% 7.2% 5.6% 7.0% 7.3% 6.0% 6.4%
</TABLE>
- -------
(a) Includes the results of operation of Heat-N-Glo from October 2, 1996, the
date it was acquired.
(b) Includes various pre-tax charges totaling $5,575,000 (after-tax effect of
$3,512,000, or $.12 per share) for nonrecurring costs primarily associated
with closing several leased facilities and severance arrangements from
eliminating certain administrative positions.
(c) Includes a $3,200,000 pre-tax gain on the sale of Ring King (after-tax
gain of $2,000,000, or $.07 per share).
(d) Includes one-time federal and state income tax credits of $2,100,000, or
$.07 per share.

15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

For the six months ended June 28, 1997, cash from operations was $43.8
million. During 1996, cash from operations was $93.3 million, which provided
the funds necessary to meet working capital needs, help finance an
acquisition, invest in capital improvements, repay long-term debt, pay
increased dividends and repurchase Company stock.

Cash Management. Cash, cash equivalents, and short-term investments totaled
$24.4 million at June 28, 1997, compared to $32.7 million at the end of 1996,
$46.9 million at the end of 1995, and $30.7 million at year-end 1994. These
funds, coupled with future cash from operations and additional long-term debt,
if needed, are expected to be adequate to finance operations, planned
improvements, and internal growth.

Another major element in maintaining a strong balance sheet is managing the
investment in receivables and inventories. The Company's success in managing
receivables is in large part due to maintaining close communications with its
customers and utilizing prudent risk assessment techniques. Inventory levels
and turns continue to improve as a function of reducing production cycle
times. Trade receivables turns have approximated 10 times for the past several
years, including 1996, and inventory turns have been in the 14 to 16 range,
with 1996 reaching 17 turns.

Capital Expenditure Investments. Capital expenditures, net of disposals,
were $34.2 million for the six months ended June 28, 1997, $44.7 million in
1996, $53.9 million in 1995, and $35.0 million in 1994. Expenditures for the
six months ended June 28, 1997 were principally for machinery, equipment,
process improvements, support for new products, production and warehouse
capacity, and information technology. Expenditures in 1996 were principally
for machinery, equipment, process improvements and tooling for new products.
Approximately $11.0 million of the expenditures in 1995 were for facility
capacity expansion and improvements, with the remainder invested in more
productive machinery, equipment, process improvements and tooling of new
products. Expenditures for 1994 were also principally for machinery, equipment
and process improvements. Looking forward, the projected capital expenditure
level for 1997 will be at a higher level than in 1996 and will include some
facility capacity expansion, but the bulk of the investment will be for new
product tooling and more productive and flexible machinery, equipment and
processes as in the past.

Long-Term Debt. Long-term debt, including capital lease obligations, was 35%
of total capitalization at June 28, 1997. Long-term debt, including capital
lease obligations, was 23.5% of total capitalization at December 28, 1996,
after recording the debt associated with the Heat-N-Glo acquisition. The
Company does not expect future capital resources to be a concern. The Company
has significant additional borrowing capacity and treasury stock available in
the event cash generated from operations should be inadequate to meet future
capital needs.

Cash Dividends. Cash dividends were $0.28 per common share for the six
months ended June 28, 1997, $0.50 for 1996, $0.48 for 1995, and $0.44 for
1994. The Board of Directors announced a 17% increase in the quarterly
dividend rate, from $0.12 to $0.14 per common share, in November 1996,
effective with the December 1, 1996, dividend payment. The previous quarterly
dividend increase was from $0.11 to $0.12, effective with the March 1, 1995,
dividend payment. A cash dividend has been paid every quarter since April 15,
1955, and quarterly dividends are expected to continue. The dividend payout
percentage has ranged from approximately 22% to 33% of prior year earnings.

Common Share Repurchases. In August 1996, the Board of Directors authorized
an additional $20.0 million to acquire the Company's Common Stock. During the
first six months of 1997, 63,648 shares were reacquired at a cost of
approximately $2.5 million, or an average price of $40.10 per share. During
1996, 753,800 shares were reacquired at a cost of approximately $21.9 million,
or an average price of $29.07 per share. During 1995, 367,317 shares were
reacquired at a cost of approximately $9.8 million, and 1,078,835 shares were
purchased in 1994 at a cost of approximately $29.6 million. The Company
purchases its own shares in open market transactions. The stock repurchase
strategy was initiated in 1985. Approximately 16.0 million shares have been
repurchased since the program's inception at a cost of approximately $231.3
million. As of June 28, 1997, approximately $6.2 million of the Board's last
$20.0 million purchase authorization remained available.

Litigation and Uncertainties. The Company is involved in various legal
action arising in the course of business, including certain environmental
matters. These uncertainties are referenced in the "Contingencies" note
included in the notes to consolidated financial statements.

16
<PAGE>

BUSINESS

The Company is a leading designer and manufacturer of value-priced office
furniture and furniture systems in the United States. The Company's products
are marketed through multiple distribution channels primarily to small- and
medium-sized businesses and home offices on the basis of price, quality,
selection and quick delivery. The Company maintains its leadership position by
offering "compelling value" to its customers through a broad line of quality
office furniture, including filing cabinets, seating, office systems, desks
and related products, at attractive price points, with quick delivery. The
Company's low-cost manufacturing capabilities, extensive distribution network,
innovative product development and unique employee ("member") culture enable
it to provide compelling value to its customers. In addition to its core
office furniture business, the Company, through its Hearth Technologies Inc.
subsidiary ("Hearth Technologies"), is the leading manufacturer of wood- and
gas-burning fireplaces, stoves and related accessories in the United States.
The Company markets its hearth products through the widely-recognized
"Heatilator" and "Heat-N-Glo" brand names. In fiscal 1996, the Company had net
sales of $998.1 million, of which $887.3 million was attributable to office
furniture products and $110.8 million was attributable to hearth products.

A key driver of the Company's success has been its highly-efficient and low-
cost manufacturing operations. Since its inception, the Company has been
committed to constant improvement in manufacturing and in 1992 introduced its
process improvement approach known as Rapid Continuous Improvement ("RCI")
which focuses on streamlining design, manufacturing and administrative
processes. The Company's RCI program, in which most members participate, has
significantly contributed to increased productivity, lower manufacturing
costs, and improved product quality and workplace safety. As a result of RCI,
productivity, as measured by annual revenue per member, has increased 50% over
the last five years. In addition, the Company's RCI efforts enable it to offer
short average lead times of two to four weeks, from receipt of order to
shipment, for most of its products.

The Company distributes its products through an extensive network of
independent office furniture dealers, office products dealers, wholesalers and
retailers. The Company is one of the top two suppliers of office furniture to
each of the largest national office products dealers, which are Boise Cascade
Corporation, BT Office Products International, Inc., U.S. Office Products
Company, Corporate Express Inc., Office Depot Inc.--Business Services Division
and Staples Commercial Advantage ("mega-dealers"), and to the Office Depot and
Office Max superstores. The Company offers reduced freight costs and complete
order delivery, regardless of the order size or combination of products, by
manufacturing at multiple locations and cross-docking products throughout the
United States. The Company believes that more of its products are available
for immediate delivery, through over 135 nationwide wholesaler customer
locations, than those of any of its competitors.

The Company's product development efforts are primarily focused on reducing
the cost to manufacture existing products and designing new products that
provide additional features and better quality. The Company's ability to apply
RCI techniques to reduce manufacturing costs and enhance value allows its
products to be sold at prices lower than those offered for competing products.
For example, in 1996 the Company redesigned its leading line of file cabinets
to add features while lowering the Company's costs and maintaining prices. As
a result of the Company's aggressive product development efforts,
approximately 45% of the Company's 1996 sales volume consisted of products
introduced within the last three fiscal years.

An important element of the Company's success has been its ability to
attract, develop and retain skilled, experienced and efficient members. Each
of the Company's eligible members owns stock in the Company through a number
of stock-based plans, including a member stock ownership plan, and
participates in the Company's qualified profit sharing plan. In addition, most
production members are eligible for incentive bonuses.

INDUSTRY

According to the Business and Institutional Furniture Manufacturer's
Association ("BIFMA"), U.S. office furniture industry shipments, which totaled
approximately $10 billion in 1996, have grown at a compound annual

17
<PAGE>

growth rate of approximately 7% over the three-year period ended December 31,
1996. The Company believes that growth in the office furniture industry is
being driven by changing customer needs due to the emergence of open office
floor plans to support team work environments, shared and multi-purpose office
spaces for flexible work arrangements, new office technology which requires
furniture systems that support the use of hardware and software, and an
increased focus on ergonomics and employee comfort.

The U.S. office furniture market consists of two primary segments--the
contract segment and the transactional segment. The contract segment has
traditionally been characterized by one-time sales of large quantities of
office furniture to large corporations, such as for new office facilities,
relocations or department or office redesigns, which are frequently customized
to meet specific client and designer preferences. Contract furniture is
generally purchased through office furniture dealers who typically prepare a
custom-designed office layout emphasizing image and design. The process is
often lengthy and generally has several manufacturers competing for the same
projects. Overhead and support associated with the sales and customization
efforts in this segment are major reasons why the prices for contract office
furniture have traditionally been relatively high.

The transactional segment of the market, in which the Company is a leader,
primarily represents smaller orders of office furniture purchased by
businesses and home office users on the basis of price, quality, selection and
quick delivery. Office products dealers, wholesalers and retailers, such as
office products superstores, are the primary distribution channels in this
market segment. Office products dealers (many of whom also participate in the
contract segment of the market) publish periodic catalogs that display office
furniture and products from various manufacturers.

Over the last several years, as competition in the contract segment has
intensified, dealers have sought to provide their clients with moderately-
priced alternatives to premium-priced contract furniture. In addition, small-
and medium-sized businesses with less complex needs have sought out affordable
office furniture that can be delivered quickly. In response to these trends,
the Company, as well as some of its competitors, have developed value-priced
alternatives to contract furniture lines--standard selections of quality
office furniture offered at attractive price points with quick and convenient
delivery. The Company believes that this portion of the contract segment will
continue to expand with the proliferation of small- and medium-sized
businesses, growth in home offices, commoditization of office furniture and
consolidation in the office furniture distribution network.

GROWTH STRATEGY

The Company's strategy is to build on its position as a leading manufacturer
of value-priced office furniture and hearth products in North America. The
components of this growth strategy are to:

Introduce New Value-Priced Products. The Company has been increasingly
successful in developing compelling value alternatives to premium-priced
office furniture and intends to expand and further enhance its product
offerings by developing new products. The Company's development efforts
emphasize the design of products that are easily manufactured, and the use and
development of alternative materials that enhance quality and reduce product
development cycles and manufacturing costs. The Company conducts market
research of end-users to assess evolving customer demands. The Company offers
its products in many new models, sizes, alternative materials, designs,
fabrics and finishes. Areas in which the Company intends to expand its product
offerings include computer furniture, ready-to-assemble furniture, folding
chairs and tables, fire-proof files and school furniture.

Continually Improve Productivity. The Company intends to strengthen its low-
cost manufacturing position by continuing to apply RCI, designing special
machines and tooling to enhance proprietary processes, evaluating vertical
integration opportunities and improving information systems. Lower costs allow
the Company to enhance product features at no additional cost to the customer.
As successfully demonstrated in 1996 and the first half of 1997, lower
manufacturing costs also allow the Company to reduce prices on existing
products in order to increase volume and market share while maintaining
operating margins. The Company intends to implement proven RCI tools to
realize productivity gains in acquired operations.

18
<PAGE>

Leverage Distribution Network. The changing dynamics of distribution in the
office furniture industry present an opportunity for the Company to benefit
from its extensive distributor network and its flexible operating structure.
Due to consolidation among office furniture distributors, fewer and larger
distributors exist and these distributors, such as office products and
furniture dealers, wholesalers and large, national retail chains, are reducing
their vendor bases and seeking stronger suppliers who offer more complete
product lines. As one of the top two suppliers of office furniture to each of
the mega-dealers and the Office Depot and Office Max superstores, the Company
believes that it is well-positioned to capitalize on this consolidation trend
due to its excellent reputation for price, quality, quick delivery and broad
product lines. In addition, the Company's commitment to providing distributors
with excellent customer service has helped to strengthen existing
relationships as well as develop new distribution channels.

Further Penetrate Hearth Products Market. The Company's recognized
innovation in direct-vent gas fireplace design and manufacturing coupled with
its premier position in wood-burning products provides it with the most
comprehensive product line and extensive distribution network in the hearth
products market. The Company plans to further enhance its competitive position
in the hearth products market by leveraging synergies with the office
furniture business, such as purchasing, manufacturing and product development.

PRODUCTS

The Company designs, manufactures and markets a broad range of office
furniture in four basic categories: (i) filing cabinets; (ii) seating,
including task chairs, executive desk chairs and side chairs; (iii) office
systems (typically modular and moveable workspaces with integrated work
surfaces, space dividers and lighting); and (iv) desks and related products,
including tables, bookcases and credenzas. The Company's products are sold
through the Company's HON Company Division ("The HON Company") and the
Company's wholly-owned subsidiaries--BPI Inc. ("BPI"), Holga Inc. ("Holga")
and The Gunlocke Company ("Gunlocke").

The Company's office furniture products are generally available in
contemporary as well as traditional styles, and are priced to sell in
different channels of distribution and at different price points. The
Company's products are offered in many models, sizes, designs and finishes and
are constructed from both wood and non-wood materials.

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

Filing Cabinets

The Company offers a variety of filing options designed either to be
integrated into and support the Company's office systems products, or to
function as free-standing furniture in commercial and home offices. The
Company believes it is the largest manufacturer and marketer of mid-priced
steel filing cabinets in the United States.

The Company sells most of its free-standing files--such as The HON Company's
310 and 510 Series vertical files and 600, 700 and 800 Series lateral files--
through mega-dealers, wholesalers, office products

19
<PAGE>

superstores, warehouse clubs and mail order distributors. Higher priced files,
such as The HON Company's 9000 Series lateral files and Allsteel's lateral
file line, both of which have drawer fronts designed to complement systems
furniture, are sold through contract office furniture dealers.

In 1996, the Company redesigned its industry-leading line of vertical filing
cabinets to make it even more attractive to customers. Drawer sides were
raised to a height that allows users to hang suspension file folders directly
on them, thus eliminating the need to purchase separate file folder suspension
frames at $2 to $3 per drawer. At the same time, the Company reduced the cost
of the cabinets using its RCI process and was able to sell the feature-
enriched units at the same price as the previous models.

Seating

The Company's seating line includes task chairs designed for different kinds
of office work, such as secretarial, computer, clerical, laboratory and
executive, guest chairs, conference and reception room seating, and stackable
chairs. The chairs are available in a variety of frame colors, a multitude of
fabrics and a wide range of price points. Key customer criteria in seating
includes superior ergonomics, aesthetics, comfort and quality. The Company
submits each of its chair models to customer surveys to assure that it is
among the best in its price range for design, comfort and ergonomic
adjustability to further build "compelling value" into its products.

The Company has high volume sellers throughout the range of value price
points. HON's Every-Day(R) chair and Solutions Seating(R) task chair are top
sellers with mega-dealers, wholesalers and superstores, while the HON 6000 and
5900 chairs and Allsteel's Tolleson chair are widely used by contract dealers
as key components in systems-based furniture projects.

Gunlocke is one of the few remaining companies that continues to make wood
curved legs, arms and backs through the steambending process, which produces
strong and attractive seating components. In the last year, Gunlocke
introduced two new contemporary wood seating lines, Serra(TM) and Miles, which
have been well-received by the market.

Office Systems

The Company offers a complete line of office systems products in order to
meet the needs of a variety of organizations. Systems may be used for team
work settings, private offices and open floor plans, and are typically modular
and movable workspaces composed of adjustable partitions, work surfaces, desk
extensions, storage cabinets and electrical lighting systems which can be
moved, reconfigured and reused within the office. Systems offer a cost-
effective and flexible alternative to traditional drywall office construction.
The Company has experienced increased demand for panel systems able to
accommodate new work arrangements such as team work spaces and work spaces
shared by several employees who are frequently out of the office. According to
BIFMA, panel systems comprise the largest product segment in the office
furniture industry with 1996 sales from this segment amounting to $3.4
billion. Importantly, a typical installation of office panels often includes
associated sales of seating, case goods, files and accessories.

The Company offers whole office solutions, movable panels, storage units and
work surfaces that can be installed easily and reconfigured to accommodate
growth and change in organizations. The Company also offers consultative
selling and design services for certain of its office system products. The
compelling value of the Company's systems lines is that these products are
styled and featured similar to those of premium-priced contract systems
manufacturers but are offered at substantially lower prices. As a result of
this, the Company's system lines have grown considerably faster than industry
system sales over the past four years.

Leading products and brands include HON's Concensys(R) (solid panel) and
Terrace(TM) (tiled panel) systems lines, and its complementary line of
Regent(R) case goods and seating, which are sold through selected contract
furniture dealers in key markets throughout North America. BPI's People
Furniture is popular with smaller companies because of its entry level price
point and ease of assembly and reconfigurability. Echelon(TM) is a new and
more fully featured BPI systems line which is growing rapidly.

20
<PAGE>

Desks and Related Products

The Company's collection of desks and related products include stand-alone
steel and wood furniture items, such as desks, bookshelves and credenzas, and
are available in a range of designs and price points. The Company offers these
products in both contemporary and traditional styles. The Company's desks and
related products are sold to a wide variety of customers from those designing
large office configurations to small retail and home office purchasers.

The Company offers a variety of contemporary and traditional tables designed
for use in conference rooms, private offices, training areas, teamwork
settings and open floor plans. Tables are produced in wood veneer and laminate
and are available in numerous sizes, shapes and base styles.

HEARTH TECHNOLOGIES

The Company is the largest U.S. manufacturer and marketer of metal
prefabricated fireplace and related products, primarily for the home, which it
sells under the widely-recognized Heatilator and Heat-N-Glo brand names. The
Company's line of hearth products includes wood- and gas-burning fireplaces
and stoves, fireplace inserts, chimney systems and related accessories. In
October 1996, the Company acquired Heat-N-Glo and combined it with its
existing Heatilator operations to form Hearth Technologies, through which it
sells all its hearth products.

The Company believes that shipments for the North American segment of the
building products industry in which Hearth Technologies directly participates,
representing the wood fireplace, hearth stove, gas- and wood-fireplace insert
and gas log set product lines were $1 billion for 1996, representing an
increase of approximately 15% over the prior year. Heatilator and Heat-N-Glo
are leaders in the two largest segments of the home fireplace market: vented-
gas and wood fireplaces.

Historically, the hearth products industry has consisted primarily of low-
cost builders' box fireplaces sold through builder distributors and wood
stoves and high efficiency fireplaces sold through dealer showrooms. With the
acquisition of Heat-N-Glo in October 1996, Hearth Technologies began marketing
a "direct vent" fireplace, which replaces the top-venting chimney system used
in traditional fireplaces. See "Business--Intellectual Property." The Company
believes that the introduction of the direct vent fireplace, together with the
introduction of fireplace inserts and accessories such as remote controls, and
more sophisticated marketing, will lead to rapid industry growth in the
future. Sales of home fireplaces are largely dependent on new housing starts
while sales of heating stoves and fireplace inserts are largely dependent upon
home remodeling expenditures. Management believes that this complementary
diversity and Hearth Technologies' broad national distribution afford
potential for growth for the Company's products.

As of December 28, 1996, the Company's hearth products sales organization
consisted of 9 regional sales managers supervising 22 salespersons and 15
independent manufacturers' representatives.

MANUFACTURING

Since its inception, the Company has focused on making its manufacturing
facilities and processes more flexible while at the same time reducing costs
and improving product quality. In 1992, the Company adopted the principles of
RCI, which focus on developing flexible and efficient design, manufacturing
and administrative processes that remove excess cost. To achieve flexibility
and attain efficiency goals, the Company has adopted a variety of production
techniques including cell manufacturing, focused factories, just-in-time
inventory management and value engineering. The application of the RCI process
has increased productivity by reducing set-up and processing times, square
footage, inventory levels, product costs and delivery times, while improving
quality and enhancing member safety. The Company's RCI process involves
production and administrative employees, management, customers and suppliers.
The Company has over 100 facilitators, coaches and consultants dedicated to
the RCI process and strives to involve all members in the RCI process. In
addition, the Company has organized a group that designs, fabricates, tests
and installs proprietary manufacturing equipment.

21
<PAGE>

Manufacturing also plays a key role in the Company's concurrent product
development process that primarily seeks to design new products for ease of
manufacturability.

PRODUCT DEVELOPMENT

The Company's product development efforts are primarily focused on reducing
the cost to manufacture existing products and designing new products that
provide additional features and quality. The Company accomplishes this through
improving existing products, extending product lines, applying ergonomic
research, improving manufacturing processes, applying alternative materials
and providing engineering support and training to its operating units. The
Company conducts its product development efforts at both the corporate and
operating unit level. At the corporate level, the staff at the Company's
Stanley Howe Technical Center, working in conjunction with operating staff,
seeks breakthrough developments in product design, manufacturability and
materials usage. At the operating unit level, development efforts are focused
on achieving incremental improvements in product features and manufacturing
processes. As a result of the Company's aggressive product development
efforts, approximately 45% of the Company's 1996 sales volume consisted of
products introduced within the last three fiscal years. The Company invested
approximately $10.4 million, $11.6 million, and $10.1 million in product
development during fiscal 1996, 1995 and 1994, respectively, and has budgeted
$15 million for product development in fiscal 1997.

BIFMA and the American National Standards Institute ("ANSI") have
promulgated a variety of voluntary standards governing the construction and
design of office furniture. The ANSI/BIFMA standards include tests for
strength, stability and durability. The Company's products undergo internal
testing in the Company's product testing laboratory to confirm that such
products meet or exceed applicable ANSI/BIFMA standards. All HON branded
products meet or exceed applicable ANSI/BIFMA standards. HON is a member of
the BIFMA task force working to develop standards for ready-to-assemble
furniture.

SALES, MARKETING AND DISTRIBUTION

Over the last ten years, the office products and office furniture industries
have experienced substantial consolidation as larger dealers have acquired
smaller local and regional dealers. Consolidation permits large dealers to
benefit from economies of scale, increased purchasing power and the
elimination of redundant management and overhead expenses. Larger dealers have
also been able to take advantage of more sophisticated management techniques
designed to enhance customer service, lower costs and increase operating
efficiency. According to The Dun and Bradstreet Corporation, the number of
office products dealers has decreased from approximately 12,000 in 1986 to
approximately 6,000 in 1996. At the same time, office products superstores
have emerged and replaced local, retail office supply stores. The Company
believes that these trends may continue to result in fewer, larger dealers and
retailers as customers for the Company's products.

As a result of these trends, the Company today sells its products through
five principal distribution channels. The first channel, independent, local
office furniture and office products dealers, specialize in the sale of a
broad range of office furniture and office furniture systems, mostly to small-
and medium-sized businesses, branch offices of large corporations and home
office owners. The second distribution channel comprises the mega-dealers,
including Boise Cascade Corporation, BT Office Products International, Inc.,
U.S. Office Products Company, Corporate Express Inc., Office Depot Inc.--
Business Services Division and Staples Commercial Advantage. Many of the
independent dealers and mega-dealer locations assist their customers with the
evaluation of office space requirements, systems lay-out and product
selection, and design and office solution services provided by professional
designers.

The third distribution channel, wholesalers, serve as distributors of the
Company's products to independent dealers, mega-dealers and superstores. The
Company sells to the nation's largest wholesalers, United Stationers and S.P.
Richards, as well as to smaller, regional wholesalers. Wholesalers maintain
stocks of standard product lines for resale to dealers. They also special
order products from the Company in customer-selected models and colors. The
Company's wholesalers maintain over 135 warehouse locations throughout the
United States, which enable the Company to make its products available for
rapid delivery to dealers anywhere in the country.

22
<PAGE>

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

The fifth distribution channel consists of government-focused dealers that
sell the Company's products to federal, state and local government offices in
accordance with contract terms to which the Company has agreed.

As of December 28, 1996, the Company's office furniture sales force
consisted of 16 regional sales managers supervising 70 salespersons, plus
approximately 150 independent manufacturers' representatives, who collectively
provided national sales coverage. Approximately 25 salespersons were added in
June 1997 as a result of the Allsteel acquisition.

Office products dealers, national wholesalers and retailers market their
products through catalogs published periodically and distributed to existing
and potential customers. The Company's marketing objective is to gain share in
its customers' catalogs. The Company believes that the inclusion of the
Company's product lines in customer catalogs offers strong potential for
increased sales of the listed product items due to the exposure provided by
these publications. The Company measures its sales potential and ranking
relative to its competitors on the basis of the Company's percentage share in
its customers' catalogs. The Company's average percentage share of pages in
the office furniture section of catalogs published for 1996 and 1997 and
estimated for 1998 by the six megadealers was approximately 39%, 48% and 64%,
respectively. The Company's average percentage share of pages in the office
furniture section of catalogs published for 1996 and 1997 and estimated for
1998 by SP Richards and United Stationers, two of the nation's largest
wholesalers, was approximately 34%, 38% and 53%, respectively. Catalog page
share is calculated on the basis of the total catalog page space featuring the
Company's products as a percentage of total catalog pages devoted to
comparable office furniture products from all suppliers.

The Company also makes export sales through HON Export Limited to
approximately 75 office furniture dealers and wholesale distributors serving
select foreign markets. Distributors are principally located in Latin America
and the Caribbean. The Company has an international field sales organization
consisting of a Vice President of Sales and Marketing and four regional
managers. Sales outside of the United States and Canada represented less than
1% of net sales in fiscal 1996.

COMPETITION

The office furniture industry is highly competitive, with a significant
number of competitors offering similar products. The Company competes by
emphasizing its ability to deliver compelling value products. In executing
this strategy, the Company has two significant classes of competitors. First,
the Company competes with numerous small- and medium-sized office furniture
manufacturers that focus on more limited product lines and/or end-user
segments and include Global Furniture Inc.; Anderson-Hickey Co., Globe
Business Furniture and United Chair, Inc., divisions of Haworth, Inc.;
National Office Furniture, a division of Kimball Office Furniture Co.; and
High Point Furniture Industries, Inc. Second, the Company competes with a
small number of large office furniture manufacturers which control a
substantial portion of the market share in the contract office furniture
market, such as Steelcase Inc., Haworth, Inc., Herman Miller, Inc. and Knoll,
Inc. Some of these large competitors have substantially greater assets,
resources and capabilities in the traditional contract market than the
Company.

Hearth products, consisting of prefabricated metal fireplaces and related
products, are manufactured by a number of national and regional competitors. A
limited number of manufacturers, however, are predominant in the relatively
small industry.

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

23
<PAGE>

The Company is the fourth largest office furniture manufacturer in the
United States, and believes that it is the largest manufacturer of value-
priced furniture. The Company is also the largest manufacturer and marketer of
fireplaces in the United States.

PROPERTIES

The Company maintains its corporate headquarters in Muscatine, Iowa, and
conducts its operations at locations throughout the United States and Canada
which house manufacturing and distribution operations and offices totaling an
aggregate of approximately 7.3 million square feet. Of this total,
approximately 2 million square feet are leased, including approximately 0.3
million square feet under a capital lease.

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

24
<PAGE>

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

<TABLE>
<CAPTION>
OWNED
APPROXIMATE OR DESCRIPTION
LOCATION SQUARE FEET LEASED OF USE
-------- ----------- ------ -----------
<C> <C> <C> <S>
Cedartown, Georgia 443,334 Owned Manufacturing non-wood
case goods office furni-
ture(1)
Chester, Virginia 283,040 Leased(2) Manufacturing non-wood
case goods office furni-
ture(1)
Jackson, Tennessee 303,000 Leased Manufacturing parts for
office furniture(1)
Jackson, Tennessee 170,000 Leased Manufacturing non-wood
office seating
Lake City, Minnesota 235,000 Leased Manufacturing metal pre-
fabricated fireplaces
Louisburg, North Carolina 176,354 Owned Manufacturing wood case
goods office furniture
Milan, Tennessee 358,000 Leased Manufacturing systems of-
fice furniture
Mt. Joy, Iowa 159,500 Leased Distributing office furni-
ture
Mt. Pleasant, Iowa 288,006 Owned Manufacturing metal pre-
fabricated fireplaces
Muscatine, Iowa 231,444 Owned Manufacturing non-wood
office seating
Muscatine, Iowa 612,713 Owned Manufacturing non-wood
case goods office furni-
ture(1)
Muscatine, Iowa 177,000 Owned Manufacturing wood case
goods office furniture
Muscatine, Iowa 209,100 Owned Manufacturing systems of-
fice furniture
Owensboro, Kentucky 311,575 Owned Manufacturing wood office
seating
South Gate, California 520,270 Owned Manufacturing non-wood
case goods and seating of-
fice furniture(1)
Sulphur Springs, Texas 155,690 Owned Manufacturing non-wood
case goods office furni-
ture
Wayland, New York 692,226 Owned Manufacturing wood case
goods and seating office
furniture
West Hazelton, Pennsylvania 268,800 Owned Manufacturing non-wood
case goods office furni-
ture
Williamsport, Pennsylvania 238,326 Owned Manufacturing wood office
seating
Winnsboro, South Carolina 180,093 Owned Manufacturing non-wood
office seating
Verona, Mississippi 257,000 Owned Manufacturing systems of-
fice furniture
</TABLE>
- --------
(1) Also includes a regional warehouse/distribution center.
(2) A capital lease.

25
<PAGE>

Other Company manufacturing and distribution facilities, under 100,000
square feet in size, are located in Muscatine and Mt. Pleasant, Iowa; Van
Nuys, California; Kent, Washington; Salisbury, North Carolina; Richmond,
Virginia; Rome, Georgia; Cedartown, Georgia; and Calgary, Alberta, Canada.
These facilities total approximately 980,000 square feet with approximately
900,000 square feet used for the manufacture and distribution of office
furniture and approximately 80,000 square feet for hearth products. Of this
total, approximately 500,000 square feet are leased. The Company also leases
sales showroom space in office furniture market centers in several major
metropolitan areas. The Company is in the process of expanding its Cedartown
and Chester facilities to add an aggregate of approximately 150,000 square
feet of manufacturing and distribution capacity.

The Company also has two facility changes in progress. It recently moved the
manufacturing being performed at a approximately 104,000 square foot leased
plant in Savage, Minnesota to its Lake City, Minnesota plant. This plant had
been used for the manufacture of metal prefabricated fireplaces. The Savage
plant is in the process of being subleased. In addition, the Company is in the
process of renovating approximately 165,000 square feet of owned space in
Muscatine, Iowa to use for manufacturing systems office furniture. This space
was previously leased to a third party.

INTELLECTUAL PROPERTY

The Company owns 141 U.S. and 143 foreign patents and has applications
pending for 64 U.S. and 79 foreign patents. In addition, the Company holds
registrations for 77 U.S. and 132 foreign trademarks, and has applications
pending for 18 U.S. and 48 foreign trademarks.

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

When Hearth Technologies acquired Heat-N-Glo in October 1996, it also
acquired its patent for the design of a zero-clearance direct vent gas
fireplace (the "direct vent patent"). The direct vent design replaces the
traditional top-venting chimney system by permitting the exhaust pipe to
traverse a structure's exterior wall. The sealed combustion chamber of the
direct vent gas fireplace increases indoor air quality by using outside rather
than inside air for combustion and the direct vent design achieves 70% heating
efficiency, which means that the patented direct vent gas fireplaces are an
efficient alternative heat source in individual rooms. The direct vent gas
fireplaces are highly versatile for use in home design because the direct vent
design eliminates the need for a traditional chimney system with top venting,
thus opening the space above the fireplace up for use. The Company currently
offers numerous product designs that would not be possible without the direct
vent technology. Additionally, since a chimney is not employed in the direct
vent design, the cost of adding a new fireplace to a home is greatly reduced.

The direct vent patent has been successfully enforced against numerous
infringers. Hearth Technologies presently is engaged as a plaintiff in two
patent infringement cases involving this patent. Final disposition of these
cases is not likely for several years. Although the Company believes that the
protection afforded by the direct vent patent is not vital to sustaining
Hearth Technologies' gross profit margins on its direct vent gas fireplaces
due to other technological innovations that support the direct vent design,
the technology that underlies the patent is a significant distinguishing
feature for the Company's products.

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

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

26
<PAGE>

EMPLOYEES/MEMBERS

As of June 28, 1997, the Company employed approximately 6,900 persons, 6,300
of whom were members and 600 of whom were temporary personnel. Of the
approximately 6,900 persons employed by the Company, 4,300 were in the
Company's manufacturing operations. The Company employed approximately 300
members who were members of unions. The Company believes that its labor
relations are good. As a result of the Allsteel acquisition, approximately
1,100 employees have been added subsequent to June 28, 1997.

27
<PAGE>

MANAGEMENT

The current executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------
<S> <C> <C>
Jack D. Michaels................. 60 Chairman, President and Chief
Executive Officer; Director
George J. Koenigsaecker III...... 52 President, The HON Company
David C. Stuebe.................. 57 Vice President and Chief Financial
Officer
Jeffrey D. Fick.................. 36 Vice President, Member and Community
Relations
Melvin L. McMains................ 56 Controller
James I. Johnson................. 48 Vice President, General Counsel and
Secretary
Robert W. Cox.................... 60 Director
Stanley M. Howe.................. 73 Director
Lee Liu.......................... 64 Director
Lorne R. Waxlax.................. 64 Director
W. James Farrell................. 55 Director
Michael S. Plunkett.............. 59 Director
Herman J. Schmidt................ 80 Director
Robert L. Katz................... 71 Director
Celeste C. Michalski............. 55 Director
Richard H. Stanley............... 64 Director
</TABLE>

Set forth below is certain information with respect to the Company's
executive officers and directors:

Jack D. Michaels. Mr. Michaels has served as the Company's Chairman of the
Board since 1996, the Company's Chief Executive Officer since 1991, and the
Company's President since March 1990. He has been a director since 1990. Prior
to joining the Company, Mr. Michaels served as President and Chief Executive
Officer of Hussmann Corporation, a manufacturer and marketer of food store
refrigerated display equipment, from 1987 to January 1990. Mr. Michaels is
also a director of Huffy Corporation.

George J. Koenigsaecker III. Mr. Koenigsaecker has served as President of
The HON Company since November 1995. From February 1995 to November 1995, he
served as Senior Vice President of the Company. From August 1992 through
October 1995, Mr. Koenigsaecker served as Executive Vice President,
Operations, The HON Company. Prior to joining the Company, Mr. Koenigsaecker
was Group Executive, Danaher Corporation, a manufacturer of automotive,
instrumentation and precision components products from 1990 to 1992.

David C. Stuebe. Mr. Stuebe has served as Vice President and Chief Financial
Officer of the Company since October 1994. Prior to joining the Company, he
was President, Chief Executive Officer and a director of Diversified
Industries, Inc., a processor and trader of precious and semi-precious metals
from January 1990 to September 1994.

Jeffrey D. Fick. Mr. Fick has served as the Company's Vice President, Member
and Community Relations since May 1997 and the Company's Secretary from March
1997 to September 1997. From March 1994 to April 1997, Mr. Fick served as
Senior Counsel. Prior to joining the Company, Mr. Fick was an attorney with
Gray, Plant, Mooty, Mooty & Bennett from May 1986 to February 1994.

28
<PAGE>

Melvin L. McMains. Mr. McMains has served as the Company's Controller since
1980.

James I. Johnson. Mr. Johnson has served as Vice President, General Counsel
and Secretary of the Company since September 1997. From May 1990 to August
1997, Mr. Johnson served as General Counsel and Secretary of Norand
Corporation.

Robert W. Cox. Mr. Cox has served as a Director of the Company since 1994.
He is currently of counsel to Baker & McKenzie, an international law firm.
From 1992 to 1994, Mr. Cox was Chairman of Baker & McKenzie's Policy Committee
and from 1984 to 1992, he was its Managing Partner and Chairman of its
Executive Committee and Strategic Planning Committee. Mr. Cox is also a
director of Carey International, Inc.

Stanley M. Howe. Mr. Howe has served as Chairman Emeritus of the Company
since 1996 and a Director since 1958. He has served the Company since 1948,
serving as Chairman from 1984 to 1996, President from 1964 to 1990 and Chief
Executive Officer from 1979 to 1991.

Lee Liu. Mr. Liu has served as a Director of the Company since 1990. He has
served as an officer of IES Industries Inc. ("IESI"), IES Utilities ("IESU")
and various affiliates or predecessor companies, in the energy, transportation
and telecommunications industries, since 1990, serving IESI as Chairman and
Chief Executive Officer since 1993 and President from 1993 to November 1996
and serving IESU as Chairman and Chief Executive Officer since 1993 and as
President in 1996, 1994 and 1993. From 1990 to 1993, Mr. Liu served as an
officer to various affiliates to IESI and IESU. Mr. Liu is also a director of
Eastman Chemical Company, Principal Financial Group and McLeod USA.

Lorne R. Waxlax. Mr. Waxlax has served as a Director of the Company since
1994. He served as Executive Vice President, Diversified Group of The Gillette
Company, a marketer and manufacturer of personal care and use products from
1985 to 1993. Mr. Waxlax is also a director of Clean Harbors, Inc., Quaker
State Corporation, B.J's Wholesale Club Inc. and Homebase Inc.

W. James Farrell. Mr. Farrell has been a Director of the Company since 1988.
He has served Illinois Tool Works Inc., a manufacturer of highly engineered
products and systems, since 1965, serving as Chairman since May 1996, Chief
Executive Officer since September 1995, President from 1994 to 1995 and as
Executive Vice President and President of the Specialty Mechanical and
Adhesive Products Group from 1983 to 1994. Mr. Farrell is also a director of
Morton International, Inc. and Premark International, Inc.

Michael S. Plunkett. Mr. Plunkett has served as a Director of the Company
since 1980. He has been the Senior Vice President, Engineering, Technology and
Human Resources since 1986 and a Director from 1986 to 1993 of Deere &
Company, a manufacturer of mobile power machinery. Mr. Plunkett is also a
director of Bank One, Quad Cities, NA.

Herman J. Schmidt. Mr. Schmidt has been a Director of the Company since
1980. He served as Vice Chairman of Mobil Oil Corporation from 1974 to 1978.
Mr. Schmidt is also a director of H.J. Heinz Co.

Robert L. Katz. Dr. Katz has served as a Director of the Company since 1995.
He has been President of Robert L. Katz and Associates, consultants on
corporate strategy, since 1953 and President of Caltex Investment Management
Co., a venture capital firm since 1975. Dr. Katz is also a director of Newell
Co., a manufacturer of window shades, hardware, cookware and school supplies.

Celeste C. Michalski. Ms. Michalski has served as a Director of the Company
since 1993. She served the Telecommunications Group of NYNEX, in the
telecommunications, directory publishing and information delivery services
industries, from July 1995 to April 1997, serving as Managing Director,
Finance from December 1996 to April 1997, Vice President--Collections--
Residence and Business from November 1995 to November 1996 and Managing
Director, Productivity and Process Improvement from July to November 1995.
From 1994 to June 1995, Ms. Michalski served as Assistant Comptroller of NYNEX
and from 1993 to 1994 she

29
<PAGE>

served as Comptroller of New York Telephone, the largest operating subsidiary
of NYNEX. From 1988 to 1993, she was the Vice President and Controller of
GenCorp, Inc.

Richard H. Stanley. Mr. Stanley has served as Vice Chairman of the Company
since 1979 and as a Director since 1964. He has been the President of SC
Companies, Inc. since 1986, Chairman of Stanley Consultants, Inc., an
international engineering, architecture, planning and management firm, since
1984 and President since 1984 and Chairman since 1995 of The Stanley
Foundation, a private operating foundation. Mr. Stanley also serves as a
director of Dover Resources, Inc., a subsidiary of Dover Corporation, a
diversified manufacturer of industrial products.

SELLING SHAREHOLDER

The following table sets forth certain information regarding the Selling
Shareholder's beneficial ownership of the Company's Common Stock as of October
23, 1997, and as adjusted to reflect the sale of the shares of Common Stock
offered hereby.

<TABLE>
<CAPTION>
BEFORE THIS OFFERING AFTER THIS OFFERING
------------------------ ------------------------
SHARES TO
SHARES PERCENT BE SOLD SHARES PERCENT
NAME AND ADDRESS OF BENEFICIALLY OF SHARES IN BENEFICIALLY OF SHARES
BENEFICIAL OWNER OWNED OUTSTANDING OFFERING OWNED OUTSTANDING
- ------------------- ------------ ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BTC, Inc................ 2,395,000 8.1% 2,395,000 0 0%
1105 N. Market St.,
Suite 1300
Wilmington, Delaware,
19899
</TABLE>

BTC, Inc. is a Delaware corporation and a newly-formed, wholly-owned
subsidiary of Bandag, Incorporated. Bandag, Incorporated, headquartered in
Muscatine, Iowa, manufactures retreading materials and equipment for its
worldwide network of 1,300 independent franchised dealers who produce and
market retread tires.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 100 million shares
of Common Stock, par value $1.00 per share, and one million shares of
preferred stock, par value $1.00 per share (the "Preferred Stock"). At
September 22, 1997, the Company had 29,670,610 shares of Common Stock issued
and outstanding, held of record by approximately 5,315 shareholders, and no
shares of Preferred Stock issued and outstanding. No series of Preferred Stock
has been designated other than 200,000 shares of Series A Junior Participating
Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock").

The following summarizes the capital stock of the Company and certain
provisions of the Company's Articles of Incorporation, as amended (the
"Articles of Incorporation"), and its By-laws, as amended (the "By-laws") and
is qualified in its entirety by reference to the provisions of the Company's
Articles of Incorporation and By-laws and the Company's Rights Agreement.

COMMON STOCK

Except as required by law, holders of Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of the
holders of Common Stock. The holders of Common Stock are not entitled to
cumulative voting rights with respect to the election of directors. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution, or winding up of the Company,
holders of the Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding Preferred Stock. Holders of Common Stock have no preemptive
rights. There are no redemption or sinking fund

30
<PAGE>

provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon consummation of the
Offerings will be, fully paid and nonassessable. The Board of Directors may
issue additional authorized shares of Common Stock without further action by
the shareholders.

The Articles of Incorporation provide that the affirmative vote of the
holders of two-thirds of the total number of outstanding shares of Common
Stock entitled to vote shall be required and shall be sufficient to take any
action at any meeting of shareholders. Notwithstanding the foregoing, the
affirmative vote of the holders of a majority of the total number of
outstanding shares of Common Stock entitled to vote shall be required and
shall be sufficient to approve (i) any amendment to the Articles of
Incorporation which has been approved or recommended by the Board of Directors
of the Company (other than the provisions of the Articles of Incorporation
relating to voting requirements and election or removal of directors), (ii)
the election of a class of directors at any annual meeting of the shareholders
if (A) at the annual meeting of the shareholders in the third preceding year,
an election of such class of directors was held or attempted, but no director
of such class was elected at such meeting because no candidate received a two-
thirds majority vote and (B) the term of such class of directors was extended
for an additional three-year term pursuant to the Articles of Incorporation,
and (iii) any other motion, resolution or action which has been approved or
recommended by the Board of Directors of the Company (provided, that this
provision shall not apply to any motion, resolution or action regarding the
election or removal of directors, any amendment of the Articles of
Incorporation, any Corporate Combination (as defined below), any liquidating
dividend or distribution, or any dissolution of the Company).

PREFERRED STOCK

The Board of Directors has the authority, without further action by the
shareholders, to issue up to one million shares of Preferred Stock in one or
more series and, except as to those shares of Series A Preferred Stock
designated by the Board, to fix the rights and preferences thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences, and the number of shares constituting any series or
the designation of such series. Except as required by Iowa law, holders of
Preferred Stock have no voting rights. Holders of Preferred Stock shall have
no preemptive rights. The issuance of Preferred Stock could adversely affect
the voting power of holders of Common Stock and could have the effect of
delaying, deferring, or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock other than
the issuance of shares of Series A Preferred Stock in connection with the
Company's shareholder rights plan.

SHAREHOLDER RIGHTS AGREEMENT

Pursuant to the Company's Rights Agreement, each share of Common Stock
carries with it one right entitling a shareholder to buy one two-hundredth of
a share of Series A Preferred Stock at an exercise price of $75. For a
description of the Company's Rights Agreement, see notes to the Company's
consolidated financial statements.

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION, BY-LAWS AND IOWA CORPORATE LAW

The Company's Articles of Incorporation and By-laws and the Iowa Business
Corporation Act contain provisions that could make more difficult or delay the
acquisition of control of the Company by various means, such as a tender
offer, open market purchases, a merger, a proxy contest or otherwise. The
purposes of these provisions are to discourage certain types of transactions
which may involve an actual or threatened change of control of the Company and
encourage persons seeking to acquire control of the Company to consult first
with the Board of Directors to negotiate the terms of any proposed business
combination or offer. The provisions are designed to reduce the vulnerability
of the Company to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all outstanding shares or is otherwise unfair
to shareholders of the Company, or an unsolicited proposal for the
restructuring or sale of all or part of the Company.

Supermajority Vote Requirement. The Company's Articles of Incorporation
provide that the affirmative vote of the holders of that fraction of the total
outstanding shares of Common Stock entitled to vote, but not less than two-
thirds, determined by using as the numerator a number equal to the sum of (i)
the outstanding shares of Common Stock entitled to vote which are owned by a
Related Person (as defined below), plus (ii) two-thirds of

31
<PAGE>

the remaining number of outstanding shares of Common Stock entitled to vote,
and using as the denominator a number equal to the total number of outstanding
shares of Common Stock entitled to vote, shall be required for any act of the
shareholders of the Company relating to adoption of a Corporate Combination or
any amendment of such provision of the Articles of Incorporation. For purposes
of the Articles of Incorporation, "Corporate Combination" is defined as (a)
any merger or consolidation of the Company or any majority-owned subsidiary
with (i) any Related Person other than a majority-owned subsidiary or (ii) any
other corporation other than a majority-owned subsidiary which is, or after
such merger or consolidation would be, an affiliate of a Related Person, (b)
any sale, lease, exchange, mortgage, pledge, transfer, or other disposition in
one transaction or a series of transactions to or with any Transaction Person
(as defined below) of any assets of the Company or any majority-owned
subsidiary having an aggregate fair market value of $1,000,000 or more; (c)
the issuance or transfer by the Company or any majority-owned subsidiary in
one transaction or a series of transactions of any securities of the Company
or any majority-owned subsidiary to any Transaction Person in exchange for
cash, securities, other property, or a combination thereof, having an
aggregate fair market value of $1,000,000 or more; (d) the adoption of any
plan or proposal for the liquidation or dissolution of the Company proposed by
or on behalf of a Related Person or any affiliate of any Related Person; (e)
any reclassification of securities, including any reverse stock split or
recapitalization of the Company, or any merger or consolidation of the Company
with any of its majority-owned subsidiary, or any other transaction (whether
or not with, into, or otherwise involving a Related Person) which has the
effect, directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class of capital stock or any securities which are
convertible (with or without consideration) into shares of capital stock or
into other securities convertible into shares of capital stock or convertible
securities of the Company or any majority-owned subsidiary which is directly
or indirectly owned by any Related Person or any affiliate of any Related
Person. "Related Person" is defined as any person which, together with its
affiliates, associates and the associates of its affiliates, owns 10% or more
of the outstanding Common Stock.

Notwithstanding the foregoing, the affirmative vote of two-thirds of the
outstanding shares of Common Stock entitled to vote shall be sufficient for
the adoption and authorization of a Corporate Combination when (i) the
Corporate Combination will result in an involuntary sale, redemption,
cancellation, or other termination of ownership of all shares of Common Stock
owned by shareholders who do not vote in favor of or consent in writing to the
Corporate Combination; (ii) the cash or fair market value (as determined in
good faith by the Board of Directors) of other readily marketable
consideration to be received by all holders of Common Stock for their shares
will be (A) at least equal to the highest gross price per share paid or agreed
to be paid to acquire any shares of Common Stock by any Related Person within
two years of the record date for determining the shareholders entitled to vote
on the Corporate Combination, and (B) in cash or in the same form as the
Related Person, any person who would become a Related Person as a result of
the Corporate Combination or any affiliate, associate or affiliate of an
associate of such a person ("Transaction Person") has previously paid for
shares of Common Stock (if the Transaction Person has paid for shares of
Common Stock with varying forms of consideration, the form of consideration
for such Common Stock shall be either cash or the form used to acquire the
largest number of shares of such class of stock of the Company previously
acquired by it); (iii) during the period from the earlier of the date that a
person becomes a Transaction Person or a Transaction Person becomes a Related
Person until the date of consummation of such Corporate Combination (A) there
shall have been no failure to declare and pay at the regular date therefor any
full dividends, whether or not cumulative, on any outstanding preferred stock
of the Company; (B) there shall have been no reduction in the annual rate of
dividends paid on the Common Stock, except as necessary to reflect any
subdivision of such stock, and all increases in such annual rate of dividends
necessary to reflect any reclassification, including any reverse stock split,
recapitalization, reorganization, or any similar transaction which has the
effect of reducing the number of outstanding shares of the Common Stock; (C)
the Transaction Person shall not have become the beneficial owner of any
additional shares of stock of the Company except as part of the transaction
which results in the Transaction Person's becoming a Related Person; and (D)
the Transaction Person shall not have received the benefit, directly or
indirectly, except proportionately as a shareholder, of any loans, advances,
guaranties, pledges, other financial assistance, tax credits, or tax
advantages provided by the Company, whether in anticipation of or in
connection with such Corporate Combination or otherwise; and (iv) a proxy
statement

32
<PAGE>

responsive to the requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall be mailed to the shareholders of the
Company at least 30 days prior to the proposed consummation of a Corporate
Combination (whether or not such proxy statement is required to be mailed
pursuant to the Exchange Act or subsequent provisions) for the purpose of
soliciting shareholder approval of the proposed Corporate Combination.

Classified Board of Directors. The Company's Board of Directors is divided
into three classes, as nearly equal in number as is reasonably possible,
serving staggered terms. One class of directors is elected at each annual
meeting to serve a term of three years. Amendments to the staggered board
provisions require a two-thirds vote of shareholders. In addition, special
meetings of shareholders may only be called by a majority of the Board of
Directors or by the holders of at least 10% of the outstanding shares entitled
to vote at the meeting.

Section 490.1109 of the Iowa Business Corporation Act. The Company is
subject to the provisions of Section 490.1109 of the Iowa Business Corporation
Act (the "Business Combination Statute"). Under the Business Combination
Statute, certain "business combinations" between an Iowa corporation whose
stock is publicly traded or held by more than 2,000 shareholders and an
"interested shareholder" are prohibited for a three-year period following the
date that such a shareholder became an interested shareholder, unless (i)
prior to the time the shareholder became an interested shareholder, the board
of directors of the corporation approved either the business combination or
the transaction which resulted in the shareholder becoming an interested
shareholder; (ii) at or subsequent to the time the shareholder became an
interested shareholder, the business combination is approved by the board of
directors and authorized at an annual or special meeting of shareholders (such
approval shall not be by written consent) by the affirmative vote of at least
sixty-six and two-thirds percent of the outstanding voting stock which is not
owned by the interested shareholder; or (iii) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan). The
three-year prohibition also does not apply to certain business combinations
proposed by an interested shareholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested shareholder during the previous
three years. The term "business combination" is defined generally to include
mergers or consolidations between an Iowa corporation and an "interested
shareholder," transactions with an "interested shareholder" involving the
assets or stock of the corporation or its majority-owned subsidiaries and
transactions which increase an interested shareholder's percentage ownership
of stock. The term "interested shareholder" is defined generally as a
shareholder who, together with affiliates and associates, owns (or, within
three years prior, did own) 10% or more of an Iowa corporation's voting stock.

33
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement"), among the Company, the Selling Shareholder and
each of the underwriters named below (the "U.S. Underwriters"), and
concurrently with the sale of 679,000 shares of Common Stock to the
International Managers (as defined below), the Company and the Selling
Shareholder have agreed to sell to each of the U.S. Underwriters, and each of
the U.S. Underwriters severally has agreed to purchase from the Company and
the Selling Shareholder the number of shares of Common Stock set forth
opposite its name below.

<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
---------------- ---------
<S> <C>
Merrill Lynch Pierce Fenner & Smith
Incorporated...........................................
William Blair & Company, L.L.C..................................
Robert W. Baird & Co. Incorporated..............................
McDonald & Company Securities, Inc..............................
---------
Total...................................................... 2,716,000
=========
</TABLE>

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and
McDonald & Company Securities, Inc. are acting as representatives (the "U.S.
Representatives") for the U.S. Underwriters.

The Company and the Selling Shareholder have also entered into a purchase
agreement (the "International Purchase Agreement" and, together with the U.S.
Purchase Agreement, the "Purchase Agreements") with certain underwriters
outside the United States and Canada (collectively, the "International
Managers," and together with the U.S. Underwriters, the "Underwriters"), for
whom Merrill Lynch International, William Blair & Company, L.L.C., Robert W.
Baird & Co. Incorporated and McDonald & Company Securities, Inc. are acting as
representatives (the "International Representatives" and, together with the
U.S. Representatives, the "Representatives"). Subject to the terms and
conditions set forth in the International Purchase Agreement, and concurrently
with the sale of 2,716,000 shares of Common Stock to the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, the Company and the Selling
Shareholder have agreed to sell to the International Managers, and the
International Managers have severally agreed to purchase from the Company and
the Selling Shareholder, an aggregate of 679,000 shares of Common Stock. The
public offering price per share of Common Stock and the underwriting discount
per share of Common Stock are identical under the U.S. Purchase Agreement and
the International Purchase Agreement. The respective percentages of the Common
Stock to be sold by each of the Company and the Selling Shareholder will be
identical in the U.S. Offering and the International Offering.

In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth

34
<PAGE>

therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant
to such agreement are purchased. Under certain circumstances involving a
default by an Underwriter, the commitments of non-defaulting U.S. Underwriters
or International Managers (as the case may be) may be increased or the U.S.
Purchase Agreement or the International Purchase Agreement (as the case may
be) may be terminated. The sale of Common Stock to the U.S. Underwriters is
conditioned upon the sale of Common Stock to the International Managers and
vice versa.

The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. The Underwriters are permitted to sell
shares of Common Stock to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell shares of Common Stock will not offer to sell or sell
shares of Common Stock to persons who are non-U.S. or non-Canadian persons or
to persons they believe intend to resell to persons who are non-U.S. or non-
Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to U.S. persons or to Canadian persons or to persons they believe intend
to resell to U.S. persons or Canadian persons, except in the case of
transactions pursuant to the Intersyndicate Agreement.

The U.S. Representatives have advised the Company and the Selling
Shareholder that the U.S. Underwriters propose initially to offer the shares
of Common Stock to the public at the offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $. per share. The U.S. Underwriters may allow, and such
dealers may reallow, a discount not in excess of $. per share to certain
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.

The Company has granted to the U.S. Underwriters an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
aggregate of 407,400 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The U.S. Underwriters may exercise this option only to cover over-
allotments, if any, made on the sale of Common Stock offered hereby. To the
extent that the U.S. Underwriters exercise this option, each U.S. Underwriter
will be obligated, subject to certain conditions, to purchase a number of
additional shares of Common Stock proportionate to such U.S. Underwriters'
initial amount reflected in the foregoing table. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,395,000 shares are being offered.

The Company has, subject to certain exceptions, agreed not to, directly or
indirectly, offer, pledge, sell, contract to sell or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock without the prior written consent
of Merrill Lynch for a period of 90 days from the date of this Prospectus,
except that the Company may, without such consent, issue shares of Common
Stock upon the exercise or conversion of any outstanding options, rights,
warrants or other convertible securities, or issue shares of Common Stock or
grant options to purchase shares of Common Stock pursuant to the Company's
existing employee benefit plans, director stock plan, or dividend reinvestment
plan. In addition, the Company's executive officers and directors have agreed
not to effect any sales of Common Stock in open market transactions without
the prior written consent of Merrill Lynch for a period of 90 days from the
date of this Prospectus.

In connection with the Offerings, the Underwriters or their respective
affiliates and selling group members (if any) who are qualified market makers
on Nasdaq may engage in "passive market making" in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act. Rule 103 permits, upon the satisfaction of certain conditions,
underwriters and selling group members participating in a distribution that
are also Nasdaq market makers in the security being distributed (or a related
security) to engage in limited market making transactions during the period
when Regulation M under the Exchange Act would otherwise prohibit such
activity. Rule 103 prohibits underwriters and selling group members engaged in
passive market making generally from entering a bid or affecting a purchase at
a price that

35
<PAGE>

exceeds the highest bid for those securities displayed on the Nasdaq National
Market by a market maker that is not participating in the distribution. Under
Rule 103, each underwriter or selling group member engaged in passive market
making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately preceding the date of the filing of the registration
statement under the Securities Act of 1933, as amended (the "Securities Act")
pertaining to the security to be distributed (or such related security).

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.

The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.

The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments initially the Underwriters may be
required to make in respect thereof.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.

Edgar D. Jannotta, a director of the Selling Shareholder, is Senior Director
of William Blair & Company, L.L.C.

36
<PAGE>

LEGAL MATTERS

The legality of the Common Stock offered hereby has been passed upon for the
Company by Stanley, Lande & Hunter, P.C., Muscatine, Iowa. Certain other legal
matters will be passed upon for the Company by Jones, Day, Reavis & Pogue,
Chicago, Illinois and Stanley, Lande & Hunter, P.C., for the Selling
Shareholder by Foley & Lardner, Milwaukee, Wisconsin and for the Underwriters
by Sidley & Austin, Chicago, Illinois. Members of Stanley, Lande & Hunter,
P.C., own of record and beneficially a total of 96,987 shares of Common Stock.

EXPERTS
The audited consolidated financial statements and schedules of HON
INDUSTRIES Inc. and Subsidiaries as of and for the fiscal year ended December
28, 1996 included in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in its reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.

The consolidated balance sheets of HON INDUSTRIES Inc. and its subsidiaries
as of December 30, 1995 and December 31, 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then
ended included in this Prospectus and the related financial statement schedule
listed in Item 14 of HON INDUSTRIES Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 28, 1996, incorporated by reference into this
Registration Statement, have been audited by Ernst & Young LLP, as stated in
its reports appearing herein and incorporated by reference into this
Registration Statement. Such financial statements and financial statement
schedule have been so included and incorporated by reference in reliance upon
such reports given upon the authority of such firms as experts in accounting
and auditing.

AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (of which this Prospectus
is a part) under the Securities Act, with respect to the securities offered
hereby. This Prospectus does not contain all information set forth in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information about the Company and the securities offered hereby, reference is
made to the Registration Statement, including the exhibits filed as a part
thereof and otherwise incorporated therein. Statements made in this Prospectus
as to the contents of any document referred to are not necessarily complete,
and in each instance reference is made to such exhibit for a more complete
description and each such statement is qualified in its entirety by such
reference.

The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files periodic reports, proxy statements and other
information with the Commission. The Registration Statement, including
exhibits thereto, as well as such reports, proxy statements and other
information filed by the Company with the Commission can be inspected, without
charge, and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, 7
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission and that
is located at http://www.sec.gov. The Registration Statement was filed
electronically with the Commission.

37
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed with the Commission by the Company
(File No. 0-2648) pursuant to the Exchange Act are incorporated by reference
in this Prospectus and made a part hereof: the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1996; the Company's Quarterly
Reports on Form 10-Q for the fiscal quarters ended March 29, 1997 and June 28,
1997; the Company's Current Reports on Form 8-K dated June 30, 1997, October
8, 1997 and October 22, 1997; and the descriptions of the Company's Common
Stock set forth in Item 1 of the Company's Registration Statement on Form 8-A
filed May 1, 1967 and Series A Junior Participating Preferred Stock and Rights
Agreement set forth in Item 1 of the Company's Registration Statement on Form
8-A filed July 12, 1988, and all amendments and reports filed for the purpose
of updating such descriptions.

All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
their respective dates of filing. Any statement contained in a document
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein modifies, supersedes or replaces such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.

THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE DOCUMENTS WHICH HAVE BEEN INCORPORATED BY REFERENCE IN
THIS PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS
ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO THE DOCUMENTS SO INCORPORATED.
REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO HON INDUSTRIES INC., OFFICE OF
THE SECRETARY, 414 EAST THIRD STREET, P.O. BOX 1109, MUSCATINE, IOWA 52761-
7109 (TELEPHONE NUMBER (319) 264-7400).

38
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HON INDUSTRIES Inc. and Subsidiaries:
Audited Financial Statements
Report of Independent Public Accountants................................ F-2
Report of Independent Auditors.......................................... F-3
Consolidated Statements of Income for the Years Ended December 28, 1996,
December 30, 1995 and December 31, 1994................................ F-4
Consolidated Balance Sheets as of December 28, 1996, December 30, 1995
and December 31, 1994.................................................. F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 28, 1996, December 30, 1995 and December 31, 1994............. F-6
Consolidated Statements of Cash Flows for the Years Ended December 28,
1996,
December 30, 1995 and December 31, 1994................................ F-7
Notes to Consolidated Financial Statements.............................. F-8
Unaudited Financial Statements
Condensed Consolidated Statements of Income for the Quarters Ended June
28, 1997
and June 29, 1996...................................................... F-20
Condensed Consolidated Statements of Income for the Six Months Ended
June 28, 1997
and June 29, 1996...................................................... F-21
Condensed Consolidated Balance Sheets at June 28, 1997 and December 28,
1996................................................................... F-22
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 28, 1997 and June 29, 1996........................................ F-23
Notes to Condensed Consolidated Financial Statements.................... F-24
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
HON INDUSTRIES Inc.

We have audited the accompanying consolidated balance sheet of HON
INDUSTRIES Inc. and subsidiaries as of December 28, 1996, and the related
consolidated statement of income, shareholders' equity, and cash flows for the
fiscal year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of HON INDUSTRIES Inc. and subsidiaries as of December 28, 1996, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.

Arthur Andersen LLP

Chicago, Illinois
January 30, 1997

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
HON INDUSTRIES Inc.

We have audited the accompanying consolidated balance sheets of HON
INDUSTRIES Inc. and subsidiaries as of December 30, 1995, and December 31,
1994, and the related consolidated statements of income, shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of HON INDUSTRIES Inc. and subsidiaries as of December 30, 1995, and December
31, 1994, and the consolidated results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.

As discussed in the Notes to Consolidated Financial Statements, the Company
changed its method of accounting for postemployment benefits in 1994.

Ernst & Young LLP

Chicago, Illinois
January 30, 1996

F-3
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.............................. $998,135,000 $893,119,000 $845,998,000
Cost of products sold.................. 679,496,000 624,700,000 573,392,000
------------ ------------ ------------
Gross Profit....................... 318,639,000 268,419,000 272,606,000
Selling and administrative expenses.... 215,646,000 201,691,000 185,490,000
Gain on sale of subsidiary............. 3,200,000 -- --
------------ ------------ ------------
Operating Income................... 106,193,000 66,728,000 87,116,000
------------ ------------ ------------
Interest income........................ 3,247,000 2,358,000 2,470,000
Interest expense....................... 4,173,000 3,569,000 3,248,000
------------ ------------ ------------
Income Before Income Taxes......... 105,267,000 65,517,000 86,338,000
Income taxes........................... 37,173,000 24,419,000 31,945,000
------------ ------------ ------------
Income Before Cumulative Effect of
Accounting Changes................ 68,094,000 41,098,000 54,393,000
Cumulative effect of accounting
changes............................... -- -- (237,000)
------------ ------------ ------------
Net Income......................... $ 68,094,000 $ 41,098,000 $ 54,156,000
============ ============ ============
Net Income Per Common Share:
Income before cumulative effect of
accounting changes.................. $2.26 $1.35 $1.74
Cumulative effect of accounting
changes............................. -- -- (.01)
------------ ------------ ------------
Net Income......................... $2.26 $1.35 $1.73
============ ============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF YEAR-END
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.......... $ 31,196,000 $ 32,231,000 $ 27,659,000
Short-term investments............. 1,502,000 14,694,000 3,083,000
Receivables........................ 109,095,000 88,178,000 94,269,000
Inventories........................ 43,550,000 36,601,000 43,259,000
Deferred income taxes.............. 9,046,000 14,180,000 11,565,000
Prepaid expenses and other current
assets............................ 11,138,000 8,299,000 8,975,000
------------ ------------ ------------
Total Current Assets............. 205,527,000 194,183,000 188,810,000
Property, Plant, and Equipment....... 234,616,000 210,033,000 177,844,000
Goodwill............................. 51,213,000 908,000 1,247,000
Other Assets......................... 22,158,000 4,394,000 4,667,000
------------ ------------ ------------
Total Assets..................... $513,514,000 $409,518,000 $372,568,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued
expenses.......................... $127,910,000 $117,273,000 $ 99,898,000
Income taxes....................... 2,574,000 5,361,000 4,949,000
Note payable and current maturities
of long-term obligations.......... 22,069,000 6,281,000 6,246,000
------------ ------------ ------------
Total Current Liabilities........ 152,553,000 128,915,000 111,093,000
Long-Term Debt and Other Liabilities. 91,468,000 45,911,000 46,080,000
Capital Lease Obligations............ 6,320,000 7,700,000 8,661,000
Deferred Income Taxes................ 10,726,000 10,757,000 12,094,000
Minority Interest in Subsidiary...... 50,000 -- --
Commitments and Contingencies........
Shareholders' Equity
Common stock....................... 29,713,000 30,394,000 30,675,000
Paid-in capital.................... 360,000 550,000 434,000
Retained earnings.................. 227,365,000 193,505,000 174,642,000
Receivable from HON Members Company
Ownership Plan.................... (5,041,000) (8,214,000) (11,111,000)
------------ ------------ ------------
Total Shareholders' Equity....... 252,397,000 216,235,000 194,640,000
------------ ------------ ------------
Total Liabilities and
Shareholders' Equity............ $513,514,000 $409,518,000 $372,568,000
============ ============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOR THE YEARS
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Common Stock
Balance, beginning of year......... $ 30,394,000 $ 30,675,000 $ 31,676,000
Purchase of shares................. (742,000) (367,000) (1,078,000)
Shares issued under Members Stock
Purchase Plan and restricted stock
awards............................ 61,000 86,000 77,000
------------ ------------ ------------
Balance, end of year............. $ 29,713,000 $ 30,394,000 $ 30,675,000
------------ ------------ ------------
Paid-In Capital
Balance, beginning of year......... $ 550,000 $ 434,000 $ 281,000
Purchase of shares................. (1,654,000) (1,725,000) (1,567,000)
Shares issued under Members Stock
Purchase Plan and restricted stock
awards............................ 1,464,000 1,841,000 1,720,000
------------ ------------ ------------
Balance, end of year............. $ 360,000 $ 550,000 $ 434,000
------------ ------------ ------------
Retained Earnings
Balance, beginning of year......... $193,505,000 $174,642,000 $161,079,000
Net income......................... 68,094,000 41,098,000 54,156,000
Purchase of shares................. (19,264,000) (7,699,000) (26,992,000)
Dividends paid..................... (14,970,000) (14,536,000) (13,601,000)
------------ ------------ ------------
Balance, end of year............. $227,365,000 $193,505,000 $174,642,000
------------ ------------ ------------
Receivable from HON Members Company
Ownership Plan
Balance, beginning of year......... $ (8,214,000) $(11,111,000) $(13,483,000)
Principal repaid by HON Members
Company Ownership Plan............ 3,173,000 2,897,000 2,372,000
------------ ------------ ------------
Balance, end of year............. $ (5,041,000) $ (8,214,000) $(11,111,000)
------------ ------------ ------------
Shareholders' Equity
Balance, end of year............... $252,397,000 $216,235,000 $194,640,000
============ ============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Net Cash Flows From (To) Operating
Activities:
Net income........................ $ 68,094,000 $ 41,098,000 $ 54,156,000
Noncash items included in net
income:
Depreciation and amortization... 25,252,000 21,416,000 19,042,000
Gain on sale of subsidiary, net
of tax......................... (2,016,000) -- --
Other postretirement and
postemployment benefits........ 1,398,000 2,273,000 2,104,000
Deferred income taxes........... 5,103,000 (3,952,000) 854,000
Cumulative effect of accounting
changes........................ -- -- 237,000
Other--net...................... 252,000 1,185,000 54,000
Changes in working capital,
excluding acquisition and
disposition:
Receivables..................... (5,085,000) 6,091,000 (10,619,000)
Inventories..................... 184,000 6,658,000 (4,629,000)
Prepaid expenses and other
current assets................. (2,613,000) 676,000 1,484,000
Accounts payable and accrued
expenses....................... 998,000 17,009,000 4,619,000
Accrued facilities closing and
reorganization expenses........ (1,147,000) 366,000 (1,885,000)
Income taxes.................... (3,971,000) 412,000 (1,847,000)
Increase in other liabilities..... 6,860,000 (216,000) 1,077,000
------------- ------------ ------------
Net cash flows from (to)
operating activities......... 93,309,000 93,016,000 64,647,000
------------- ------------ ------------
Net Cash Flows From (To) Investing
Activities:
Capital expenditures--net......... (44,684,000) (53,879,000) (35,005,000)
Acquisition spending, net of cash
acquired......................... (79,136,000) -- --
Net proceeds from sale of
subsidiary....................... 7,336,000 -- --
Principal repaid by HON Members
Company Ownership Plan........... 3,173,000 2,897,000 2,372,000
Short-term investments--net....... 12,392,000 (11,611,000) 8,515,000
Other--net........................ (976,000) (205,000) (291,000)
------------- ------------ ------------
Net cash flows from (to)
investing activities......... (101,895,000) (62,798,000) (24,409,000)
------------- ------------ ------------
Net Cash Flows From (To) Financing
Activities:
Purchase of HON INDUSTRIES common
stock............................ (21,912,000) (9,791,000) (29,637,000)
Proceeds from long-term debt...... 51,072,000 104,000 --
Payments of note and long-term
debt............................. (8,416,000) (3,350,000) (3,916,000)
Proceeds from sale of HON
INDUSTRIES common stock to
members.......................... 1,777,000 1,927,000 1,797,000
Dividends paid.................... (14,970,000) (14,536,000) (13,601,000)
------------- ------------ ------------
Net cash flows from (to)
financing activities......... 7,551,000 (25,646,000) (45,357,000)
------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents................... (1,035,000) 4,572,000 (5,119,000)
------------- ------------ ------------
Cash and cash equivalents at
beginning of year.................. 32,231,000 27,659,000 32,778,000
------------- ------------ ------------
Cash and cash equivalents at end of
year............................... $ 31,196,000 $ 32,231,000 $ 27,659,000
------------- ------------ ------------
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest........................ $ 3,334,000 $ 3,401,000 $ 3,234,000
Income taxes.................... $ 36,318,000 $ 27,560,000 $ 32,534,000
============= ============ ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-7
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NATURE OF OPERATIONS

HON INDUSTRIES Inc. and subsidiaries (the Company) are a national
manufacturer and marketer of office furniture and hearth products. Both
industries are reportable segments; however, the Company's office furniture
business is its principal line of business. Refer to the "Business Segment
Information" note for further information. Office furniture products are sold
through a national system of dealers, wholesalers, mass merchandisers,
warehouse clubs, and retail superstores and to end-user customers and federal
and state governments. Dealer, wholesaler, and retail superstores are the
major channels based on sales. Hearth products include wood- and gas-burning
factory-built fireplaces, fireplace inserts, gas logs, and stoves. These
products are sold through a national system of dealers, wholesalers, and large
regional contractors. The Company's products are marketed predominately in the
United States and Canada. The Company exports select products to a limited
number of markets outside North America, principally Latin America and the
Caribbean, through its export subsidiary; however, based on sales, it is not
significant.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Fiscal Year-End

The consolidated financial statements include the accounts and transactions
of the Company and its subsidiaries. Intercompany accounts and transactions
have been eliminated in consolidation.

The Company's fiscal year ends on the Saturday nearest December 31. Fiscal
year 1996 ended on December 28, 1996; 1995 ended on December 30, 1995; and
1994 ended on December 31, 1994.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash and commercial paper.
These securities have original maturity dates not exceeding three months from
date of purchase.

Short-Term Investments

Short-term investments are classified as available-for-sale and are highly
liquid debt and equity securities. These investments are stated at cost which
approximates market value.

Receivables

Accounts receivable are presented net of an allowance for doubtful accounts
of $1,830,000; $1,867,000; and $1,654,000 for 1996, 1995, and 1994,
respectively.

Inventories

Inventories are valued at the lower of cost or market, determined
principally by the last-in, first-out (LIFO) method.

Property, Plant, and Equipment

Property, plant, and equipment are carried at cost. Depreciation has been
computed by the straight-line method over estimated useful lives: land
improvements, 10-20 years; buildings, 10-40 years; and machinery and
equipment, 3-12 years. The Company capitalized interest costs of $95,000 and
$256,000 in 1996 and 1995, respectively.

F-8
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Goodwill and Patents

Goodwill represents the excess of cost over the fair value of net
identifiable assets of acquired companies. Goodwill is being amortized on a
straight-line basis predominately over 40 years. Patents are being amortized
on a straight-line basis over their estimated useful lives which range from 7
to 16 years. Patents are reported by the Company as "Other Assets."

The carrying value of goodwill and patents is reviewed by the Company
whenever significant events or changes occur which might impair recovery of
recorded costs. Based on its most recent analysis, the Company believes no
material impairment of these intangible assets exists at December 28, 1996.

<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill........................................... $52,051 $2,865 $2,865
Patents............................................ 16,060 -- --
Less accumulated amortization...................... 838 1,957 1,618
------- ------ ------
$67,273 $ 908 $1,247
======= ====== ======
</TABLE>

Product Development Costs

Product development costs relating to the development of new products and
processes, including significant improvements and refinements to existing
products, are expensed as incurred. The amounts charged against income were
$10,423,000 in 1996, $11,591,000 in 1995, and $10,081,000 in 1994.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

New Accounting Policies

The Company adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," in the first quarter of 1996. The adoption had no material
effect on results of operations.

BUSINESS COMBINATIONS

On October 2, 1996, the Company acquired all of the outstanding stock of
Heat-N-Glo Fireplace Products, Inc., located in Savage, Minnesota, for a
combination of cash and debt totaling approximately $79 million. The Company
merged Heat-N-Glo into Heatilator Inc., a wholly owned subsidiary, which
changed its name to Hearth Technologies Inc. Both Heatilator and Heat-N-Glo
are engaged in the manufacture and marketing of quality hearth products and
operate as divisions of Hearth Technologies Inc.

The Company paid approximately $62.0 million in cash, a $5.0 million long-
term note, and $12.0 million as a convertible debenture for Heat-N-Glo. In
connection with the merger, the Company entered into a $34.0 million five-year
term loan with LaSalle National Bank.

This transaction has been accounted for under the purchase method.
Accordingly, the accounts and transactions of the acquired company have been
included in the consolidated financial statements from the date of
acquisition.

F-9
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Assuming the acquisition had occurred as of the beginning of fiscal year
1995, the Company's pro forma consolidated net sales would have been
approximately $1.07 billion and $971.6 million for 1996 and 1995,
respectively. Pro forma consolidated net income and net income per common
share would not have been materially different than reported amounts.

The net purchase price was preliminarily allocated as follows: (In
thousands)

<TABLE>
<S> <C>
Working capital, other than cash................................. $10,702
Property, plant, and equipment................................... 6,441
Other assets..................................................... 548
Patents.......................................................... 16,060
Goodwill......................................................... 52,051
Other liabilities................................................ (6,666)
-------
Purchase price, net of cash received........................... $79,136
=======
</TABLE>

BUSINESS DISPOSITION

On January 24, 1996, the Company sold the outstanding stock of Ring King
Visibles, Inc., a wholly owned subsidiary, for $8.0 million in cash and the
forgiveness of intercompany receivables of approximately $2.0 million. The
sale resulted in an approximate $3.2 million pretax gain for the Company (an
after-tax gain of $2.0 million, or $0.07 per share) which was recorded in the
first quarter of fiscal year 1996.

INVENTORIES

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Finished products................................ $15,793 $11,265 $13,554
Materials and work in process.................... 27,757 25,336 29,705
------- ------- -------
$43,550 $36,601 $43,259
======= ======= =======
</TABLE>

Current replacement cost exceeded the amount stated for inventories valued
by the LIFO method by approximately $12,337,000; $13,594,000; and $12,983,000
as of year-end 1996, 1995, and 1994, respectively.

PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land and land improvements.................... $ 9,114 $ 9,701 $ 8,832
Buildings..................................... 92,509 95,310 84,801
Machinery and equipment....................... 231,780 208,707 185,421
Construction and equipment installation in
progress..................................... 42,507 30,036 17,915
-------- -------- --------
375,910 343,754 296,969
Less allowances for depreciation.............. 141,294 133,721 119,125
-------- -------- --------
$234,616 $210,033 $177,844
======== ======== ========
</TABLE>

F-10
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Trade accounts payable......................... $ 44,762 $ 47,617 $40,939
Compensation................................... 6,331 4,855 3,343
Profit sharing and retirement expense.......... 11,736 11,490 11,066
Vacation pay................................... 8,064 8,492 8,579
Marketing expenses............................. 36,550 23,930 17,443
Workers' compensation, general, and product
liability expenses............................ 3,787 4,032 4,700
Other accrued expenses......................... 16,680 16,857 13,828
-------- -------- -------
$127,910 $117,273 $99,898
======== ======== =======
</TABLE>

LONG-TERM DEBT AND OTHER LIABILITIES

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Industrial development revenue bonds, various
issues, payable through 2013 with interest at
4.50-8.50% per annum............................ $24,063 $24,542 $24,928
Note payable to bank, term loan payable in 2001
with interest at 7.11% per annum*............... 27,200 -- --
Note payable to bank, payable quarterly through
1997 with interest at a variable rate (6.03% at
year-end 1996).................................. -- 7,750 9,700
Convertible debenture payable to individuals, due
in 1999 with interest at 7.0% per annum......... 12,000 -- --
Accrued employee health care costs............... 7,901 6,503 4,230
Other notes and amounts.......................... 20,304 7,116 7,222
------- ------- -------
$91,468 $45,911 $46,080
======= ======= =======
</TABLE>
- --------
* The Company has entered into an interest rate swap agreement on a notional
amount of $34 million, which is equivalent to the amount of the term loan,
to obtain a fixed rate of interest in lieu of a floating rate. The interest
rate swap agreement matures at the time the related note matures. The
Company is exposed to credit loss in the event of nonperformance by the
bank making the loan who is the other party to the agreement. However, the
Company does not anticipate nonperformance by the counterparty.

Aggregate maturities of long-term debt are as follows (in thousands):

<TABLE>
<S> <C>
1997...................................... $15,107
1998...................................... 7,459
1999...................................... 19,486
2000...................................... 10,104
2001...................................... 10,026
Thereafter................................ 24,209
</TABLE>

The note and convertible debenture payable to individuals are payable to the
former owners of a business acquired by the Company in 1996. These individuals
continue as officers of a subsidiary of the business

F-11
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

following the merger. The convertible debenture is convertible into shares of
common stock of Hearth Technologies Inc., a subsidiary of the Company,
representing 10% of the current issued and outstanding stock of Hearth
Technologies Inc.

Certain of the above borrowing arrangements include covenants which require
the maintenance of a minimum level of working capital, place restrictions on
the payment of cash dividends, and limit the assumption of additional debt and
lease obligations. Approximately $198,176,000 of retained earnings were
unrestricted at the end of 1996.

The fair value of the Company's outstanding long-term debt obligations at
year-end 1996 approximates the recorded aggregate amount.

Property, plant, and equipment, with net carrying values of approximately
$33,451,000 at the end of 1996, are mortgaged.

INCOME TAXES

Significant components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $27,958 $25,360 $27,504
State.......................................... 3,932 3,011 3,587
------- ------- -------
31,890 28,371 31,091
Deferred......................................... 5,283 (3,952) 854
------- ------- -------
$37,173 $24,419 $31,945
======= ======= =======
</TABLE>

A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal tax effect.................. 2.7 2.6 2.8
Federal and state tax credits........................... (2.2) -- --
Other, net.............................................. (.2) (.3) (.8)
---- ---- ----
Effective tax rate...................................... 35.3% 37.3% 37.0%
==== ==== ====
</TABLE>

The Company recognized one-time federal and state research and development
and new jobs tax credits totaling $2.1 million, or $0.07 per share, in 1996
related to prior tax years.

F-12
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets are as follows:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net long-term deferred tax liabilities:
Tax over book depreciation............ $(17,584) $(16,358) $(13,630)
OPEB obligations...................... 2,947 2,048 1,301
Other--net............................ 3,911 3,553 235
-------- -------- --------
Total net long-term deferred tax
liabilities........................ (10,726) (10,757) (12,094)
Net current deferred tax assets:
Workers' compensation, general, and
product liability accruals........... 1,548 1,670 2,029
Vacation accrual...................... 1,855 3,167 3,180
Other--net............................ 5,643 9,343 6,356
-------- -------- --------
Total net current deferred tax
assets............................. 9,046 14,180 11,565
-------- -------- --------
Net deferred tax (liabilities)
assets............................. $ (1,680) $ 3,423 $ (529)
======== ======== ========
</TABLE>

SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE

<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Common Stock, $1 Par Value
Authorized........................ 100,000,000 100,000,000 100,000,000
Issued and outstanding............ 29,713,265 30,394,337 30,674,603
Preferred Stock
Authorized........................ 1,000,000 1,000,000 1,000,000
Issued and outstanding............ -- -- --
</TABLE>

The Company purchased 753,800; 367,317; and 1,078,835 shares of its common
stock during 1996, 1995, and 1994, respectively.

Cash dividends declared and paid per share for each year are:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Common shares.............................................. $.50 $.48 $.44
</TABLE>

Net income per common share is based on the weighted average number of shares
of common stock outstanding during each year including allocated and
unallocated ESOP shares.

Shares of common stock were issued in 1996, 1995, and 1994 pursuant to a
members' stock purchase plan as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Shares issued....................................... 61,370 86,049 77,302
Average price per share............................. $24.90 $22.39 $23.25
</TABLE>

F-13
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company uses the par value method of accounting for common stock
repurchases. The excess of the cost of shares acquired over their par value is
allocated to Paid-In Capital to the extent appropriate, with the excess
charged to Retained Earnings.

During 1994, shareholders approved the 1994 Members' Stock Purchase Plan.
Under the new plan, 500,000 shares of common stock were registered for
issuance to participating members. Beginning on July 3, 1994, rights to
purchase stock are granted on a quarterly basis to all members who have one
year of employment eligibility and work a minimum of 20 hours per week. The
price of the stock purchased under the plan is 85% of the closing price on the
applicable purchase date. No member may purchase stock under the plan in an
amount which exceeds the lesser of 20% of his or her gross earnings or 2,000
shares, with a maximum fair market value of $25,000 in any calendar year. An
additional 275,279 shares were available for issuance under the plan at
December 28, 1996. The effect of the application of adopting Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation," was not material to the Company.

The Company has granted restricted stock awards aggregating 75,500 shares of
common stock to officers. The officers were entitled to dividends and had
voting rights on all shares awarded. Unearned compensation expense,
representing the fair market value of the shares at the date of grant, was
charged to income over the vesting period. Approximately $37,000 were charged
to income as a result of the awards for the years 1995 and 1994. All of the
awarded shares were vested as of year-end 1995.

Pursuant to the Company's Shareholder Rights Plan, each share of common
stock carries with it one Right. Each Right entitles a shareholder to buy one
two-hundredth of a share of a new series of preferred stock at an exercise
price of $75.00. Each one two-hundredth of a share of the new preferred stock
has terms designed to make it the economic equivalent of one share of common
stock. Rights will be exercisable only if a person or group acquires 20% or
more of the Company's common stock or announces a tender offer, the
consummation of which would result in ownership by a person or group of 20% or
more of the common stock. If the Company is acquired in a merger or other
business combination transaction, each Right will entitle its holder to
purchase, at the then current exercise price of the Right, a number of the
acquiring company's common shares having a market value at that time of twice
the exercise price of the Right.

The Company has entered into change in control employment agreements with
corporate officers and certain other key employees. According to the
agreements, a change in control occurs when a third person or entity becomes
the beneficial owner of 20% or more of the Company's common stock or when more
than one-third of the Company's Board of Directors is composed of persons not
recommended by at least three-fourths of the incumbent Board of Directors.
Upon a change in control, a key employee is deemed to have a two-year
employment with the Company, and all his or her benefits are vested under
Company plans. If, at any time within two years of the change in control, the
employee's employment is terminated by the Company for any reason other than
cause or by the key employee for good reason, as such terms are defined in the
agreement, then the key employee is entitled to receive a severance payment
equal to two times salary and the average of the prior two years' bonuses.

RETIREMENT BENEFITS

The Company has defined contribution profit-sharing plans covering
substantially all employees who are not participants in certain defined
benefit plans. The Company's annual contribution to the defined contribution
plans is based on employee eligible earnings and results of operations and
amounted to $11,118,000; $10,955,000; and $10,849,000 in 1996, 1995, and 1994,
respectively.

The Company sponsors defined benefit plans which include a limited number of
salaried and hourly employees at certain subsidiaries. The Company's funding
policy is generally to contribute annually the minimum actuarially computed
amount. Net pension costs relating to these plans were $146,000; $256,000; and

F-14
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

$228,000 for 1996, 1995, and 1994, respectively. The actuarial present value
of benefit obligations, less related plan assets at fair value, is not
significant.

In 1992, the Company established a trust to administer a leveraged employee
stock ownership plan (ESOP), the HON Members Company Ownership Plan. Company
contributions based on employee eligible earnings and dividends on the shares
are used to make loan interest and principal payments. As the loan is repaid,
shares are distributed to the ESOP trust for allocation to participants.
Selected financial data pertaining to the ESOP is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C> <C>
Company contribution to ESOP..................... $ 3,348 $ 3,302 $ 2,977
Dividend income of ESOP.......................... 446 436 403
Company interest expense on ESOP loan............ 555 749 656
Shares of common stock allocated to ESOP
participant accounts............................ 152,733 149,749 133,945
Shares held in suspense (unallocated)
by ESOP as of year-end.......................... 223,939 376,672 526,421
Fair value of shares held in suspense by ESOP as
of year-end..................................... $ 7,264 $ 8,758 $14,082
Closing market price of common stock as of year-
end............................................. $ 32.44 $ 23.25 $ 26.75
</TABLE>

In 1994, the Company adopted Statement of Financial Accounting Standards No.
112, "Employers' Accounting for Postemployment Benefits." The cumulative
effect of adoption was to reduce net income by $237,000 after tax, or $.01 a
share.

POSTRETIREMENT HEALTH CARE

The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," as of
January 3, 1993, and recorded the cumulative effect of the accounting change
on the deferred recognition basis.

The following table sets forth the funded status of the plan, reconciled to
the accrued postretirement benefits cost recognized in the Company's balance
sheet at:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Accumulated postretirement benefit
obligation (APBO):
Retirees............................... $ 6,535 $ 8,138 $ 6,947
Fully eligible active plan
participants.......................... 3,916 5,612 3,816
Other active plan participants......... 4,808 7,809 6,397
Unrecognized net (loss)/gain............. 6,919 (933) (713)
Unrecognized prior service cost.......... (2,776) (2,922) --
Unrecognized transition obligation....... (11,501) (12,214) (12,932)
-------- -------- --------
Accrued postretirement benefit cost...... $ 7,901 $ 5,490 $ 3,515
======== ======== ========

Net periodic postretirement benefits costs include:

Service cost............................. $ 810 $ 685 $ 687
Interest cost............................ 1,629 1,344 1,242
Amortization of transition obligation
over 20 years........................... 713 718 718
Amortization of prior service cost....... 146 -- --
-------- -------- --------
Net periodic postretirement benefits
cost.................................... $ 3,298 $ 2,747 $ 2,647
======== ======== ========
</TABLE>

F-15
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The discount rates at fiscal year-end 1996, 1995, and 1994 were 7.5%, 7.75%,
and 8.0%, respectively. The pre-65 1997 gross trend rates begin at 11.0% for
the medical and prescription drug coverages and grade down to 5.0% in 2006 and
remain at this level for all future years. The post-64 gross trend rates begin
at 9.0% for the medical coverage and decrease until the maximum Company
subsidy (cap) is reached in 2003. For the prescription drug coverage, the 1997
gross trend rates begin at 11.0% and decrease until the cap is reached in
2003. If the health care cost trend rates were increased by 1.0% for each
year, the accumulated postretirement benefit obligation as of December 28,
1996, would increase by $493,520; and, the sum of the service and interest
cost components of the net periodic postretirement benefit cost for fiscal
year 1996 would increase by $45,000. The Company's postretirement health care
plans are not funded.

LEASES

The Company leases certain warehouse and plant facilities and equipment.
Commitments for minimum rentals under noncancellable leases at the end of 1996
are as follows:

<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
----------- ---------
(IN THOUSANDS)
<S> <C> <C>
1997............................................... $2,024 $ 5,532
1998............................................... 2,024 4,941
1999............................................... 2,024 3,975
2000............................................... 2,024 2,897
2001............................................... 664 2,113
Thereafter......................................... 2,069 883
------ -------
Total minimum lease payments....................... 10,829 $20,341
=======
Less amount representing interest.................. 3,377
------
Present value of net minimum lease payments,
including current maturities of $1,133,000........ $7,452
======
</TABLE>

Property, plant, and equipment at year-end include the following amounts for
capitalized leases:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Buildings........................................... $3,299 $3,299 $3,709
Machinery and equipment............................. 8,419 8,419 8,419
------ ------ ------
11,718 11,718 12,128
Less allowances for depreciation.................... 4,854 3,569 2,507
------ ------ ------
$6,864 $8,149 $9,621
====== ====== ======
</TABLE>

Rent expense for the years 1996, 1995, and 1994 amounted to approximately
$6,788,000; $7,439,000; and $6,572,000, respectively. The Company has
operating leases for office and production facilities with annual rentals
totaling $578,000 with the former owners of a business acquired in 1996. These
individuals continue as officers of a subsidiary of the Company following the
merger. Contingent rent expense under both capitalized and operating leases
(generally based on mileage of transportation equipment) amounted to $353,000;
$608,000; and $525,000 for the years 1996, 1995, and 1994, respectively.

CONTINGENCIES

The Company is involved in various legal actions arising in the course of
business. Although management cannot predict the ultimate outcome of these
matters with certainty, it believes, after taking into consideration

F-16
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

legal counsel's evaluation of such actions, that the outcome of these matters
will not have a material effect on the financial position or results of
operations of the Company.

The Company and certain subsidiaries are party to three environmental
actions which have arisen in the ordinary course of business. These include
possible obligations to investigate and mitigate the effects on the
environment of the disposal or release of certain chemical substances at
various sites, such as Superfund sites and other operating or closed
facilities. The effect of these actions on the Company's financial position
and operations to date has not been significant. The Company is participating
in environmental assessments and monitoring, and liabilities have been accrued
reflecting management's best estimate of the eventual future cost of the
Company's anticipated share (based upon estimated ranges of remediation costs,
the existence of many other larger "potentially responsible parties" who are
financially viable to share in such costs, the Company's experience to date in
relation to the determination of its allocable share, the volume and type of
waste the Company is believed to have contributed to each site, and the
anticipated periods of time over which such costs may be paid) of remediation
costs. Potential insurance reimbursements are not anticipated. The Company is
also reviewing available defenses and claims it may have against third
parties. Due to such factors as the wide discretion of regulatory authorities
regarding clean-up levels and uncertain allocation of liability at multiple
party sites, estimates made prior to the approval of a formal plan of action
represent management's best judgment as to estimates of reasonably foreseeable
expenses based upon average remediation costs at comparable sites. While the
final resolution of these contingencies could result in expenses in excess of
current accruals and therefore have an impact on the Company's consolidated
financial results in a future reporting period, management believes that the
ultimate outcome will not have a material effect on the Company's financial
position or results of operations.

BUSINESS SEGMENT INFORMATION

The Company has two reportable business segments: office furniture and
hearth products. However, the manufacture and marketing of office furniture is
the Company's principal business segment.

The office furniture segment manufactures and markets a broad line of metal
and wood commercial and home office furniture which includes file cabinets,
desks, credenzas, chairs, storage cabinets, tables, bookcases, freestanding
office partitions and panel systems, and other related products. The hearth
products segment manufactures and markets a broad line of manufactured gas-
and wood-burning fireplaces and stoves, fireplace inserts, and chimney systems
principally for the home.

The Company's October 2, 1996, acquisition of Heat-N-Glo Fireplace Products,
Inc., resulted in hearth products becoming a reportable segment. Prior to this
acquisition, the Company had only one reportable segment, office furniture.
Refer to the "Business Combinations" note for additional information regarding
this acquisition.

For purposes of segment reporting, intercompany sales transfers between
segments are not material, and operating profit is income before income taxes
exclusive of certain unallocated corporate expenses. Identifiable assets by
segment are those assets applicable to the respective industry segments.
Corporate assets consist principally of cash and cash equivalents, short-term
investments, and corporate office real estate and related equipment.

F-17
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Reportable segment data reconciled to the consolidated financial statements
for the years ended 1996, 1995, and 1994 is as follows:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
Office furniture............................ $887,299 $818,907 $772,299
Hearth products............................. 110,836 74,212 73,699
-------- -------- --------
$998,135 $893,119 $845,998
======== ======== ========
Operating profit:
Office furniture............................ $106,824 $ 79,085 $ 96,813
Hearth products............................. 14,155 6,395 6,373
-------- -------- --------
Total operating profit.................. 120,979 85,480 103,186
Unallocated corporate expenses.............. (15,712) (19,963) (16,848)
-------- -------- --------
Income before income taxes.............. $105,267 $ 65,517 $ 86,338
======== ======== ========
Identifiable assets:
Office furniture.......................... $330,575 $308,783 $288,436
Hearth products........................... 122,037 25,811 25,791
General corporate......................... 60,902 74,924 58,341
-------- -------- --------
$513,514 $409,518 $372,568
======== ======== ========
Depreciation and amortization expense:
Office furniture.......................... $ 21,140 $ 18,328 $ 16,264
Hearth products........................... 2,813 1,424 1,191
General corporate......................... 1,299 1,664 1,587
-------- -------- --------
$ 25,252 $ 21,416 $ 19,042
======== ======== ========
Capital expenditures, net:
Office furniture.......................... $ 41,186 $ 50,816 $ 29,987
Hearth products........................... 4,060 2,857 3,763
General corporate......................... (562) 206 1,255
-------- -------- --------
$ 44,684 $ 53,879 $ 35,005
======== ======== ========
</TABLE>

One office furniture customer accounted for approximately 12%, 13%, and 13%
of consolidated net sales in 1996, 1995, and 1994, respectively.

F-18
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
YEAR-END 1996:*
Net sales..................... $233,477 $219,260 $255,254 $290,144 $998,135
Gross profit.................. 73,471 69,033 78,851 97,284 318,639
Income before income taxes.... 26,706 19,518 25,337 33,706 105,267
Income taxes.................. 9,881 7,222 7,430 12,640 37,173
Net income**.................. 16,825 12,296 17,907 21,066 68,094
Net income per common share**. .55 .41 .60 .70 2.26
YEAR-END 1995:
Net sales..................... $216,498 $206,604 $228,195 $241,822 $893,119
Gross profit.................. 68,942 60,358 67,876 71,243 268,419
Income before income taxes.... 20,119 12,366 19,448 13,584 65,517
Income taxes.................. 7,544 4,638 7,209 5,028 24,419
Net income***................. 12,575 7,728 12,239 8,556 41,098
Net income per common
share***..................... .41 .25 .41 .28 1.35
YEAR-END 1994:
Net sales..................... $200,693 $193,045 $222,112 $230,148 $845,998
Gross profit.................. 63,374 59,713 71,005 78,514 272,606
Income before income taxes.... 18,458 14,637 24,659 28,584 86,338
Income taxes.................. 6,830 5,415 9,124 10,576 31,945
Income before cumulative
effect of accounting change.. 11,628 9,222 15,535 18,008 54,393
Cumulative effect of
accounting change............ (237) -- -- -- (237)
Net income.................... 11,391 9,222 15,535 18,008 54,156
Net income per common share:
Income before cumulative
effect of accounting change.. .37 .30 .49 .58 1.74
Cumulative effect of
accounting change............ (.01) -- -- -- (.01)
Net income per common share... .36 .30 .49 .58 1.73
</TABLE>
- --------
*Includes the results of operation of Heat-N-Glo Fireplace Products, Inc.,
acquired October 2, 1996.
**First quarter 1996 includes a $3,200,000 pretax gain on the sale of Ring
King Visibles, Inc., a wholly owned subsidiary (after-tax gain of
$2,000,000, or $.07 per share), and third quarter includes one-time federal
and state income tax credits of $2,100,000, or $.07 per share.
***Fourth quarter 1995 includes various pretax charges totaling $5,575,000
(after-tax effect of $3,512,000, or $.12 per share) for nonrecurring costs
primarily associated with closing several leased facilities and severance
arrangements from eliminating certain administrative positions.

F-19
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
JUNE 28, JUNE 29,
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Net sales (Note E)....................................... $ 296,567 $ 219,260
Cost of products sold.................................... 200,969 150,227
---------- ----------
Gross Profit........................................... 95,598 69,033
Selling and administrative expenses...................... 64,303 49,507
---------- ----------
Operating Income....................................... 31,295 19,526
Interest income.......................................... 441 759
Interest expense......................................... 1,582 767
---------- ----------
Income Before Income Taxes............................. 30,154 19,518
Income taxes............................................. 11,307 7,222
---------- ----------
Net Income............................................. $ 18,847 $ 12,296
========== ==========
Net income per common share (Note D)..................... $ 0.63 $ 0.41
========== ==========
Average number of common shares outstanding.............. 29,692,077 30,170,014
========== ==========
Cash dividends per common share.......................... $ 0.14 $ 0.12
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-20
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 28, JUNE 29,
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Net sales (Note E)....................................... $ 579,426 $ 452,737
Cost of products sold.................................... 395,163 310,233
---------- ----------
Gross Profit........................................... 184,263 142,504
Selling and administrative expenses...................... 124,756 99,353
Gain on sale of subsidiary (Note C)...................... -- 3,200
---------- ----------
Operating Income....................................... 59,507 46,351
Interest income.......................................... 852 1,500
Interest expense......................................... 3,135 1,627
---------- ----------
Income Before Income Taxes............................. 57,224 46,224
Income taxes............................................. 21,459 17,103
---------- ----------
Net Income............................................. $ 35,765 $ 29,121
========== ==========
Net income per common share (Note D)..................... $ 1.20 $ 0.96
========== ==========
Average number of common shares outstanding.............. 29,695,994 30,257,593
========== ==========
Cash dividends per common share.......................... $ 0.28 $ 0.24
========== ==========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-21
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 28,
1997 DECEMBER 28,
(UNAUDITED) 1996
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 24,137 $ 31,196
Short-term investments.............................. 256 1,502
Receivables......................................... 142,019 109,095
Inventories (Note B)................................ 61,156 43,550
Deferred income taxes............................... 19,746 9,046
Prepaid expenses and other current assets........... 15,927 11,138
-------- --------
Total Current Assets.............................. 263,241 205,527
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land and land improvements.......................... 8,969 9,114
Buildings........................................... 132,154 92,509
Machinery and equipment............................. 256,146 231,780
Construction in progress............................ 45,903 42,507
-------- --------
443,172 375,910
Less accumulated depreciation....................... 149,661 141,294
-------- --------
Net Property, Plant, and Equipment.................. 293,511 234,616
GOODWILL.............................................. 58,020 51,213
OTHER ASSETS.......................................... 20,620 22,158
-------- --------
Total Assets...................................... $635,392 $513,514
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses............... $160,432 $127,910
Income taxes........................................ 3,714 2,574
Note payable and current maturities of long-term
obligations........................................ 4,844 22,069
-------- --------
Total Current Liabilities......................... 168,990 152,553
LONG-TERM DEBT AND OTHER LIABILITIES.................. 162,889 91,468
CAPITAL LEASE OBLIGATIONS............................. 6,036 6,320
DEFERRED INCOME TAXES................................. 18,602 10,726
MINORITY INTEREST IN SUBSIDIARY....................... 56 50
SHAREHOLDERS' EQUITY
Capital Stock:
Preferred, $1 par value; authorized 1,000,000
shares; no shares outstanding.................... -- --
Common, $1 par value; authorized 100,000,000
shares; outstanding--1997--29,689,707 shares;
1996--29,713,265 shares.......................... 29,689 29,713
Paid-in capital..................................... 91 360
Retained earnings................................... 254,080 227,365
Receivable from HON Members Company Ownership Plan.. (5,041) (5,041)
-------- --------
Total Shareholders' Equity...................... 278,819 252,397
-------- --------
Total Liabilities and Shareholders' Equity...... $635,392 $513,514
======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-22
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------
JUNE 28, JUNE 29,
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net Cash Flows From (To) Operating Activities:
Net income............................................... $ 35,765 $ 29,121
Noncash items included in net income:
Depreciation and amortization.......................... 15,084 11,392
Gain on sale of subsidiary, net of tax (Note C)........ -- (2,016)
Other postretirement and postemployment benefits....... 686 1,205
Deferred income taxes.................................. 1,234 (113)
Other--net............................................. 12 248
Net increase (decrease) in noncash operating assets and
liabilities............................................. (6,674) (6,281)
Increase in other liabilities............................ (2,356) (519)
-------- --------
Net cash flows from operating activities............... 43,751 33,037
Net Cash Flows From (To) Investing Activities:
Capital expenditures--net................................ (34,222) (20,928)
Acquisition spending, net of cash acquired............... (66,292) --
Net proceeds from sale of subsidiary (Note C)............ -- 7,336
Short-term investments--net.............................. 446 (604)
Long-term investments.................................... 1,045 (95)
Other--net............................................... (194) --
-------- --------
Net cash flows (to) investing activities............... (99,217) (14,291)
Net Cash Flows From (To) Financing Activities:
Purchase of HON INDUSTRIES common stock.................. (2,535) (7,971)
Proceeds from long-term debt............................. 100,000 --
Payments of note and long-term debt...................... (42,249) (1,883)
Proceeds from sales of HON INDUSTRIES common stock to
members and stock-based compensation.................... 1,505 991
Dividends paid........................................... (8,314) (7,258)
-------- --------
Net cash flows from (to) financing activities.......... 48,407 (16,121)
Net increase (decrease) in cash and cash equivalents....... (7,059) 2,625
Cash and cash equivalents at beginning of period........... 31,196 32,231
-------- --------
Cash and cash equivalents at end of period................. $ 24,137 $ 34,856
======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-23
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 28, 1997

NOTE A. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the six-month
period ended June 28, 1997, are not necessarily indicative of the results that
may be expected for the year ending January 3, 1998. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's annual report on Form 10-K for the year ended December 28, 1996.

NOTE B. INVENTORIES

Inventories of the Company and its subsidiaries are summarized as follows:

<TABLE>
<CAPTION>
JUNE 28, DECEMBER 28,
1997 1996
---------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Finished products................................ $20,583 $15,793
Materials and work in process.................... 40,573 27,757
------- -------
$61,156 $43,550
======= =======
</TABLE>

NOTE C. GAIN ON SALE OF SUBSIDIARY

During the first quarter of 1996, the Company sold all outstanding shares of
its subsidiary, Ring King Visibles, Inc., for a sale price of $8,000,000 in
cash and the forgiveness of intercompany receivables of approximately
$2,000,000. The sale resulted in an approximate $3,200,000 pre-tax gain.

NOTE D. NET INCOME PER COMMON SHARE

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 128, "Earnings per Share." The
Statement requires the current primary earnings per share calculation to be
replaced with a new basic earnings per share calculation. The Statement will
become effective for public companies for financial statements issued after
December 15, 1997, and early adoption is not permitted. Management estimates
the impact of adopting FAS 128 will have no effect on the calculation of the
Company's reported year-end 1997 earnings per share given its current capital
structure of common stock and no potentially dilutive securities.

NOTE E. BUSINESS COMBINATIONS

Assuming the acquisition of Heat-N-Glo Fireplace Products, Inc., had
occurred on December 31, 1995, the beginning of the Company's 1996 fiscal
year, instead of on October 2, 1996, when it actually occurred, the Company's
pro forma consolidated net sales for the second quarter ended June 29, 1996,
would have been approximately $242.5 million instead of the reported $219.3
million. Pro forma consolidated net sales for the six months ended June 29,
1996, would have been approximately $495.6 million instead of the reported
$452.7 million. Pro forma consolidated net income and net income per share for
the second quarter and first six months of 1996 would not have been materially
different from the reported amounts.

F-24
<PAGE>

HON INDUSTRIES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company acquired Allsteel Inc. on June 17, 1997. The transaction has
been accounted for under the purchase method. Accordingly, Allsteel's opening
balance has been included in the Company's consolidated balance sheet as of
June 28, 1997, and its purchase in the Consolidated Statement of Cash Flows
for the six months ended June 28, 1997. The purchase price of Allsteel was
$66.0 million which has been preliminarily allocated as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Working capital, other than cash........................... $29.4
Property, plant, and equipment............................. 38.4
Goodwill................................................... 6.1
Other liabilities.......................................... (7.9)
</TABLE>

Allsteel had no impact on the Company's reported consolidated statements of
income for the second fiscal quarter and six months ended June 28, 1997.
Further information regarding the transaction is set forth in the Company's
Form 8-K, filed June 30, 1997.

F-25
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCOR-
PORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COV-
ERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURIS-
DICTION WHERE, OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SO-
LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT
BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF
THE COMPANY OR THE SELLING SHAREHOLDER SINCE THE DATE HEREOF.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Recent Developments....................................................... 8
Use of Proceeds........................................................... 9
Market Price of and Dividends on
Common Stock............................................................. 9
Capitalization............................................................ 10
Selected Consolidated Financial and Operating Data........................ 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 12
Business.................................................................. 17
Management................................................................ 28
Selling Shareholder....................................................... 30
Description of Capital Stock.............................................. 30
Underwriting.............................................................. 34
Legal Matters............................................................. 37
Experts................................................................... 37
Available Information..................................................... 37
Incorporation of Certain Documents by Reference........................... 38
Index to Consolidated Financial
Statements............................................................... F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

3,395,000 SHARES

HON INDUSTRIES INC.

COMMON STOCK

--------------

PROSPECTUS

--------------

MERRILL LYNCH & CO.

WILLIAM BLAIR & COMPANY

ROBERT W. BAIRD & CO.
INCORPORATED

MCDONALD & COMPANY
SECURITIES, INC.

, 1997

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED OCTOBER 23, 1997

PROSPECTUS
3,395,000 SHARES

HON INDUSTRIES INC.

COMMON STOCK

-----------

Of the 3,395,000 shares of Common Stock of HON INDUSTRIES Inc., an Iowa
corporation (the "Company"), offered hereby, 1,000,000 shares are being sold by
the Company and 2,395,000 shares are being sold by a certain shareholder (the
"Selling Shareholder"). The Company will not receive any of the proceeds of
shares sold by the Selling Shareholder. See "Selling Shareholder."

Of the 3,395,000 shares of Common Stock of the Company offered, 679,000
shares are being offered initially outside the United States and Canada by the
International Managers (the "International Offering") and 2,716,000 shares are
being offered in a concurrent offering inside the United States and Canada by
the U.S. Underwriters (the "U.S. Offering" and together with the International
Offering, the "Offerings"). The price to the public and the aggregate
underwriting discount per share will be identical for both offerings. See
"Underwriting."

The Common Stock is listed on the Nasdaq National Market under the symbol
"HONI." On October 1, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $59 5/8 per share. See "Market Price of and
Dividends on Common Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.

-----------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
SELLING
PRICE TO UNDERWRITING PROCEEDS TO SHAREHOLDER
PUBLIC DISCOUNT (1) COMPANY (2) (2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................................. $ $ $ $
- -------------------------------------------------------------------------------------------
Total (3)................................. $ $ $ $
- -------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, estimated at $500,000, which are payable by the
Company. The Selling Shareholder will not be paying any expenses of the
Offerings, other than the expenses of its counsel.
(3) The Company has granted the International Managers and the U.S.
Underwriters options, exercisable within 30 days of the date hereof, to
purchase up to an aggregate of 101,850 and 407,400, respectively,
additional shares of Common Stock on the same terms as set forth above, to
cover over-allotments, if any. If the over-allotment options are exercised
in full, the total Price to Public, Underwriting Discount, and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."

-----------

The shares of Common Stock are being offered by the several Underwriters
subject to prior sale, when, as and if issued to and accepted by them and
subject to approval of certain legal matters by counsel for the Company,
counsel for the Selling Shareholder and counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Common Stock will be made against payment
therefor in New York, New York on or about , 1997.

-----------

MERRILL LYNCH INTERNATIONAL WILLIAM BLAIR & COMPANY
ROBERT W. BAIRD & CO. MCDONALD & COMPANY
INCORPORATED SECURITIES, INC.

-----------

The date of this Prospectus is , 1997.
<PAGE>

UNITED STATES TAXATION OF FOREIGN SHAREHOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock that may be relevant to Non-United States Holders of such Common Stock.
For purposes of this discussion, a "Non-United States Holder" is any
corporation, individual, partnership, estate or trust that is, as to the
United States, a foreign corporation, a non-resident alien individual, a
foreign partnership or a foreign estate or trust as such terms are defined in
Section 7701 of the United States Internal Revenue Code of 1986, as amended
(the "Code"). In general, a "Non-United States Holder" is any holder of Common
Stock that is not (i) a citizen or resident alien individual of the United
States, (ii) a corporation, partnership or other entity created or organized
in or under the laws of the United States or any State thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust with respect to which a court within
the United States is able to exercise primary supervision over its
administration, and one or more United States persons have the authority to
control all of its substantial decisions. Resident alien individuals will be
subject to United States federal income taxation with respect to the Common
Stock in the same manner as if they were United States citizens.

The following discussion does not deal with all aspects of United States
federal income and estate taxation and does not consider specific facts and
circumstances that may be relevant to a particular Non-United States Holder in
light of such holder's personal investment or tax position. Furthermore, the
discussion does not address tax consequences that may be relevant to certain
Non-United States Holders subject to special treatment under the United States
federal income tax laws, such as insurance companies, tax-exempt
organizations, financial institutions or broker-dealers. The discussion does
not discuss any aspects of non-United States or United States state and local
tax consequences that may be relevant to Non-United States Holders. Finally,
the discussion is based on the current provisions of the Code, the final,
temporary and proposed Treasury Regulations promulgated thereunder, and
administrative and judicial interpretations of the foregoing, all as in effect
on the date of this Prospectus and all of which are subject to change,
possibly with retroactive effect.

PROSPECTIVE NON-UNITED STATES HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE SPECIFIC UNITED STATES FEDERAL, STATE AND LOCAL AND
NON-UNITED STATES INCOME, ESTATE AND OTHER TAX CONSEQUENCES TO THEM OF THE
OWNERSHIP AND DISPOSITION OF COMMON STOCK (INCLUDING SUCH HOLDER'S STATUS AS A
NON-UNITED STATES HOLDER).

DIVIDENDS

Dividends paid by the Company to a Non-United States Holder will generally
be subject to United States federal income tax withholding at the rate of 30
percent of the gross amount of the dividends, or at such lower rate as may be
specified by an applicable United States income tax treaty. Under the United
States Treasury Regulations currently in effect and published Revenue Rulings,
dividends paid to an address in a foreign country generally are presumed to be
paid to a resident of such country (unless the payor has actual knowledge to
the contrary) for purposes of both applying the withholding tax and
determining the applicability of a reduced treaty rate of withholding, if any.
Under newly issued United States Treasury Regulations, which will become
effective for payments made after December 31, 1998, however, a Non-United
States Holder who wishes to claim the benefit of an applicable reduced treaty
rate of withholding will be required to satisfy certain certification and
other requirements, including the requirement generally to file a properly
completed IRS Form W-8 with the Company, the paying agent or such other entity
as may be required to withhold tax. The new Treasury Regulations also provide
special rules for dividends paid to foreign intermediaries, United States or
foreign wholly-owned entities that are disregarded as entities separate from
their owners for United States federal income tax purposes, and flow-through
entities or arrangements that are treated as fiscally transparent for United
States federal income tax purposes or under the laws of an applicable income
tax treaty jurisdiction or both. For example, in the case of Common Stock held
by a foreign partnership, the certification requirement will be applied to the
partners of the partnership, rather than the partnership itself, although the
partnership will also be required to provide certain information, and a look-
through rule is provided for tiered partnership structures.

34
<PAGE>

A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service (the "IRS"). To the extent that a
distribution with respect to the Common Stock represents a return of basis for
United States federal income tax purposes, a Non-United States Holder may
apply for a refund of any amounts currently withheld with respect to such
return of basis by filing an appropriate claim for refund with the IRS.

Dividends received by a Non-United States Holder that are effectively
connected with the conduct by the Non-United States Holder of a trade or
business within the United States (or, if certain income tax treaties apply,
that are attributable to a permanent establishment maintained by such Non-
United States Holder in the United

States) are exempt from United States federal income tax withholding provided
that such Non-United States Holder files with the Company, its paying agent or
such other entity as may be required to withhold tax, a properly completed IRS
Form 4224 (or, in the case of an applicable tax treaty, IRS Form 1001), or,
after the newly issued United States Treasury Regulations become effective on
January 1, 1999, a properly completed IRS Form W-8. In general, a Non-United
States Holder will not be considered to be engaged in a trade or business
within the United States solely as a result of ownership of Common Stock. If
the dividends are effectively connected with a United States trade or business
(or are attributable to a United States permanent establishment), the
dividends will be subject to United States federal income tax (on a net income
basis) at the same graduated rates applicable to United States persons. In the
case of a Non-United States Holder that is a corporation, such effectively
connected dividends may also be subject to the branch profits tax (which is
generally imposed at a 30 percent rate (or a lower applicable treaty rate) on
repatriated effectively connected earnings and profits).

DISPOSITION OF COMMON STOCK

A Non-United States Holder generally will not be subject to United States
federal income tax (and no tax generally will be withheld) on any gain
realized upon the sale or other disposition of Common Stock unless (i) such
gain is effectively connected with a United States trade or business of the
Non-United States Holder (or, if certain income tax treaties apply, such gain
is attributable to a permanent establishment maintained by such Non-United
States Holder in the United States), (ii) the gain is not described in clause
(i) above and the Non-United States Holder is a non-resident alien individual
who holds the Common Stock as a capital asset and who is present in the United
States for a period or periods aggregating 183 days or more during the
calendar year (or taxable year if one has been established) in which such
disposition occurs, and either (a) such individual's "tax home," within the
meaning of Section 911(d)(3) of the Code, is in the United States or (b) the
gain is attributable to an office or other fixed place of business in the
United States, (iii) the Non-United States Holder is an individual who is a
former citizen or long-term resident alien of the United States and who is
subject to tax pursuant to the provisions of the United States federal income
tax laws applicable to certain United States expatriates, or (iv) the Company
is, or has been at any time during the five-year period preceding the
disposition (or such shorter period during which such Non-United States Holder
has owned such Common Stock), a "United States real property holding
corporation" for United States federal income tax purposes and, so long as the
Common Stock continues to be "regularly traded on an established securities
market" for tax purposes, the Non-United States Holder disposing of the Common
Stock directly or indirectly owned more than five percent in value of the
Common Stock at any time during such five-year (or shorter) period.

A corporation is generally a "United States real property holding
corporation" if the fair market value of its United States real property
interests equals or exceeds 50 percent of the sum of the fair market value of
its worldwide real property interests plus its other assets used or held for
use in a trade or business both within and without the United States. The
Company believes it is not currently, and does not expect that it will become,
a United States real property holding corporation for United States federal
income tax purposes. There can be no assurance, however, that the Company will
not become, or be determined to be, such a corporation.

Gain that is effectively connected with the conduct of a trade or business
by a Non-United States Holder within the United States (or that is
attributable to a United States permanent establishment maintained by such

35
<PAGE>

Non-United States Holder in the United States) will be subject to United
States federal income tax (on a net income basis) at the same graduated rates
applicable to United States persons, but will not be subject to withholding.
In the case of a Non-United States Holder that is a corporation, such gain may
also be subject to the branch profits tax. An individual Non-United States
Holder that is described under clause (ii) above will be subject to a flat 30
percent tax on the gain derived from the sale, which gain may be offset by
certain U.S.-source capital losses (notwithstanding the fact that such
individual is not considered to be a resident of the United States for United
States federal income tax purposes).

BACKUP WITHHOLDING AND INFORMATION REPORTING

The Company must report annually to the IRS and to each Non-United States
Holder the amount of dividends paid, and the tax withheld, with respect to
shares of Common Stock held by such holder. These information reporting
requirements apply regardless of whether the withholding tax was reduced or
eliminated

by an applicable tax treaty. This information may also be made available
(under the provisions of an applicable income tax treaty or other
international agreement) to the tax authorities of the country in which the
Non-United States Holder resides. United States federal income tax backup
withholding (imposed at a rate of 31 percent on dividends paid to certain
holders who fail to provide in the required manner certain identifying
information, such as the holder's name, address and taxpayer identification
number, or under certain other circumstances) generally does not apply to
dividends that are subject to United States federal income tax withholding at
the 30 percent statutory rate or at a reduced tax treaty rate, dividends that
are effectively connected with a United States trade or business of the Non-
United States Holder, or dividends paid to a Non-United States Holder at an
address outside the United States or otherwise to a Non-United States Holder
who is an "exempt recipient" (such as a corporation). Under the newly issued
United States Treasury Regulations, certain Non-United States Holders who are
not currently subject to backup withholding on dividend payments will have to
certify as to their non-United States status to avoid backup withholding on
dividends paid after December 31, 1998.

If a Non-United States Holder sells or otherwise disposes of shares of
Common Stock to or through a United States office of a broker, the broker is
required to file an information return and is required to apply backup
withholding at the rate of 31 percent unless the Non-United States Holder has
provided the broker with a certification, under penalties of perjury, as to
its non-United States status or has otherwise established its entitlement to
an exemption from backup withholding. If payment of the proceeds from the sale
or other disposition of Common Stock by a Non-United States Holder is made to
or through an office of a broker outside the United States, the broker
generally will not be required to apply backup withholding or to file
information returns, except as provided below. Under the Treasury Regulations
currently in effect, information reporting (but not backup withholding) is
required with respect to the payment of proceeds from the sale or other
disposition of Common Stock to or through a foreign office of a broker that is
(a) a United States person, (b) a controlled foreign corporation for United
States federal income tax purposes, or (c) a foreign person 50 percent or more
of whose gross income for the three-year period ending with the close of the
taxable year preceding the year of payment (or for the part of that period
that the broker has been in existence) is effectively connected with the
conduct of a trade or business in the United States, unless that broker has
documentary evidence in its files that the payee is not a United States person
(and the broker has no actual knowledge to the contrary) and certain other
conditions are met, or the payee has otherwise established its entitlement to
an exemption. The newly issued United States Treasury Regulations, which will
become effective for payments made after December 31, 1998, expand the
categories of brokers that will be required to comply with the information
reporting requirements with respect to the payment of proceeds from the sale
or other disposition of Common Stock effected at an office outside the United
States. As a result, information reporting may apply to certain payments of
proceeds from the sale or other disposition of Common Stock made after
December 31, 1998 by or through foreign offices of brokers that were
previously exempt. Under the new Treasury Regulations, however, backup
withholding will not be required with respect to the payment of proceeds from
the sale or other disposition of Common Stock effected at a foreign office of
a broker unless the broker has actual knowledge that the payee is a United
States person.

36
<PAGE>

Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules are generally allowable as a refund or credit against
a Non-United States Holder's United States federal income tax liability, if
any, provided that the required information is furnished to the IRS.

As previously noted above, the procedures for United States federal income
tax withholding on dividend payments and some of the associated backup
withholding and information reporting rules are the subject of new United
States Treasury Regulations, which were issued on October 6, 1997, and become
effective for payments made after December 31, 1998, subject to certain
transition rules. These new Treasury Regulations modify the procedures for
establishing an exemption from or a reduced rate of withholding tax as
described above, as well as the certification procedures and forms for
purposes of backup withholding and information reporting, and also clarify and
modify reliance standards. Prospective Non-United States Holders should
consult their own tax advisors concerning these new Treasury Regulations and
the effect of such Treasury Regulations on their ownership of Common Stock.

ESTATE TAX

Common Stock owned, or treated as owned, by an individual who is neither a
citizen or a resident (as specially defined for United States federal estate
tax purposes) of the United States at the time of such individual's death will
be included in such individual's gross estate for United States federal estate
tax purposes and thus will be subject to United States federal estate tax,
subject to certain credits, at graduated rates of up to 55 percent, unless an
applicable estate tax treaty provides otherwise.

37
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in an international purchase
agreement (the "International Purchase Agreement") among the Company, the
Selling Shareholder and each of the underwriters named below (the
"International Managers") and concurrently with the sale of 2,716,000 shares
of Common Stock to the U.S. Underwriters (as defined below), the Company and
the Selling Shareholder have agreed to sell to the International Managers, and
each of the International Managers severally has agreed to purchase from the
Company and the Selling Shareholder the number of shares of Common Stock set
forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER
OF
INTERNATIONAL UNDERWRITER SHARES
------------------------- -------
<S> <C>
Merrill Lynch International......................................
William Blair & Company, L.L.C...................................
Robert W. Baird & Co. Incorporated...............................
McDonald & Company Securities, Inc...............................
-------
Total........................................................ 679,000
=======
</TABLE>

Merrill Lynch International ("Merrill Lynch"), William Blair & Co., L.L.C.,
Robert W. Baird & Co. Incorporated and McDonald & Company Securities, Inc. are
acting as representatives (the "International Representatives") of the
International Managers.

The Company and the Selling Shareholder have also entered into a purchase
agreement (the "U.S. Purchase Agreement" and, together with the International
Purchase Agreement, the "Purchase Agreements") with certain underwriters in
the United States and Canada (collectively, the "U.S. Underwriters," and
together with the International Managers, the "Underwriters"), for whom
Merrill Lynch, Pierce Fenner & Smith Incorporated, William Blair & Company,
L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities,
Inc. are acting as representatives (the "U.S. Representatives") and, together
with the International Representatives, the "Representatives"). Subject to the
terms and conditions set forth in the U.S. Purchase Agreement, and
concurrently with the sale of 679,000 shares of Common Stock to the
International Managers pursuant to the International Purchase Agreement, the
Company and the Selling Shareholder have agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters have severally agreed to purchase from
the Company and the Selling Shareholder, an aggregate of 2,716,000 shares of
Common Stock. The public offering price per share of Common Stock and the
underwriting discount per share of Common Stock are identical under the
International Purchase Agreement and the U.S. Purchase Agreement. The
respective percentages of the Common Stock to be sold by each of the Company
and the Selling Shareholder will be identical in the U.S. Offering and the
International Offering.

38
<PAGE>

or U.S. Underwriters (as the case may be) may be increased or the
International Purchase Agreement or the U.S. Purchase Agreement (as the case
may be) may be terminated. The sale of Common Stock to the International
Managers is conditioned upon the sale of Common Stock to the U.S. Underwriters
and vice versa.

The International Underwriters and the U.S. Underwriters have entered into
an intersyndicate agreement (the "Intersyndicate Agreement") providing for the
coordination of their activities. The Underwriters are permitted to sell
shares of Common Stock to each other for purposes of resale at the initial
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are United States
or Canadian persons or to persons they believe intend to resell to persons who
are United States or Canadian persons, and the U.S. Underwriters and any
dealer to whom they sell shares of Common Stock will not offer to sell or sell
shares of Common Stock to non-United States persons or to non-Canadian persons
or to persons they believe intend to resell to non-United States persons or
non-Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.

The International Representatives have advised the Company and the Selling
Shareholder that the International Managers propose initially to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain selected dealers at such
price less a concession not in excess of $ . per share. The International
Managers may allow, and such dealers may reallow, a discount not in excess of
$ . per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount and may be
changed.

Each International Manager has agreed that (i) it has not offered or sold,
and will not for a period of six months following consummation of the
Offerings offer or sell, in the United Kingdom by means of any document, any
shares of Common Stock offered hereby, other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that do not constitute an offer to the public
within the meaning of the Public Offers to Securities Regulations of 1995;
(ii) it has complied with and will comply with all applicable provisions of
the Financial Services Act of 1986 with respect to anything done by it in
relation to the Common Stock in, from or otherwise involving the United
Kingdom and (iii) it has only issued or passed on and will only issue or pass
on to any person in the United Kingdom any document received by it in
connection with the issue of the Common Stock if that person is of a kind
described in Article 11(3) of the Financial Services Act of 1986 (Investment
Advertisements) (Exemptions) Order 1996, as amended, or is a person to whom
the document may otherwise lawfully be issued or passed on.

The Company has granted to the International Managers an option, exercisable
within 30 days after the date of this Prospectus, to purchase up to an
aggregate of 101,850 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The International Managers may exercise this option only to cover
over-allotments, if any, made on the sale of Common Stock offered hereby. To
the extent that the International Managers exercise this option, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
International Manager's initial amount reflected in the foregoing table. If
purchased, the Underwriters will offer such additional shares on the same
terms as those on which the 3,395,000 shares are being offered.

Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.

39
<PAGE>

shares of Common Stock upon the exercise or conversion of any outstanding
options, rights, warrants or other convertible securities, or issue shares of
Common Stock or grant options to purchase shares of Common Stock pursuant to
the Company's employee benefit plans, director stock plan or dividend
reinvestment plan. In addition, the Company's executive officers and directors
have agreed not to effect any sales of Common Stock in open market
transactions without the prior written consent of Merrill Lynch for a period
of 90 days from the date of this Prospectus.

In connection with this Offering, the Underwriters or their respective
affiliates and selling group members (if any) who are qualified market makers
on Nasdaq may engage in "passive market making" in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act. Rule 103 permits, upon the satisfaction of certain conditions,
underwriters and selling group members participating in a distribution that
are also Nasdaq market makers in the security being distributed (or a related
security) to engage in limited market making transactions during the period
when Regulation M under the Exchange Act would otherwise prohibit such
activity. Rule 103 prohibits underwriters and selling group members engaged in
passive market making generally from entering a bid or affecting a purchase at
a price that exceeds the highest bid for those securities displayed on the
Nasdaq National Market by a market maker that is not participating in the
distribution. Under Rule 103, each underwriter or selling group member engaged
in passive market making is subject to a daily net purchase limitation equal
to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of
the registration statement under the Securities Act of 1933, as amended (the
"Securities Act") pertaining to the security to be distributed (or such
related security).

In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant
to such agreement are purchased. Under certain circumstances involving a
default by an Underwriter, the commitments of non-defaulting International
Underwriters or U.S. Underwriters (as the case may be) may be increased or the
International Purchase Agreement or the U.S. Purchase Agreement (as the case
may be) may be terminated. The sale of Common Stock to the International
Managers is conditioned upon the sale of Common Stock to the U.S. Underwriters
and vice versa.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase Common Stock. As the
exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.

The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments initially the
Underwriters may be required to make in respect thereof.

40
<PAGE>

Edgar D. Jannotta, a director of the Selling Shareholder, is Senior Director
of William Blair & Company, L.L.C.

41
<PAGE>

LEGAL MATTERS

42
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

43
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON WHOM, IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY OR THE SELLING SHAREHOLDER SINCE THE DATE
HEREOF.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Recent Developments....................................................... 8
Use of Proceeds........................................................... 9
Market Price of and Dividends on Common Stock............................. 9
Capitalization............................................................ 10
Selected Consolidated Financial and Operating Data........................ 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 12
Business.................................................................. 17
Management................................................................ 28
Selling Shareholder....................................................... 30
Description of Capital Stock.............................................. 30
United States Taxation of Foreign Shareholders............................ 34
Underwriting.............................................................. 38
Legal Matters............................................................. 42
Experts................................................................... 42
Available Information..................................................... 42
Incorporation of Certain Documents by Reference........................... 43
Index to Consolidated Financial Statements................................ F-1
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

3,395,000 SHARES

HON INDUSTRIES INC.

COMMON STOCK

----------------

PROSPECTUS

----------------

MERRILL LYNCH INTERNATIONAL

WILLIAM BLAIR & COMPANY

ROBERT W. BAIRD & CO.
INCORPORATED

MCDONALD & COMPANY
SECURITIES, INC.

, 1997

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following expenses incurred in connection with the issuance and
distribution of the securities being registered, other than the registration,
listing and filing fees, are estimated.

<TABLE>
<CAPTION>
ITEM AMOUNT
---- -----------
<S> <C>
Securities and Exchange Commission Registration Fee........ $ 64,553.22
Printing and Engraving..................................... 150,000.00
NASD Filing Fee............................................ 23,194.00
Nasdaq Listing Fee......................................... 17,500.00
Legal Fees and Expenses.................................... 120,000**
Accounting Fees and Expenses............................... 100,000**
Miscellaneous.............................................. 24,752.78**
-----------
Total.................................................. $500,000.00**
</TABLE>
- --------

**Estimated.

The Company will pay for all the above-listed fees and expenses of the
offering, except that the Selling Shareholder will pay all legal fees of its
attorneys.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by the Iowa Business Corporation Act ("IBCA"), the Company's
Articles of Incorporation (the "Articles") provide that no director shall be
personally liable to the Company or any shareholder for monetary damages for
breach of fiduciary duty as a director, except for: (i) a breach of the
director's duty of loyalty to the Company or its shareholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of the law, (iii) a transaction from which the director derived an
improper personal benefit, or (iv) an improper act related to the payment of
dividends or approval of a stock purchase in violation of Section 833 of the
IBCA. While the Articles provide protection from awards for monetary damages
for breaches of the duty of care, it does not eliminate the director's duty of
care. Accordingly, the Articles will not effect the availability of equitable
remedies, such as an injunction, based on a director's breach of the duty of
care.

In addition, the Company's By-Laws provide that the Company may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding (whether civil,
criminal, administrative, or investigative including, without limitation, an
action or suit by or in the right of the Company (collectively, "Action")) by
reason of the fact that he or she is or was a director, officer, employee, or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, other enterprise, or
employee benefit plan (each a "Qualified Person"). The indemnification, which
may be made in any manner not prohibited by Iowa law, may be against expenses
(including attorneys' fees), judgments, fines and amounts paid or incurred in
settlement which the Qualified Person actually and reasonably incurred in
connection with the Action. Indemnification shall not be provided in any case
for (i) a breach of a person's duty of loyalty to the Company, (ii) acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of the law, (iii) a transaction from which the person derives an
improper personal benefit, (iv) acts arising under IBCA Section 490.833
(regarding liability for unlawful distributions by the Company) or (v)
proceedings by or in the right of the Company unless permitted by the IBCA.
The By-Laws also provide that a Qualified Person shall be indemnified against
actually and reasonably incurred expenses in connection with any Action to the
extent such Qualified Person has been successful on the merits or otherwise in
defense of such Action or in the defense of any claim, issue or matter
therein.

II-1
<PAGE>

The Company has director and officer liability insurance in the amount of
$20,000,000, under which each director and each of certain officers of the
Company is insured against certain liabilities. The Company and its directors
and executive officers are also parties to Indemnification Agreements that
entitle such director or officer to indemnification to the fullest extent
permitted by applicable law against all expenses and liabilities with respect
to all proceedings relating to or arising out of the indemnitee's being or
having been a director or officer of the Company.

ITEM 16. EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
4.1 Articles of Incorporation, as amended, incorporated by reference to
Exhibit (3)(a) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988.
4.2 By-Laws, as amended, incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-8 filed May 14, 1997.
4.3 Rights Agreement dated as of July 7, 1988 between the Company and
First Chicago Trust Company of New York, incorporated by reference to
Exhibit 1 to Registration Statement on Form 8-A filed July 12, 1988,
as amended by amendment dated as of May 1, 1990, incorporated by
reference to Exhibit 1 to Amendment No. 1 to Registration Statement on
Form 8 filed May 29, 1990.
*5.1 Form of opinion of Stanley, Lande & Hunter, P.C., as to the validity
of securities registered hereunder.
*23.1 Consent of Stanley, Lande & Hunter, P.C. (set forth in their opinion
filed as Exhibit 5.1 to this Registration Statement).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
*24.1 Powers of Attorney (included on the signature page of the Registration
Statement, as filed
September 26, 1997).
</TABLE>
- --------
*Filed with the Registration Statement on September 26, 1997.

Long-term debt of the registrant or various of its subsidiaries is outstanding
under numerous instruments. No such instrument authorizes an amount of
securities thereunder in excess of 10% of the total assets of registrant and
its subsidiaries on a consolidated basis. The registrant agrees that it will
furnish a copy of any such instrument to the Securities and Exchange
Commission upon its request.

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.

(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the

II-2
<PAGE>

Securities Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registrant statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registrant statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 2
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF MUSCATINE, STATE OF IOWA, ON OCTOBER
23, 1997.

HON INDUSTRIES Inc.
(Registrant)

/s/ Jack D. Michaels
By:__________________________________
Jack D. Michaels
Chairman, President and Chief
Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ Jack D. Michaels Chairman, President and October 23, 1997
____________________________________ Chief Executive Officer and
Jack D. Michaels Director Principal
Executive Officer

/s/ Melvin L. McMains Controller and Principal October 23, 1997
____________________________________ Accounting Officer
Melvin L. McMains

/s/ David C. Stuebe Vice President and Chief October 23, 1997
____________________________________ Financial Officer
David C. Stuebe

/s/ Robert W. Cox* Director October 23, 1997
____________________________________
Robert W. Cox

/s/ W. James Farrell* Director October 23, 1997
____________________________________
W. James Farrell

/s/ Stanley M. Howe* Director October 23, 1997
____________________________________
Stanley M. Howe

/s/ Robert L. Katz* Director October 23, 1997
____________________________________
Robert L. Katz
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ Lee Liu* Director October 23, 1997
____________________________________
Lee Liu

/s/ Celeste C. Michalski* Director October 23, 1997
____________________________________
Celeste C. Michalski

/s/ Michael S. Plunkett* Director October 23, 1997
____________________________________
Michael S. Plunkett

/s/ Herman J. Schmidt* Director October 23, 1997
____________________________________
Herman J. Schmidt

/s/ Richard H. Stanley* Director October 23, 1997
____________________________________
Richard H. Stanley

/s/ Lorne R. Waxlax* Director October 23, 1997
____________________________________
Lorne R. Waxlax
</TABLE>
- --------

*The undersigned by signing his name hereunto has hereby signed this
Amendment No. 2 to the Registration Statement on behalf of the undersigned
in the capacities indicated and the above-named directors on October 23,
1997, pursuant to a power of attorney executed on behalf of each such
director and filed with the Securities and Exchange Commission.

/s/ James I. Johnson

By: ___________________________

James I. Johnson

Vice President, General
Counsel and Secretary

II-5

<PAGE>

Draft of 10/23/97

================================================================================

HON INDUSTRIES INC.

(an Iowa corporation)

3,395,000 Shares of Common Stock

U.S. PURCHASE AGREEMENT

Dated: October 23, 1997

================================================================================
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>

<S> <C> <C>
PURCHASE AGREEMENT.................................................................................. 1

SECTION 1. Representations and Warranties.......................................................... 4

(a) Representations and Warranties by the Company........................................... 4

(i) Compliance with Registration Requirements....................................... 4
(ii) Incorporated Documents.......................................................... 5
(iii) Independent Accountants......................................................... 5
(iv) Financial Statements............................................................ 5
(v) No Material Adverse Change in Business.......................................... 5
(vi) Good Standing of the Company.................................................... 6
(vii) Good Standing of Subsidiaries................................................... 6
(viii) Capitalization.................................................................. 6
(ix) Authorization of Agreement...................................................... 7
(x) Authorization and Description of Securities..................................... 7
(xi) Absence of Defaults and Conflicts............................................... 7
(xii) Absence of Labor Dispute........................................................ 8
(xiii) Absence of Proceedings.......................................................... 8
(xiv) Accuracy of Exhibits............................................................ 8
(xv) Possession of Intellectual Property............................................. 8
(xvi) Absence of Further Requirements................................................. 9
(xvii) Possession of Licenses and Permits.............................................. 9
(xviii) Title to Property............................................................... 9
(xix) Absence of Manipulation......................................................... 10
(xx) Investment Company Act.......................................................... 10
(xxi) Environmental Laws.............................................................. 10

(b) Representations and Warranties by Bandag and the Selling Shareholder.................... 10

(i) Accurate Disclosure............................................................. 10
(ii) Authorization of Agreement...................................................... 11
(iii) Good and Marketable Title....................................................... 11
(iv) Absence of Manipulation......................................................... 12
(v) Absence of Further Requirements................................................. 12
(vi) No Association with NASD........................................................ 12

i
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<TABLE>
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<S> <C> <C>
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing......................................... 12

(a) Initial U.S. Securities................................................................. 12
(b) U.S. Option Securities.................................................................. 13
(c) Payment................................................................................. 13
(d) Denominations; Registration............................................................. 14

SECTION 3. Covenants of the Company................................................................ 14

(a) Compliance with Securities Regulations and Commission Requests.......................... 14
(b) Filing of Amendments.................................................................... 15
(c) Delivery of Registration Statements..................................................... 15
(d) Delivery of Prospectuses................................................................ 15
(e) Continued Compliance with Securities Laws............................................... 15
(f) Blue Sky Qualifications................................................................. 16
(g) Rule 158................................................................................ 16
(h) Use of Proceeds......................................................................... 16
(i) Listing................................................................................. 17
(j) Restriction on Sale of Securities....................................................... 17
(k) Reporting Requirements.................................................................. 17

SECTION 4. Payment of Expenses..................................................................... 17

(a) Expenses................................................................................ 17
(b) Expenses of Bandag and the Selling Shareholder.......................................... 18
(c) Termination of Agreement................................................................ 18
(d) Allocation of Expenses.................................................................. 18

SECTION 5. Conditions of Underwriters' Obligations................................................. 18

(a) Effectiveness of Registration Statement; Filing of Registration Statement............... 19
(b) Opinion of Counsel for Company.......................................................... 19
(c) Opinion of Counsel for Bandag and the Selling Shareholder............................... 19
(d) Opinion of Counsel for U.S. Underwriters................................................ 19
(e) Officers' Certificate................................................................... 19
(f) Certificate of Bandag and the Selling Shareholder....................................... 20
(g) Accountant's Comfort Letter............................................................. 20
(h) Bring-down Comfort Letter............................................................... 20
(i) Approval of Listing..................................................................... 20
(j) No Objection............................................................................ 20
(k) Purchase of Initial International Securities............................................ 20
(l) Lock-up Agreements...................................................................... 21
(m) Conditions to Purchase of U.S. Option Securities........................................ 21
</TABLE>

ii
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<TABLE>
<CAPTION>
<S> <C> <C>
(n) Additional Documents.................................................................... 21
(o) Termination of Agreement................................................................ 22

SECTION 6. Indemnification......................................................................... 22

(a) Indemnification of U.S. Underwriters by the Company..................................... 22
(b) Indemnification of U.S. Underwriters and the Company by Bandag and the
Selling Shareholder..................................................................... 23
(c) Indemnification of Company, Directors and Officers, Bandag and the
Selling Shareholder..................................................................... 23
(d) Actions against Parties; Notification................................................... 24
(e) Settlement without Consent if Failure to Reimburse...................................... 24
(f) Other Agreements with Respect to Indemnification........................................ 25

SECTION 7. Contribution............................................................................ 25

SECTION 8. Representations, Warranties and Agreements to Survive Delivery.......................... 26

SECTION 9. Termination of Agreement................................................................ 26

(a) Termination; General.................................................................... 26
(b) Liabilities............................................................................. 27

SECTION 10. Default by One or More of the U.S. Underwriters........................................ 27

SECTION 11. Default by the Selling Shareholder or the Company...................................... 28

SECTION 12. Notices................................................................................ 28

SECTION 13. Parties................................................................................ 28

SECTION 14. Governing Law and Time................................................................. 29

SECTION 15. Effect of Headings..................................................................... 29
</TABLE>

iii
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<TABLE>
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<S> <C> <C>
SCHEDULES
Schedule A - List of Underwriters......................................................... Sch A-1
Schedule B - Shares to be sold by the Company and the Selling Shareholder................. Sch B-1
Schedule C - Pricing Information.......................................................... Sch C-1
Schedule D - List of Subsidiaries......................................................... Sch D-1
Schedule E - Persons Executing Lock-up Agreements......................................... Sch E-1

EXHIBITS
Exhibit A-1 - Form of Opinion of Company's In-House Counsel................................... A-1
Exhibit A-2 - Form of Opinion of Company's Counsel............................................ A-2
Exhibit A-3 - Form of Opinion of Company's Counsel............................................ A-3
Exhibit B - Form of Opinion of Bandag's and Selling Shareholder's Counsel..................... B-1
Exhibit C - Form of Opinion of Counsel for U.S. Underwriters.................................. C-1
Exhibit D - Form of Lock-up Letter............................................................ D-1

ANNEXES

Annex A - Form of Accountant's Comfort Letter................................................. A-1
</TABLE>

iv
<PAGE>

HON INDUSTRIES INC.

(an Iowa corporation)

3,395,000 Shares of Common Stock

(Par Value $1.00 Per Share)

U.S. PURCHASE AGREEMENT
-----------------------

October 23, 1997

MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
William Blair & Company, L.L.C.
Robert W. Baird & Co. Incorporated
McDonald & Company Securities, Inc.
as Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209

Ladies and Gentlemen:

HON INDUSTRIES Inc., an Iowa corporation (the "Company"), and Bandag,
Incorporated, an Iowa corporation ("Bandag"), and BTC, Inc., a Delaware
corporation (the "Selling Shareholder"), confirm their respective agreements
with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A
hereto (collectively, the "U.S. Underwriters", which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for whom
Merrill Lynch and William Blair & Company, L.L.C., Robert W. Baird & Co.
Incorporated and McDonald & Company Securities, Inc. are acting as
representatives (in such capacity, the "U.S. Representatives"), with respect to
(i) the sale by the Company and the Selling Shareholder, acting severally and
not jointly, and the purchase by the U.S. Underwriters, acting severally and not
jointly, of the respective numbers of shares of Common Stock, par value $1.00
per share, of the Company ("Common Stock") set forth in Schedules A and B hereto
and (ii) the grant by the Company to the U.S. Underwriters, acting severally and
not jointly, of the option described in Section 2(b) hereof to purchase all or
any part of 407,400 additional shares of Common Stock solely to cover over-
allotments, if any. The aforesaid 2,716,000 shares of Common Stock (the
"Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or
any part of the
<PAGE>

407,400 shares of Common Stock subject to the option described in Section 2(b)
hereof (the "U.S. Option Securities") are hereinafter called, collectively, the
"U.S. Securities".

It is understood that the Company, Bandag and the Selling Shareholder are
concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the offering by the Company
and the Selling Shareholder acting severally and not jointly of an aggregate of
679,000 shares of Common Stock (the "Initial International Securities") through
arrangements with certain underwriters outside the United States and Canada (the
"International Managers") for which Merrill Lynch International and William
Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated and McDonald &
Company Securities, Inc. are acting as lead managers (the "Lead Managers") and
the grant by the Company to the International Managers, acting severally and not
jointly, of an option to purchase all or any part of the International Managers'
pro rata portion of up to 101,850 additional shares of Common Stock solely to
cover overallotments, if any (the "International Option Securities" and,
together with the U.S. Option Securities, the "Option Securities"). The Initial
International Securities and the International Option Securities are hereinafter
called the "International Securities". It is understood that neither the
Company nor the Selling Shareholder is obligated to sell, and the U.S.
Underwriters are not obligated to purchase, any Initial U.S. Securities unless
all of the Initial International Securities are contemporaneously purchased by
the International Managers.

The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities".

The Underwriters will concurrently enter into an Intersyndicate Agreement of
even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co. (in such capacity, the "Global Coordinator").

The Company, Bandag and the Selling Shareholder understand that the U.S.
Underwriters propose to make a public offering of the U.S. Securities as soon as
the U.S. Representatives deem advisable after this Agreement has been executed
and delivered.

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-36433) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of

2
<PAGE>

Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the
1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule
424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term
sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b). Two forms of prospectus are to be used in connection with the offering
and sale of the Securities: one relating to the U.S. Securities (the "Form of
U.S. Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical to
the Form of U.S. Prospectus, except for the front cover and back cover pages and
the information under the caption "Underwriting" and the inclusion in the Form
of International Prospectus of a section under the caption "United States
Taxation of Foreign Shareholders." The information included in such prospectus
or in any such Term Sheet, as the case may be, that was omitted from such
registration statement at the time it became effective but that is deemed to be
part of such registration statement at the time it became effective (a) pursuant
to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information."
Each Form of U.S. Prospectus and Form of International Prospectus used before
such registration statement became effective, and any prospectus that omitted,
as applicable, the Rule 430A Information or the Rule 434 Information, that was
used after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto, schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final Form of U.S.
Prospectus and the Final Form of International Prospectus, including the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, in the form first furnished to the Underwriters for use in
connection with the offering of the Securities is herein called the "U.S.
Prospectus" and the "International Prospectus", respectively, and collectively,
the "Prospectuses." If Rule 434 is relied on, the terms "U.S. Prospectus" and
"International Prospectus" shall refer to the preliminary U.S. Prospectus dated
October 3, 1997 and preliminary International Prospectus dated October 3, 1997,
respectively, each together with the applicable Term Sheet and all references in
this Agreement to the date of the Prospectuses shall mean the date of the
applicable Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the U.S. Prospectus, the
International Prospectus or any Term Sheet or any amendment or supplement to any
of the foregoing shall be deemed to include the copy filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval system
("EDGAR").

3
<PAGE>

may be; and all references in this Agreement to amendments or supplements to the
Registration Statement, any preliminary prospectus or the Prospectuses shall be
deemed to mean and include the filing of any document under the Securities
Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the
Registration Statement, such preliminary prospectus or the Prospectuses, as the
case may be.

SECTION 1. Representations and Warranties.

(a) Representations and Warranties by the Company. The Company
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S.
Underwriter, as follows:

(i) Compliance with Registration Requirements. The Company meets the
requirements for use of Form S-3 under the 1933 Act. Each of the Registration
Statement and any Rule 462(b) Registration Statement has become effective
under the 1933 Act and no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of the Company, are
contemplated by the Commission, and any request on the part of the Commission
for additional information has been complied with.

At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of the
1933 Act and the 1933 Act Regulations and did not and will not contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading. Neither the Prospectuses nor any amendments or supplements
thereto, at the time the Prospectuses or any amendments or supplements were
issued and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434 is used,
the Company will comply with the requirements of Rule 434. The representations
and warranties in this subsection shall not apply to information stated in or
omitted from the Registration Statement or U.S. Prospectus made in reliance
upon and in conformity with information furnished to the Company in writing by
any U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement or the U.S. Prospectus.

4
<PAGE>

Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters for
use in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.

(ii) Incorporated Documents. The documents incorporated or deemed to
be incorporated by reference in the Registration Statement and the
Prospectuses, at the time they were or hereafter are filed with the Commission
(assuming for purposes hereof that the Company's Annual Report on Form 10-K
for the year ended December 28, 1996 (the "Form 10-K") included, at the time
such Form 10-K was originally filed, the information set forth in the
Company's Form 10-K/A filed with the Commission on October 6, 1997), complied
and will comply in all material respects with the requirements of the 1934 Act
and the rules and regulations of the Commission thereunder (the "1934 Act
Regulations"), and, as modified, superseded and read together with the other
information in the Prospectuses, at the time the Registration Statement became
effective, at the time the Prospectuses were issued and at the Closing Time
(and, if any U.S. Option Securities are purchased, at the Date of Delivery),
did not and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.

(iii) Independent Accountants . The accountants who certified the
financial statements and supporting schedules, if any, included in the
Registration Statement are independent public accountants as required by the
1933 Act and the 1933 Act Regulations.

(iv) Financial Statements . The financial statements included in the
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly the financial position of the Company and
its consolidated subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial statements
have been prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved. The
supporting schedules, if any, included in the Registration Statement present
fairly in accordance with GAAP the information required to be stated therein.
The selected financial data and the summary financial information included in
the Prospectuses present fairly the information shown therein and have been
compiled on a basis consistent with that of the audited financial statements
included in the Registration Statement.

5
<PAGE>

subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have been
no transactions entered into by the Company or any of its subsidiaries, other
than those in the ordinary course of business, which are material with respect
to the Company and its subsidiaries considered as one enterprise, and (C)
except for regular quarterly dividends on the Common Stock in amounts per
share that are consistent with the current dividend policy and past practice
of the Company, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.

(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under the
laws of the State of Iowa and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in which
such qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect.

(vii) Good Standing of Subsidiaries. Each of the entities listed on
Schedule D hereto (each a "Subsidiary" and, collectively, the "Subsidiaries")
has been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectuses and is duly qualified as
a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a Material
Adverse Effect; except as otherwise disclosed in the Registration Statement,
all of the issued and outstanding capital stock of each such Subsidiary has
been duly authorized and validly issued, is fully paid and non-assessable and
is owned by the Company, directly or through subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim or equity;
none of the outstanding shares of capital stock of any Subsidiary was issued
in violation of the preemptive or similar rights of any securityholder of such
Subsidiary. The only subsidiaries of the Company that constitute "significant
subsidiaries" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) are the subsidiaries listed on Schedule D hereto.

6
<PAGE>

the Securities to be purchased by the Underwriters from the Selling
Shareholder, have been duly authorized and validly issued and are fully paid
and non-assessable; none of the outstanding shares of capital stock of the
Company, including the Securities to be purchased by the Underwriters from the
Selling Shareholder, was issued in violation of the preemptive or other
similar rights of any securityholder of the Company.

(ix) Authorization of Agreement. This Agreement and the International
Purchase Agreement have been duly authorized, executed and delivered by the
Company.

(x) Authorization and Description of Securities. The Securities to
be purchased by the U.S. Underwriters and the International Managers from the
Company have been duly authorized for issuance and sale to the U.S.
Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement and, when issued and
delivered by the Company pursuant to this Agreement and the International
Purchase Agreement, respectively, against payment of the consideration set
forth herein and the International Purchase Agreement, respectively, will be
validly issued and fully [CAPTION] paid and non-assessable; the Common Stock
conforms in all material respects to all statements relating thereto contained
in the Prospectuses and such description conforms in all material respects to
the rights set forth in the instruments defining the same; no holder of the
Securities will be subject to personal liability by reason of being such a
holder; and the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.

(xi) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust, loan
or credit agreement, note, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any of them
may be bound, or to which any of the property or assets of the Company or any
subsidiary is subject (collectively, "Agreements and Instruments") except for
such defaults that would not result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement and the International
Purchase Agreement and the consummation of the transactions contemplated in
this Agreement, the International Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities and the use of
the proceeds from the sale of the Securities as described in the Prospectuses
under the caption "Use of Proceeds") and compliance by the Company with its
obligations under this Agreement and the International Purchase Agreement have
been duly authorized by all necessary corporate action and do not and will
not, whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
subsidiary pursuant to, the Agreements and Instruments (except for such
conflicts, breaches or defaults or liens, charges or encumbrances or Repayment
Events that would not result in a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter or by-laws of
the

7
<PAGE>

Company or any subsidiary or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government instrumentality
or court, domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations (except for any
such violation as would not reasonably be expected to result in a Material
Adverse Effect). As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder's behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary.

(xii) Absence of Labor Dispute. No labor dispute with the employees of
the Company or any subsidiary exists or, to the knowledge of the Company, is
imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case, may
reasonably be expected to result in a Material Adverse Effect.

(xiii) Absence of Proceedings. Except as otherwise disclosed in the
Registration Statement, there is no action, suit, proceeding, inquiry or
investigation before or brought by any court or governmental agency or body,
domestic or foreign, now pending, or, to the knowledge of the Company,
threatened, against or affecting the Company or any subsidiary, which is
required to be disclosed in the Registration Statement, or which might
reasonably be expected to result in a Material Adverse Effect, or which may
reasonably be expected to materially and adversely affect the properties or
assets thereof or the consummation of the transactions contemplated in this
Agreement and the International Purchase Agreement or the performance by the
Company of its obligations hereunder or thereunder; all pending legal or
governmental proceedings to which the Company or any subsidiary is a party or
of which any of their respective property or assets is the subject, including
ordinary routine litigation incidental to the business, are, in the aggregate,
not reasonably likely to result in a Material Adverse Effect.

(xiv) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement, the
Prospectuses or the documents incorporated by reference therein or to be filed
as exhibits thereto which have not been so described and filed as required
(assuming for purposes hereof that the Form 10-K included, at the time such
Form 10-K was originally filed, the information set forth in the Company's
Form 10-K/A filed with the Commission on October 6, 1997).

(xv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how (including
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service marks,
trade names or other intellectual property (collectively, "Intellectual
Property") necessary to carry on in all material respects, the business now
operated by them, and neither the Company nor any of its subsidiaries has
received any notice or is otherwise aware of any infringement of or conflict
with asserted rights of others with respect to any Intellectual Property or of
any facts or circumstances which would render any Intellectual Property
invalid

8
<PAGE>

or inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the subject of
any unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.

(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration, qualification
or decree of, any court or governmental authority or agency is necessary or
required for the performance by the Company of its obligations hereunder, in
connection with the offering, issuance or sale of the Securities hereunder or
the consummation of the transactions contemplated by this Agreement and the
International Purchase Agreement, except such as have been already obtained or
as may be required under the 1933 Act or the 1933 Act Regulations or any
foreign or state securities laws.

(xvii) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them, and are in compliance
with the terms and conditions of all such Governmental Licenses, except where
the failure to possess such Governmental Licenses or to so comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such Governmental
Licenses to be in full force and effect would not have a Material Adverse
Effect; and neither the Company nor any of its subsidiaries has received any
notice of proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Effect.

(xviii) Title to Property. The Company and its subsidiaries have
good and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them and which
are material to the business of the Company and its subsidiaries, considered
as one enterprise, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any kind
except such as (a) are described in the Prospectuses or (b) do not, singly or
in the aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company or any of its subsidiaries; and all of the leases and subleases
material to the business of the Company and its subsidiaries, considered as
one enterprise, and under which the Company or any of its subsidiaries holds
properties described in the Prospectuses, are in full force and effect, and
neither the Company nor any subsidiary has any notice of any material claim of
any sort that has been asserted by anyone adverse to the rights of the Company
or any subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary to the
continued possession of the leased or subleased premises under any such lease
or sublease.

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(xix) Absence of Manipulation. The Company has not taken, and will
not take, directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of, and neither the Company nor any
affiliated purchaser (as such term is defined in Rule 100 under Regulation M)
has or will, directly or indirectly, bid for, purchased or attempted to induce
any person to bid for or purchase, any security of the Company to facilitate
the sale or resale of the Securities.

(xx) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the application
of the net proceeds therefrom as described in the Prospectuses will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").

(xxi) Environmental Laws. Except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company nor
any of its subsidiaries is in violation of any federal, state, local or
foreign statute, law, rule, regulation, ordinance, code, policy or rule of
common law or any judicial or administrative interpretation thereof, including
any judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (C) there
are no events or circumstances that may reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency, against or
affecting the Company or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.

(b) Representations and Warranties by Bandag and the Selling Shareholder.
Bandag and the Selling Shareholder each represents and warrants to each U.S.
Underwriter as of the date hereof and as of the Closing Time and agrees with
each U.S. Underwriter, as follows:

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<PAGE>

to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(provided, that this representation and warranty shall only apply to
statements in or omissions from the Registration Statement and the
Prospectuses made in reliance upon and in conformity with information
furnished to the Company in writing by Bandag or the Selling Shareholder
expressly for use in the Registration Statement and the Prospectuses); the
Selling Shareholder is not prompted to sell the Securities to be sold by the

Selling Shareholder hereunder by any information concerning the Company or
any subsidiary of the Company which is not set forth in the Prospectuses.

(ii) Authorization of Agreements. Each of Bandag and the Selling
Shareholder has the full right, power and authority to enter into this
Agreement and the International Purchase Agreement and to sell, transfer and
deliver the Securities to be sold by the Selling Shareholder under this
Agreement and the International Purchase Agreement. The execution and delivery
of this Agreement and the International Purchase Agreement and the sale and
delivery of the Securities to be sold by the Selling Shareholder and the
consummation of the transactions contemplated herein and under the
International Purchase Agreement and compliance by each of Bandag and the
Selling Shareholder with its obligations hereunder and under the International
Purchase Agreement have been duly authorized by each of Bandag and the Selling
Shareholder and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any tax, lien,
charge or encumbrance upon the Securities to be sold by the Selling
Shareholder or any property or assets of Bandag or the Selling Shareholder
pursuant to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, license, lease or other agreement or instrument to which
Bandag or the Selling Shareholder is a party or by which Bandag or the Selling
Shareholder may be bound, or to which any of the property or assets of Bandag
or the Selling Shareholder is subject, nor will such action result in any
violation of the provisions of the charter or by-laws or other organizational
instrument of Bandag or the Selling Shareholder, if applicable, or any
applicable treaty, law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over Bandag or the Selling Shareholder or any of
its properties.

(iii) Good and Marketable Title. The Selling Shareholder has and will
at the Closing Time have good and marketable title to the Securities to be
sold by the Selling Shareholder hereunder and under the International Purchase
Agreement, free and clear of any security interest, mortgage, pledge, lien,
charge, claim, equity or encumbrance of any kind, other than pursuant to this
Agreement and the International Purchase Agreement; and upon delivery of such
Securities and payment of the purchase price therefor as herein contemplated,
assuming each such Underwriter has no notice of any adverse claim, each of the
Underwriters will receive good and marketable title to the Securities
purchased by it from the Selling

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<PAGE>

Shareholder, free and clear of any security interest, mortgage, pledge, lien,
charge, claim, equity or encumbrance of any kind.

(iv) Absence of Manipulation. Neither Bandag nor the Selling
Shareholder has taken, and neither will take, directly or indirectly, any
action which is designed to or which has constituted or which might reasonably
be expected to cause or result in stabilization or manipulation of the price
of, and none of Bandag, the Selling Shareholder or any affiliated purchaser
(as such term is defined in Rule 100 under Regulation M) has or will, directly
or indirectly, bid for, purchased or attempted to induce any person to bid for
or purchase, any security of the Company to facilitate the sale or resale of
the Securities.

(v) Absence of Further Requirements. No filing with, or consent,
approval, authorization, order, registration, qualification or decree of, any
court or governmental authority or agency, domestic or foreign, is necessary
or required for the performance by either Bandag or the Selling Shareholder of
their respective obligations hereunder or under the International Purchase
Agreement, or in connection with the sale and delivery of the Securities
hereunder or under the International Purchase Agreement or the consummation of
the transac tions contemplated by this Agreement or the International Purchase
Agreement, except such as may have previously been made or obtained or as may
be required under the 1933 Act or the 1933 Act Regulations or state securities
laws.

(vi) No Association with NASD. Except for Edgar D. Jannotta, Senior
Director at William Blair & Company, L.L.C. and a director of Bandag, none of
Bandag, the Selling Stockholder nor any of its affiliates directly, or
indirectly through one or more intermediaries, controls, or is controlled by,
or is under common control with, or has any other association with (within the
meaning of Article I, Section 1(m) of the By-laws of the National Association
of Securities Dealers, Inc.), any member firm of the National Association of
Securities Dealers, Inc.

(c) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby; and any certificate signed by or on behalf of Bandag or
the Selling Shareholder as such and delivered to the Global Coordinator, the
U.S. Representatives or to counsel for the U.S. Underwriters pursuant to the
terms of this Agreement shall be deemed a representation and warranty by Bandag
or the Selling Shareholder, as the case may be, to each U.S. Underwriter as to
the matters covered thereby.

SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.

(a) Initial U.S. Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, (i) the Company and (ii) Bandag and the Selling Shareholder, severally
and not jointly, each agrees to sell to each U.S. Underwriter, severally and not
jointly, and each U.S. Underwriter,

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<PAGE>

severally and not jointly, agrees to purchase from the Company and Bandag and
the Selling Shareholder, at the price per share set forth in Schedule C, that
proportion of the number of Initial U.S. Securities set forth in Schedule B
opposite the name of the Company or the Selling Shareholder, as the case may be,
which the number of Initial U.S. Securities set forth in Schedule A opposite the
name of such U.S. Underwriter, plus any additional number of Initial U.S.
Securities which such U.S. Underwriter may become obligated to purchase pursuant
to the provisions of Section 10 hereof, bears to the total number of Initial
U.S. Securities, subject, in each case, to such adjustments among the U.S.
Underwriters as the U.S. Representatives in their sole discretion shall make to
eliminate any sales or purchases of fractional securities.

(b) U.S. Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the U.S.
Underwriters, severally and not jointly, to purchase up to an additional 407,400
shares of Common Stock, as set forth in Schedule B, at the price per share set
forth in Schedule C, less an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial U.S. Securities
but not payable on the U.S. Option Securities (but only if the Company
establishes a record date for such dividend or distribution which is prior to
the Date of Delivery (as defined below) for the U.S. Option Securities). The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company setting forth the number of U.S. Option Securities as
to which the several U.S. Underwriters are then exercising the option and the
time and date of payment and delivery for such U.S. Option Securities. Any such
time and date of delivery (a "Date of Delivery") shall be determined by the
Global Coordinator, but shall not be later than seven full business days after
the exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
U.S. Option Securities, each of the U.S. Underwriters, acting severally and not
jointly, will purchase that proportion of the total number of U.S. Option
Securities then being purchased which the number of Initial U.S. Securities set
forth in Schedule A opposite the name of such U.S. Underwriter bears to the
total number of Initial U.S. Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.

(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial U.S. Securities shall be made at the offices of
Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or at such
other place as shall be agreed upon by the Global Coordinator, the Company,
Bandag and the Selling Shareholder, at 9:00 A.M. (Eastern time) on the third
business day (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on
any given day business day) after the date hereof (unless postponed in
accordance with the provisions of Section 10), or such other time not later than
ten business days after such date as shall be agreed upon by the Global
Coordinator, the Company and Bandag and the Selling Shareholder (such time and
date of payment and delivery being herein called "Closing Time").

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<PAGE>

In addition, in the event that any or all of the U.S. Option Securities are
purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.

Payment shall be made to the Company and the Selling Shareholder by wire
transfer of immediately available funds to the bank accounts designated by the
Company and the Selling Shareholder, as the case may be, against delivery to the
U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.

(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.

SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:

(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or
any amendment or supplement to the Prospectuses or for additional
information, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, or of

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<PAGE>

the initiation or threatening of any proceedings for any of such purposes.
The Company will promptly effect the filings necessary pursuant to Rule
424(b) and will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b) was
received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.

(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or to
the Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or
otherwise, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or use,
as the case may be, and will not file or use any such document to which the
Global Coordinator or counsel for the U.S. Underwriters shall reasonably
object.

(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the U.S. Representatives and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein and documents incorporated or
deemed to be incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the U.S.
Representatives, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without
exhibits) for each of the U.S. Underwriters. The copies of the Registration
Statement and each amendment thereto furnished to the U.S. Underwriters will
be identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.

(d) Delivery of Prospectuses. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S. Underwriter reasonably requested, and the Company hereby consents
to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each U.S. Underwriter, without charge, during the
period when the U.S. Prospectus is required to be delivered under the 1933
Act or the 1934 Act, such number of copies of the U.S. Prospectus (as amended
or supplemented) as such U.S. Underwriter may reasonably request. The U.S.
Prospectus and any amendments or supplements thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.

(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934
Act

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<PAGE>

Regulations so as to permit the completion of the distribution of the
Securities as contemplated in this Agreement, the International Purchase
Agreement and in the Prospectuses. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the U.S. Underwriters or
for the Company, to amend the Registration Statement or amend or supplement
any Prospectus in order that the Prospectuses will not include any untrue
statements of a material fact or omit to state a material fact necessary in
order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement any Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to
Section 3(b), such amendment or supplement as may be necessary to correct
such statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will furnish to
the U.S. Underwriters such number of copies of such amendment or supplement
as the U.S. Underwriters may reasonably request.

(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the U.S. Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
reasonably designate and to maintain such qualifications in effect for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; provided,
however, that the Company shall not be obligated to file any general consent
to service of process or to qualify as a foreign corporation or as a dealer
in securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b) Registration
Statement.

(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.

(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".

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<PAGE>

(i) Listing. The Company will use its best efforts to effect the
quotation of the Securities on the Nasdaq National Market.

(j) Restriction on Sale of Securities. During a period of 90 days from
the date of the Prospectus, the Company will not, without the prior written
consent of the Global Coordinator, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act (other than on Form S-8) with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is
to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A) the Securities to
be sold hereunder or under the International Purchase Agreement, (B) any
shares of Common Stock issued by the Company upon the exercise of an option,
right or warrant or the conversion of a security outstanding on the date
hereof and referred to in the Prospectuses, (C) any shares of Common Stock,
or other securities convertible into or exercisable or exchangeable for
Common Stock, issued or options or contracts to purchase Common Stock granted
or entered into pursuant to existing employee benefit plans of the Company
referred to in the Prospectuses or (D) any shares of Common Stock, or other
securities convertible into or exercisable or exchangeable for Common Stock,
issued or options or contracts to purchase Common Stock pursuant to any non-
employee director stock plan or dividend reinvestment plan or the Company's
shareholder rights plan.

(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act within the time periods required by the 1934 Act and the 1934
Act Regulations.

SECTION 4. Payment of Expenses

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<PAGE>

and the transfer of the Securities between the U.S. Underwriters and the
International Managers, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, if any, (v) the qualification of the
Securities under securities laws in accordance with the provisions of Section
3(f) hereof, including filing fees and the reasonable fees and disbursements of
counsel for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing
and delivery to the Underwriters of copies of each preliminary prospectus, any
Term Sheets and of the Prospectuses and any amendments or supplements thereto,
(vii) the preparation, printing and delivery to the Underwriters of copies of
the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of
any transfer agent or registrar for the Securities and (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities
and (x) the fees and expenses incurred in connection with the inclusion of the
Securities being issued by the Company in the Nasdaq National Market.

It is understood, however, that except as provided in this Section and Section
6 hereof, the Underwriters will pay all their own costs and expenses, including
the fees and disbursements of their counsel, and any advertisement expenses
connected with any offers they may make.

(b) Expenses of Bandag and the Selling Shareholder. Bandag and the Selling
Shareholder will pay all expenses incident to the performance of their
obligations under, and the consummation of the transactions contemplated by this
Agreement, including (i) any stamp duties, capital duties and stock transfer
taxes, if any, payable upon the sale of the Securities to the Underwriters, and
their transfer between the Underwriters pursuant to an agreement between such
Underwriters, and (ii) the fees and disbursements of their counsel and
accountants.

(c) Termination of Agreement. If this Agreement is terminated by the U.S.
Representatives in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company and Bandag and the Selling Shareholder shall
reimburse the U.S. Underwriters for all of their out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the U.S.
Underwriters.

(d) Allocation of Expenses. The provisions of this Section 4 shall not affect
any agreement that the Company and Bandag and the Selling Shareholders may make
for the sharing of such costs and expenses.

SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the several U.S. Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and Bandag and the Selling
Shareholder contained in Section 1 hereof or in certificates of any officer of
the Company or any subsidiary of the Company or Bandag or the Selling
Shareholder delivered pursuant to the provisions hereof, to the performance by
the Company and Bandag and the Selling Shareholder of their respective covenants
and other obligations hereunder, and to the following further conditions:

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<PAGE>

(a) Effectiveness of Registration Statement; Filing of Prospectus. The
Registration Statement, including any Rule 462(b) Registration Statement, has
become effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission,
and any request on the part of the Commission for additional information
shall have been complied with to the reasonable satisfaction of counsel to
the Underwriters. A prospectus containing the Rule 430A Information shall
have been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if
the Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).

(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Stanley, Lande & Hunter, counsel for the Company, Jones,
Day, Reavis & Pogue, counsel for the Company, and James I. Johnson, Vice
President, General Counsel and Secretary of the Company, in form and
substance satisfactory to counsel for the U.S. Underwriters, together with
signed or reproduced copies of each such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibits A-1, A-2 and A-3 hereto,
respectively.

(c) Opinion of Counsel for Bandag and the Selling Shareholder. At
Closing Time, the U.S. Representatives shall have received the favorable
opinion, dated as of Closing Time, of Foley & Lardner, counsel for Bandag and
the Selling Shareholder, in form and substance satisfactory to counsel for
the U.S. Underwriters, together with signed or reproduced copies of such
letter for each of the other U.S. Underwriters to the effect set forth in
Exhibit B hereto.

(d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Sidley & Austin, counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other U.S.
Underwriters with respect to the matters set forth in Exhibit C. In giving
such opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York and the federal law
of the United States, upon the opinions of counsel satisfactory to the U.S.
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper,
upon certificates of officers of the Company and its subsidiaries and
certificates of public officials.

(e) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information
is given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the U.S.
Representatives shall

19
<PAGE>

have received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has been no
such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending or
are threatened by the Commission.

(f) Certificate of Bandag and the Selling Shareholder. At Closing Time,
the U.S. Representatives shall have received certificates of a duly
authorized officer of each of Bandag and the Selling Shareholder, dated as of
Closing Time, to the effect that (i) the representations and warranties of
each of Bandag and the Selling Shareholder contained in Section 1(b) hereof
are true and correct in all respects with the same force and effect as though
expressly made at and as of Closing Time and (ii) the Selling Shareholder has
complied in all material respects with all agreements and all conditions on
its part to be performed under this Agreement at or prior to Closing Time.

(g) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the U.S. Representatives shall have received from Arthur Andersen
LLP a letter dated such date, in form and substance satisfactory to the U.S.
Representatives to the effect set forth in Annex A hereto, together with
signed or reproduced copies of such letter for each of the other U.S.
Underwriters containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.

(h) Bring-down Comfort Letter. At Closing Time, the Representatives
shall have received from Arthur Andersen LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.

(i) Approval of Listing. At Closing Time, the Securities to be issued by
the Company shall have been approved for inclusion in the Nasdaq National
Market, subject only to official notice of issuance.

(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.

(k) Purchase of Initial International Securities. Contemporaneously
with the purchase by the U.S. Underwriters of the Initial U.S. Securities
under this Agreement, the

20
<PAGE>

International Managers shall have purchased the Initial International
Securities under the International Purchase Agreement.

(l) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have an agreement substantially in the form of Exhibit
D hereto signed by the persons listed on Schedule E hereto.

(m) Conditions to Purchase of U.S. Option Securities. In the event that
the U.S. Underwriters exercise their option provided in Section 2(b) hereof
to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary of
the Company hereunder shall be true and correct as of each Date of Delivery
and, at the relevant Date of Delivery, the U.S. Representatives shall have
received:

(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(e) hereof remains true and correct as of such
Date of Delivery.

(ii) Opinion of Counsel for Company. The favorable opinion of
Stanley, Lande & Hunter, counsel for the Company, Jones, Day, Reavis
& Pogue, counsel for the Company, and James I. Johnson, Vice
President, General Counsel and Secretary of the Company, in form and
substance satisfactory to counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect
as the opinions required by Section 5(b) hereof.

(iv) Opinion of Counsel for U.S. Underwriters. The favorable opinion
of Sidley & Austin, counsel for the U.S. Underwriters, dated such
Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect
as the opinion required by Section 5(d) hereof.

(v) Bring-down Comfort Letter. A letter from Arthur Andersen LLP, in
form and substance satisfactory to the U.S. Representatives and dated
such Date of Delivery, substantially in the same form and substance
as the letter furnished to the U.S. Representatives pursuant to
Section 5(g) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.

(n) Additional Documents. At Closing Time and at each Date of Delivery
counsel for the U.S. Underwriters shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the issuance and sale of the

21
<PAGE>

Securities as herein contemplated, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company and
Bandag and the Selling Shareholder in connection with the issuance and sale
of the Securities as herein contemplated shall be reasonably satisfactory in
form and substance to the U.S. Representatives and counsel for the U.S.
Underwriters.

(o) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant U.S.
Option Securities, may be terminated by the U.S. Representatives by notice
to the Company at any time at or prior to Closing Time or such Date of
Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4
and except that Sections 1, 6, 7 and 8 shall survive any such termination
and remain in full force and effect.

SECTION 6. Indemnification.

(a) Indemnification of U.S. Underwriters by the Company. The Company agrees
to indemnify and hold harmless each U.S. Underwriter and each person, if any,
who controls any U.S. Underwriter within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act as follows:

(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the Rule
434 Information, if applicable, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact included in any preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto), or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading;

(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section 6(d)
below) any such settlement is effected with the written consent of the
Company; and

(iii) against any and all expense whatsoever, as incurred (including the
fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating,

22
<PAGE>

preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;

provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense (i) to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto) and
(ii) with respect to any preliminary prospectus to the extent that any such
loss, liability, claim, damage or expense of such U.S. Underwriter results
solely from the fact that such U.S. Underwriter sold Securities to a person as
to whom the Company shall establish that there was not sent by commercially
reasonable means, at or prior to the written confirmation of such sale, a copy
of the appropriate Prospectus in any case where such delivery is required by the
1933 Act, if the Company has previously furnished copies thereof in sufficient
quantity to such U.S. Underwriter and the loss, claim, damage or liability of
such U.S. Underwriter results from an untrue statement or omission of a material
fact contained in a preliminary prospectus that was corrected in the appropriate
Prospectus (not including the documents incorporated by reference therein).

(b) Indemnification of U.S. Underwriters and the Company by Bandag and the
Selling Shareholder. Bandag and the Selling Shareholder, jointly and severally,
agree to indemnify and hold harmless each U.S. Underwriter and each person, if
any, who controls any U.S. Underwriter within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act and the Company and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact included in any preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto) in reliance upon and
in conformity with written information furnished to the Company by Bandag or the
Selling Shareholder expressly for use therein; and will reimburse each U.S.
Underwriter and the Company for any legal or other expenses reasonably incurred
by such U.S. Underwriter or the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.

(c) Indemnification of Company, Directors and Officers and Bandag and the
Selling Shareholder. Each U.S. Underwriter severally agrees to indemnify and
hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who

23
<PAGE>

controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act, and Bandag and the Selling Shareholder and each person, if
any, who controls either Bandag or the Selling Shareholder within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary U.S.
prospectus or the U.S. Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such U.S. Underwriter through the U.S. Representatives expressly for
use in the Registration Statement (or any amendment thereto) or such preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto).

(d) Actions against Parties; Notification. Each indemnified party shall give
notice as promptly as reasonably practicable to each indemnifying party of any
action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) or 6(b)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(c) above, counsel
to the indemnified parties shall be selected by the Company. An indemnifying
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except with
the consent of the indemnified party) also be counsel to the indemnified party.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. An indemnifying party may,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), if such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.

24
<PAGE>

requested an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel, an indemnifying party shall not be liable for any
settlement of the nature contemplated by Section 6(a)(ii) effected without its
consent if such indemnifying party (i) reimburses such indemnified party in
accordance with such request to the extent it considers such request to be
reasonable and (ii) provides written notice to the indemnified party
substantiating the unpaid balance as unreasonable, in each case prior to the
date of such settlement.

(f) Other Agreements with Respect to Indemnification. The provisions of this
Section shall not affect any agreement among the Company and Bandag and the
Selling Shareholder with respect to indemnification.

SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and Bandag
and the Selling Shareholder on the one hand and the U.S. Underwriters on the
other hand from the offering of the Securities pursuant to this Agreement or
(ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and Bandag and the Selling Shareholder on the one hand and of the U.S.
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.

The relative benefits received by the Company and Bandag and the Selling
Shareholder on the one hand and the U.S. Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total net proceeds
from the offering of the U.S. Securities pursuant to this Agreement (before
deducting expenses) received by the Company and Bandag and the Selling
Shareholder and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or,
if Rule 434 is used, the corresponding location on the Term Sheet bear to the
aggregate initial public offering price of the U.S. Securities as set forth on
such cover.

The relative fault of the Company and Bandag and the Selling Shareholder
on the one hand and the U.S. Underwriters on the other hand shall be determined
by reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or Bandag and the Selling
Shareholder or by the U.S. Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.

The Company, Bandag or the Selling Shareholder and the U.S. Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the U.S. Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 7. The aggregate amount of losses, liabilities,
claims, damages and expenses

25
<PAGE>

incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.

Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such U.S. Underwriter has otherwise been required to pay by reason of any such
untrue or alleged untrue statement or omission or alleged omission.

No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company, Bandag or the Selling Shareholder within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Company or Bandag and the Selling Shareholder, as the case
may be. The U.S. Underwriters' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial U.S.
Securities set forth opposite their respective names in Schedule A hereto and
not joint.

The provisions of this Section shall not affect any agreement among the
Company and Bandag and the Selling Shareholder with respect to contribution.

SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or Bandag and the Selling Shareholder submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any U.S. Underwriter or controlling
person, or by or on behalf of the Company or Bandag and the Selling Shareholder,
and shall survive delivery of the Securities to the U.S. Underwriters.

SECTION 9. Termination of Agreement.

(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company and Bandag and the Selling Shareholder, at
any time at or prior to Closing Time (i) if there has been, since the time of
execution of this Agreement or since the respective dates as of which
information is given in the U.S. Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets

26
<PAGE>

in the United States, any outbreak of hostilities or escalation of any existing
hostilities or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the U.S. Representatives, impracticable to market the U.S.
Securities or to enforce contracts for the sale of the U.S. Securities, or (iii)
if trading in any securities of the Company has been suspended or materially
limited by the Commission or the Nasdaq National Market, or if trading generally
on the New York Stock Exchange or in the Nasdaq National Market has been
suspended or materially limited, or minimum or maximum prices for trading have
been fixed, or maximum ranges for prices have been required, by such exchange or
by such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York authorities.

(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.

SECTION 10. Default by One or More of the U.S. Underwriters. If one or more
of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting U.S. Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:

(a) if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the non-
defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all non-defaulting U.S. Underwriters, or

(b) if the number of Defaulted Securities exceeds 10% of the number of
U.S. Securities to be purchased on such date, this Agreement or, with respect
to any Date of Delivery which occurs after the Closing Time, the obligation
of the U.S. Underwriters to purchase and of the Company to sell the U.S.
Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting U.S.
Underwriter.

No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.

27
<PAGE>

Option Securities, as the case may be, either (i) the U.S. Representatives or
(ii) the Company or Bandag and the Selling Shareholder shall have the right to
postpone Closing Time, or the Company or the U.S. Representatives shall have the
right to postpone the relevant Date of Delivery, as the case may be, for a
period not exceeding seven days in order to effect any required changes in the
Registration Statement or Prospectus or in any other documents or arrangements.
As used herein, the term "U.S. Underwriter" includes any person substituted for
an Underwriter under this Section 10.

SECTION 11. Default by Bandag and the Selling Shareholder or the Company.
(a) If Bandag and the Selling Shareholder shall fail at Closing Time to sell and
deliver the number of Securities which the Selling Shareholder is obligated to
sell hereunder, then the U.S. Underwriters may, at the option of the U.S.
Representatives, by notice from the U.S. Representatives to the Company and
Bandag and the Selling Shareholder, either (a) terminate this Agreement without
any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or
(b) elect to purchase the Securities which the Company has agreed to sell
hereunder. No action taken pursuant to this Section 11 shall relieve Bandag and
the Selling Shareholder from liability, if any, in respect of such default.

In the event of a default by Bandag and the Selling Shareholder as referred
to in this Section 11, each of the U.S. Representatives and the Company shall
have the right to postpone Closing Time or Date of Delivery for a period not
exceeding seven days in order to effect any required change in the Registration
Statement or Prospectus or in any other documents or arrangements.

(b) If the Company shall fail at Closing Time or at the Date of Delivery to
sell the number of Securities that it is obligated to sell hereunder, then this
Agreement shall terminate without any liability on the part of any non-
defaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7
and 8 shall remain in full force and effect. No action taken pursuant to this
Section shall relieve the Company from liability, if any, in respect of such
default.

SECTION 12. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given if mailed or transmitted
by any standard form of telecommunication. Notices to the U.S. Underwriters
shall be directed to the U.S. Representatives at 233 South Wacker Drive, 5500
Sears Tower, Chicago, Illinois 60606, attention of Michael G. O'Grady; notices
to the Company shall be directed to it at 414 East Third Street, P.O. Box 1109,
Muscatine, Iowa 52761-7109, attention of General Counsel; notices to Bandag
shall be directed to it at 2905 North Highway 61, Muscatine, Iowa 52761,
attention of Warren W. Heidbreder, Vice President, Finance; and notices to the
Selling Shareholder shall be directed to it c/o Bandag, Incorporated at 2905
North Highway 61, Muscatine, Iowa 52761, attention of Frank B. Hall, Secretary.

SECTION 13. Parties. This Agreement shall each inure to the benefit of and
be binding upon the U.S. Underwriters, the Company and Bandag and the Selling
Shareholder and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the U.S. Underwriters, the Company and Bandag and the
Selling Shareholder and their respective successors and the controlling persons
and officers and directors referred to in Sections 6 and 7 and their heirs and
legal representatives, any legal or

28
<PAGE>

equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the U.S.
Underwriters, the Company and Bandag and the Selling Shareholder and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any U.S.
Underwriter shall be deemed to be a successor by reason merely of such purchase.

SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.

SECTION 15. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.

29
<PAGE>

If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company, Bandag and the Selling Shareholder a
counterpart hereof, whereupon this instrument, along with all counterparts, will
become a binding agreement among the U.S. Underwriters, the Company and Bandag
and the Selling Shareholder in accordance with its terms.

Very truly yours,

HON INDUSTRIES INC.

By_________________________________
Title:

BANDAG, INCORPORATED

By_________________________________
Title:

BTC, INC.

By_________________________________
Title:

CONFIRMED AND ACCEPTED,
as of the date first above written:

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
WILLIAM BLAIR & COMPANY, L.L.C.
ROBERT W. BAIRD & CO. INCORPORATED
MCDONALD & COMPANY SECURITIES, INC.

By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

By: __________________________
Authorized Signatory

For themselves and as U.S. Representatives of the other U.S. Underwriters named
in Schedule A hereto.

30
<PAGE>

SCHEDULE A

Name of U.S. Underwriter Number of
- ------------------------ Initial U.S.
Securities
----------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
William Blair & Company, L.L.C..........................
Robert W. Baird & Co. Incorporated......................
McDonald & Company Securities, Inc......................

----------

Total................................................... ==========

Sch A-1
<PAGE>

SCHEDULE B

Number of Initial U.S. Maximum Number of U.S.
Securities to be Sold Option Securities to Be Sold
---------------------- ----------------------------

HON INDUSTRIES INC. 800,000 407,400
BANDAG, 1,916,000
INCORPORATED
________________ _______________
Total 2,716,000 407,400
=============== ================

Sch B-1
<PAGE>

SCHEDULE C

HON INDUSTRIES INC.
3,395,000 Shares of Common Stock
(Par Value $1.00 Per Share)

1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $______.

2. The purchase price per share for the U.S. Securities to be paid by the
several U.S. Underwriters shall be $___, being an amount equal to the initial
public offering price set forth above less $______ per share; provided that the
purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities (but only if the Company establishes a record date for such
dividend or distribution which is prior to the Date of Delivery for the U.S.
Option Securities).

Sch C-1
<PAGE>

SCHEDULE D

Hearth Technologies, Inc.
Holga Inc.
BPI Inc.
The Gunlocke Company
T.M. Export Inc.
Allsteel, Inc.

Sch D-1
<PAGE>

SCHEDULE E

Jack D. Michaels
David C. Stuebe
Melvin L. McMains
Jeffrey D. Fick
James I. Johnson
George J. Koenigsaecker III
Robert W. Cox
W. James Farrell
Stanley M. Howe
Robert L. Katz
Lee Liu
Celeste Michalski
Michael S. Plunkett
Herman J. Schmidt
Richard H. Stanley
Lorne R. Waxlax

Sch E-1
<PAGE>

Exhibit A-1

FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)

FORM OF OPINION OF STANLEY, LANDE & HUNTER
-------------------------------------------

A1-1
<PAGE>

Exhibit A-2

FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)

FORM OF OPINION OF JONES, DAY, REAVIS & POGUE
---------------------------------------------

A2-1
<PAGE>

Exhibit A-3

FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)

FORM OF OPINION OF JAMES I. JOHNSON
-----------------------------------

A3-1
<PAGE>

Exhibit B

FORM OF OPINION OF COUNSEL FOR BANDAG AND THE SELLING SHAREHOLDER TO BE
DELIVERED PURSUANT TO SECTION 5(c)

B-1
<PAGE>

Exhibit C

FORM OF OPINION OF COUNSEL
FOR THE U.S. UNDERWRITERS

Exhibit C-1
<PAGE>

Exhibit D

[Form of lock-up from directors and executive officers pursuant to Section 5(l)]

October __, 1997

MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
William Blair & Company, L.L.C.
Robert W. Baird & Co. Incorporated
McDonald & Company Securities, Inc.
as Representatives of the several
Underwriters to be named in the within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209

MERRILL LYNCH INTERNATIONAL
William Blair & Company, L.L.C.
Robert W. Baird & Co. Incorporated
McDonald & Company Securities, Inc.
as Lead Managers of the several International Managers to be named in the
within-mentioned International Purchase Agreement
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England

Re: Proposed Public Offering by HON INDUSTRIES Inc.
-----------------------------------------------

Dear Sirs:

D-1
<PAGE>

The undersigned, a stockholder and an officer and/or director of HON
INDUSTRIES Inc., an Iowa corporation (the "Company"), understands that Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), William Blair & Co., L.L.C., Robert W. Baird & Co. Incorporated and
McDonald & Company Securities, Inc. propose to enter into a U.S. Purchase
Agreement and an International Purchase Agreement (collectively, the "Purchase
Agreements") with the Company, Bandag, Incorporated and the Selling Shareholder
(as defined in the Purchase Agreements) providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $1.00 per
share (the "Common Stock"). In recognition of the benefit that such an offering
will confer upon the undersigned as a stockholder and an officer and/or director
of the Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreements that, during a period of 90
days from the date of the Purchase Agreements, the undersigned will not, without
the prior written consent of Merrill Lynch, directly or indirectly, in any open
market transaction (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer any shares
of the Company's Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of ownership
of the Common Stock, whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise.

Very truly yours,

Signature: ___________________________

Print Name: __________________________

D-2
<PAGE>

Annex A

[FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(g)]

We are independent public accountants with respect to the Company within
the meaning of the 1933 Act and the applicable published 1933 Act Regulations.

(i) in our opinion, the audited financial statements and the related
financial statement schedules included or incorporated by reference in the
Registration Statement and the Prospectuses comply as to form in all material
respects with the applicable accounting requirements of the 1933 Act and the
published rules and regulations thereunder;

(ii) on the basis of procedures (but not an examination in accordance with
generally accepted auditing standards) consisting of a reading of the unaudited
interim consolidated financial statements of the Company for the three month
periods ended March 29, 1997 and March 29, 1996, the three and six month periods
ended June 28, 1997 and June 29, 1996, included or incorporated by reference in
the Registration Statement and the Prospectuses (collectively, the "10-Q
Financials"), a reading of the minutes of all meetings of the stockholders and
directors of the Company and its subsidiaries and the committees of the
Company's Board of Directors and any subsidiary committees since January 1,
1997, inquiries of certain officials of the Company and its subsidiaries
responsible for financial and accounting matters, a review of interim financial
information in accordance with standards established by the American Institute
of Certified Public Accountants in Statement on Auditing Standards No. 71,
Interim Financial Information ("SAS 71"), with respect to the description of
relevant periods and such other inquiries and procedures as may be specified in
such letter, nothing came to our attention that caused us to believe that:

(A) the 10-Q Financials incorporated by reference in the
Registration Statement and the Prospectuses do not comply as to form
in all material respects with the applicable accounting requirements
of the 1934 Act and the 1934 Act Regulations applicable to unaudited
financial statements included in Form 10-Q or any material
modifications should be made to the 10-Q Financials incorporated by
reference in the Registration Statement and the Prospectuses for them
to be in conformity with generally accepted accounting principles;

A-1
<PAGE>

(B) at a specified date not more than five days prior to the
date of this Agreement, there was any change in the capital stock of
the Company and its subsidiaries or any decrease in the consolidated
net current assets or shareholders' equity of the Company and its
subsidiaries or any increase in the long-term debt of the Company and
its subsidiaries, in each case as compared with amounts shown in the
latest balance sheet included in the Registration Statement, except in
each case for changes, decreases or increases that the Registration
Statement discloses have occurred or may occur; or

(C) for the period from June 28, 1997 to a specified date not
more than five days prior to the date of this Agreement, there was any
decrease in consolidated net sales, total or per share amounts of
income before extraordinary items or of net income, in each case as
compared with the comparable period in the preceding year, except in
each case for any decreases that the Registration Statement discloses
have occurred or may occur;

(iii) based upon the procedures set forth in clause (ii) above and a
reading of the Selected Consolidated Financial and Operating Data included in
the Registration Statement, nothing came to our attention that caused us to
believe that the Selected Financial and Operating Data included in the
Registration Statement do not comply as to form in all material respects with
the disclosure requirements of Item 301 of Regulation S-K of the 1933 Act;

(iv) we have compared the information in the Registration Statement under
selected captions with the disclosure requirements of Regulation S-K of the 1933
Act and, on the basis of limited procedures specified herein. nothing came to
our attention that caused us to believe that this information does not comply as
to form in all material respects with the disclosure requirements of Items 302,
402 and 503(d), respectively, of Regulation S-K;

::ODMA\PCDOCS\CHICAGO4\449314\6 October 23, 1997 (1:25am)

A-2

<PAGE>

Draft of 10/23/97

================================================================================

HON INDUSTRIES INC.

(an Iowa corporation)

3,395,000 Shares of Common Stock

INTERNATIONAL PURCHASE AGREEMENT

Dated: October 23, 1997

================================================================================
<PAGE>

TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
INTERNATIONAL PURCHASE AGREEMENT..................................................... 1

SECTION 1. Representations and Warranties........................................... 4

(a) Representations and Warranties by the Company............................ 4

(i) Compliance with Registration Requirements........................ 4
(ii) Incorporated Documents........................................... 5
(iii) Independent Accountants.......................................... 5
(iv) Financial Statements............................................. 6
(v) No Material Adverse Change in Business........................... 6
(vi) Good Standing of the Company..................................... 6
(vii) Good Standing of Subsidiaries.................................... 7
(viii) Capitalization................................................... 7
(ix) Authorization of Agreement....................................... 7
(x) Authorization and Description of Securities...................... 7
(xi) Absence of Defaults and Conflicts................................ 8
(xii) Absence of Labor Dispute......................................... 9
(xiii) Absence of Proceedings........................................... 9
(xiv) Accuracy of Exhibits............................................. 9
(xv) Possession of Intellectual Property.............................. 9
(xvi) Absence of Further Requirements.................................. 10
(xvii) Possession of Licenses and Permits............................... 10
(xviii) Title to Property................................................ 10
(xix) Absence of Manipulation.......................................... 11
(xx) Investment Company Act........................................... 11
(xxi) Environmental Laws............................................... 11

(b) Representations and Warranties by Bandag and the Selling Shareholder..... 12

(i) Accurate Disclosure.............................................. 12
(ii) Authorization of Agreements...................................... 12
(iii) Good and Marketable Title........................................ 13
(iv) Absence of Manipulation.......................................... 13
(v) Absence of Further Requirements.................................. 13
(vi) No Association with NASD......................................... 14

SECTION 2. Sale and Delivery to International Managers; Closing..................... 14
</TABLE>

i
<PAGE>

<TABLE>
<S> <C> <C>
(a) Initial International Securities......................................... 14
(b) International Option Securities.......................................... 15
(c) Payment.................................................................. 15
(d) Denominations; Registration.............................................. 16

SECTION 3. Covenants of the Company................................................. 16

(a) Compliance with Securities Regulations and Commission Requests........... 16
(b) Filing of Amendments..................................................... 17
(c) Delivery of Registration Statements...................................... 17
(d) Delivery of Prospectuses................................................. 17
(e) Continued Compliance with Securities Laws................................ 18
(f) Blue Sky Qualifications.................................................. 18
(g) Rule 158................................................................. 19
(h) Use of Proceeds.......................................................... 19
(i) Listing.................................................................. 19
(j) Restriction on Sale of Securities........................................ 19
(k) Reporting Requirements................................................... 20

SECTION 4. Payment of Expenses...................................................... 20

(a) Expenses................................................................. 20
(b) Expenses of Bandag and the Selling Shareholder........................... 21
(c) Termination of Agreement................................................. 21
(d) Allocation of Expenses................................................... 21

SECTION 5. Conditions of International Managers' Obligations........................ 21

(a) Effectiveness of Registration Statement; Filing of Prospectus............ 21
(b) Opinion of Counsel for Company........................................... 22
(c) Opinion of Counsel for Bandag and the Selling Shareholder................ 22
(d) Opinion of Counsel for International Managers............................ 22
(e) Officers' Certificate.................................................... 22
(f) Certificate of Bandag and the Selling Shareholder........................ 23
(g) Accountant's Comfort Letter.............................................. 23
(h) Bring-down Comfort Letter................................................ 23
(i) Approval of Listing...................................................... 23
(j) No Objection............................................................. 24
(k) Purchase of Initial U.S. Securities...................................... 24
(l) Lock-up Agreements....................................................... 24
(m) Conditions to Purchase of International Option Securities................ 24
(i) Officers' Certificate.............................................. 24
</TABLE>

ii
<PAGE>

<TABLE>
<S> <C> <C>
(ii) Opinion of Counsel for Company..................................... 24
(iii) Opinion of Counsel for International Managers...................... 25
(iv) Bring-down Comfort Letter.......................................... 25

(n) Additional Documents..................................................... 25
(o) Termination of Agreement................................................. 25

SECTION 6. Indemnification.......................................................... 26

(a) Indemnification of International Managers by the Company................. 26
(b) Indemnification of International Managers by Bandag
and the Selling Shareholder............................................. 27
(c) Indemnification of Company, Directors and Officers, Bandag
and the Selling Shareholder............................................. 28
(d) Actions against Parties; Notification.................................... 28
(e) Settlement without Consent if Failure to Reimburse....................... 29
(f) Other Agreements with Respect to Indemnification......................... 29

SECTION 7. Contribution............................................................. 29

SECTION 8. Representations, Warranties and Agreements to Survive Delivery........... 31

SECTION 9. Termination of Agreement................................................. 31

(a) Termination; General..................................................... 31
(b) Liabilities.............................................................. 32

SECTION 10. Default by One or More of the International Managers..................... 32

SECTION 11. Default by Bandag and the Selling Shareholder or the Company............. 33

SECTION 12. Notices.................................................................. 34

SECTION 13. Parties.................................................................. 34

SECTION 14. Governing Law And Time................................................... 34

SECTION 15. Effect of Headings....................................................... 34
</TABLE>

iii
<PAGE>

<TABLE>
<S> <C>
SCHEDULES
Schedule A - List of Underwriters............................................ Sch A-1
Schedule B - Shares to be sold by the Company and the Selling Shareholder.... Sch B-1
Schedule C - Pricing Information............................................. Sch C-1
Schedule D - List of Subsidiaries............................................ Sch D-1
Schedule E - Persons Executing Lock-up Agreements............................ Sch E-1

EXHIBITS

Exhibit A-1 - Form of Opinion of Company's Vice President, Human Resources... A-1
Exhibit A-2 - Form of Opinion of Company's Counsel........................... A-2
Exhibit A-3 - Form of Opinion of Selling Shareholder's Counsel............... A-3
Exhibit B - Form of Opinion of Bandag's and Selling Shareholder's Counsel.... B-1
Exhibit C - Form of Opinion of Counsel for the International Managers........ C-1
Exhibit D - Form of Lock-up Letter........................................... D-1

ANNEXES

Annex A - Form of Accountant's Comfort Letter................................ A-1
</TABLE>

iv
<PAGE>

HON INDUSTRIES INC.

(an Iowa corporation)

3,395,000 Shares of Common Stock

(Par Value $1.00 Per Share)

INTERNATIONAL PURCHASE AGREEMENT

MERRILL LYNCH INTERNATIONAL Dated: October 23, 1997
William Blair & Company, L.L.C.
Robert W. Baird & Co. Incorporated
McDonald & Company Securities, Inc.
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:

HON INDUSTRIES Inc., an Iowa corporation (the "Company"), and Bandag,
Incorporated, an Iowa corporation ("Bandag"), and BTC, Inc., a Delaware
corporation (the "Selling Stockholder") confirm their respective agreements with
Merrill Lynch International ("Merrill Lynch") and each of the other
international underwriters named in Schedule A hereto (collectively, the
"International Managers", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch and William Blair & Company, L.L.C., Robert W. Baird & Co. Incorporated
and McDonald & Company Securities, Inc. are acting as representatives (in such
capacity, the "Lead Managers"), with respect to (i) the issue and sale by the
Company and the Selling Shareholder, acting severally and not jointly, and the
purchase by the International Managers, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $1.00 per share, of the
Company ("Common Stock") set forth in Schedules A and B hereto, and (ii) the
grant by the Company to the International Managers, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 101,850 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 679,000 shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any part
of the
<PAGE>

101,850 shares of Common Stock subject to the option described in Section 2(b)
hereof (the "International Option Securities") are hereinafter called,
collectively, the "International Securities".

It is understood that the Company, Bandag and the Selling Shareholder are
concurrently entering into an agreement dated the date hereof (the "U.S.
Purchase Agreement") providing for the offering by the Company and the Selling
Shareholder of an aggregate of 2,716,000 shares of Common Stock (the "Initial
U.S. Securities") through arrangements with certain underwriters in the United
States and Canada (the "U.S. Underwriters") for which Merrill Lynch, Pierce,
Fenner & Smith Incorporated and William Blair & Company, L.L.C., Robert W. Baird
& Co. Incorporated and McDonald & Company Securities, Inc. are acting as
representatives (the "U.S. Representatives") and the grant by the Company to the
U.S. Underwriters, acting severally and not jointly, of an option to purchase
all or any part of the U.S. Underwriters' pro rata portion of up to 407,400
additional shares of Common Stock solely to cover over allotments, if any (the
"U.S. Option Securities" and, together with the International Option Securities,
the "Option Securities"). The Initial U.S. Securities and the U.S. Option
Securities are hereinafter called the "U.S. Securities". It is understood that
neither the Company nor the Selling Shareholder is obligated to sell, and the
International Managers are not obligated to purchase, any Initial International
Securities unless all of the Initial U.S. Securities are contemporaneously
purchased by the U.S. Underwriters.

The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities, and the U.S. Securities are
hereinafter collectively called the "Securities".

The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").

The Company, Bandag and the Selling Shareholder understand that the
International Managers propose to make a public offering of the International
Securities as soon as the Lead Managers deem advisable after this Agreement has
been executed and delivered.

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-36433) covering the
registration of the Securities

2
<PAGE>

under the Securities Act of 1933, as amended (the "1933 Act"), including the
related preliminary prospectus or prospectuses. Promptly after execution and
delivery of this Agreement, the Company will either (i) prepare and file a
prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the
rules and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act
Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule
434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term
Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms
of prospectus are to be used in connection with the offering and sale of the
Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of International Prospectus is identical to the Form
of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting" and the inclusion in the Form of
International Prospectus of a section under the caption "United States Taxation
of Foreign Shareholders." The information included in any such prospectus or in
any such Term Sheet, as the case may be, that was omitted from such registration
statement at the time it became effective but that is deemed to be part of such
registration statement at the time it became effective (a) pursuant to paragraph
(b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to
paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of
International Prospectus and Form of U.S. Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto, schedules thereto, if any, and the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, at the time it became effective and including the Rule 430A
Information and the Rule 434 Information, as applicable, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final Form of
International Prospectus and the final Form of U.S. Prospectus, including the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the 1933 Act, in the forms first furnished to the Underwriters for use in
connection with the offering of the Securities are herein called the
"International Prospectus" and the "U.S. Prospectus," respectively, and
collectively, the "Prospectuses." If Rule 434 is relied on, the terms
"International Prospectus" and "U.S. Prospectus" shall refer to the preliminary
International Prospectus dated October 3, 1997 and preliminary U.S. Prospectus
dated October 3, 1997, respectively, each together with the applicable Term
Sheet and all references in this Agreement to the date of such Prospectuses
shall mean the date of the applicable Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the International Prospectus, the U.S. Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").

3
<PAGE>

All references in this Agreement to financial statements and schedules and
other information which is "disclosed," "contained," "referred to," "included"
or "stated" in the Registration Statement, any preliminary prospectus (including
the Form of U.S. Prospectus and Form of International Prospectus) or the
Prospectuses (or other references of like import) shall be deemed to mean and
include all such financial statements and schedules and other information which
is incorporated by reference in the Registration Statement, any preliminary
prospectus (including the Form of U.S. Prospectus and Form of International
Prospectus) or the Prospectuses, as the case may be; and all references in this
Agreement to amendments or supplements to the Registration Statement, any
preliminary prospectus or the Prospectuses shall be deemed to mean and include
the filing of any document under the Securities Exchange Act of 1934 (the "1934
Act") which is incorporated by reference in the Registration Statement, such
preliminary prospectus or the Prospectuses, as the case may be.

SECTION 1. Representations and Warranties.

(a) Representations and Warranties by the Company. The Company represents
and warrants to each International Manager as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each International
Manager, as follows:

(i) Compliance with Registration Requirements. The Company meets the
requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.

4
<PAGE>

necessary to make the statements therein not misleading. Neither of the
Prospectuses nor any amendments or supplements thereto, at the time the
Prospectuses or any amendments or supplements thereto were issued and at
the Closing Time (and, if any International Option Securities are
purchased, at the Date of Delivery), included or will include an untrue
statement of a material fact or omitted or will omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434 is
used, the Company will comply with the requirements of Rule 434. The
representations and warranties in this subsection shall not apply to
information stated in or omitted from statements in or omissions from the
Registration Statement or the International Prospectus made in reliance
upon and in conformity with information furnished to the Company in writing
by any International Manager through the Lead Managers expressly for use in
the Registration Statement or the International Prospectus.

Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.

(ii) Incorporated Documents. The documents incorporated or deemed to
be incorporated by reference in the Registration Statement and the
Prospectuses, at the time they were or hereafter are filed with the
Commission (assuming for purposes hereof that the Company's Annual Report
on Form 10-K for the year ended December 28, 1996 (the "Form 10-K")
included, at the time such Form 10-K was originally filed, the information
set forth in the Company's Form 10-K/A filed with the Commission on October
6, 1997), complied and will comply in all material respects with the
requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), and, as modified,
superseded and read together with the other information in the
Prospectuses, at the time the Registration Statement became effective, at
the time the Prospectuses were issued and at the Closing Time (and, if any
International Option Securities are purchased, at the Date of Delivery),
did not and will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading.

5
<PAGE>

(iii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules, if any, included in the
Registration Statement are independent public accountants as required by
the 1933 Act and the 1933 Act Regulations.

(iv) Financial Statements. The financial statements included in the
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the statement
of operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement.

(v) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise, and (C) except for regular quarterly dividends on the
Common Stock in amounts per share that are consistent with the current
dividend policy and past practice of the Company, there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock.

(vi) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Iowa and has corporate power and authority to own,
lease and operate its properties and to conduct its business as described
in the Prospectuses and to enter into and perform its obligations under
this Agreement; and the Company is duly qualified as a foreign corporation
to transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of

6
<PAGE>

business, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect.

(vii) Good Standing of Subsidiaries. Each of the entities listed on
Schedule D hereto (each a "Subsidiary" and, collectively, the
"Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectuses
and is duly qualified as a foreign corporation to transact business and is
in good standing in each jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each such Subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the
outstanding shares of capital stock of any Subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of such
Subsidiary. The only subsidiaries of the Company that constitute
"significant subsidiaries" of the Company (as such term is defined in Rule
1-02 of Regulation S-X) are the subsidiaries listed on Schedule D hereto.

(viii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectuses in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee or director benefit plans referred to
in the Prospectuses or pursuant to the exercise of convertible securities
or options referred to in the Prospectuses). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any securityholder of the
Company.

(ix) Authorization of Agreement. This Agreement and the U.S.
Purchase Agreement have been duly authorized, executed and delivered by the
Company.

(x) Authorization and Description of Securities. The Securities to
be purchased by the International Managers and the U.S. Underwriters from
the Company have been duly

7
<PAGE>

authorized for issuance and sale to the International Managers pursuant to
this Agreement and the U.S. Underwriters pursuant to the U.S. Purchase
Agreement, respectively, and, when issued and delivered by the Company
pursuant to this Agreement and the U.S. Purchase Agreement, respectively,
against payment of the consideration set forth herein and the U.S. Purchase
Agreement, respectively, will be validly issued, fully paid and non-
assessable; the Common Stock conforms in all material respects to all
statements relating thereto contained in the Prospectuses and such
description conforms in all material respects to the rights set forth in
the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.

(xi) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the U.S. Purchase Agreement and the consummation of the
transactions contemplated in this Agreement, the U.S. Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectuses under the caption "Use of Proceeds") and
compliance by the Company with its obligations under this Agreement and the
U.S. Purchase Agreement have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any subsidiary pursuant to,
the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances or Repayment Events that would
not result in a Material Adverse Effect), nor will such action result in
any violation of the provisions of the charter or by-laws of the Company or
any subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
subsidiary or any of their assets, properties or operations (except for any
such violation as would not reasonably be expected to result in a Material
Adverse Effect). As used herein, a "Repayment Event" means any event or
condition which gives the holder of any note, debenture or other evidence
of indebtedness (or any person acting on such

8
<PAGE>

holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
subsidiary.

(xii) Absence of Labor Dispute. No labor dispute with the employees
of the Company or any subsidiary exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.

(xiii) Absence of Proceedings. Except as otherwise disclosed in the
Registration Statement, there is no action, suit, proceeding, inquiry or
investigation before or brought by any court or governmental agency or
body, domestic or foreign, now pending, or, to the knowledge of the
Company, threatened, against or affecting the Company or any subsidiary,
which is required to be disclosed in the Registration Statement, or which
might reasonably be expected to result in a Material Adverse Effect, or
which may reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement and the U.S. Purchase Agreement or the
performance by the Company of its obligations hereunder or thereunder; all
pending legal or governmental proceedings to which the Company or any
subsidiary is a party or of which any of their respective property or
assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, are, in the aggregate, not reasonably likely to result in a
Material Adverse Effect.

(xiv) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement, the
Prospectuses or the documents incorporated by reference therein or to be
filed as exhibits thereto which have not been so described and filed as
required (assuming for purposes hereof that the Form 10-K included, at the
time such Form 10-K was originally filed, the information set forth in the
Company's Form 10-K/A filed with the Commission on October 6, 1997).

9
<PAGE>

the Company nor any of its subsidiaries has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or any of its
subsidiaries therein, and which infringement or conflict (if the subject of
any unfavorable decision, ruling or finding) or invalidity or inadequacy,
singly or in the aggregate, would result in a Material Adverse Effect.

(xvi) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the U.S. Purchase Agreement or the
consummation of the transactions contemplated by this Agreement and the
U.S. Purchase Agreement, except such as have been already obtained or as
may be required under the 1933 Act or the 1933 Act Regulations and foreign
or any foreign or state securities or blue sky laws.

(xvii) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them and are in
compliance with the terms and conditions of all such Governmental Licenses,
except where the failure to possess such Governmental Licenses or to so
comply would not, singly or in the aggregate, have a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental Licenses or the
failure of such Governmental Licenses to be in full force and effect would
not have a Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.

10
<PAGE>

affect the value of such property and do not interfere with the use made
and proposed to be made of such property by the Company or any of its
subsidiaries; and all of the leases and subleases material to the business
of the Company and its subsidiaries, considered as one enterprise, and
under which the Company or any of its subsidiaries holds properties
described in the Prospectuses, are in full force and effect, and neither
the Company nor any subsidiary has any notice of any material claim of any
sort that has been asserted by anyone adverse to the rights of the Company
or any subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease.

(xix) Absence of Manipulation. The Company has not taken, and will
not take, directly or indirectly, any action which is designed to or which
has constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of, and neither the Company nor
any affiliated purchaser (as such term is defined in Rule 100 under
Regulation M) has or will, directly or indirectly, bid for, purchased or
attempted to induce any person to bid for or purchase, any security of the
Company to facilitate the sale or resale of the Securities.

(xx) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").

(xxi) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) there are no pending or threatened
administrative, regulatory or judicial actions,

11
<PAGE>

suits, demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental Law
against the Company or any of its subsidiaries and (C) there are no events
or circumstances that may reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.

(b) Representations and Warranties by Bandag and the Selling Shareholder.
Bandag and the Selling Shareholder each represents and warrants to each
International Manager as of the date hereof and as of the Closing Time and
agrees with each International Manager, as follows:

(i) Accurate Disclosure. To the best knowledge of Bandag and the
Selling Shareholder, the representations and warranties of the Company
contained in Section 1(a) hereof are true and correct; each of Bandag and
the Selling Shareholder has reviewed and is familiar with the Registration
Statement and the Prospectuses and neither the Prospectuses nor any
amendments or supplements thereto includes any untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading (provided, that this representation and warranty
shall only apply to statements in or omissions from the Registration
Statement and the Prospectuses made in reliance upon and in conformity with
the information furnished to the Company in writing by Bandag or the
Selling Shareholder expressly for use in the Registration Statements and
the Prospectuses); the Selling Shareholder is not prompted to sell the
Securities to be sold by the Selling Shareholder hereunder by any
information concerning the Company or any subsidiary of the Company which
is not set forth in the Prospectuses.

(ii) Authorization of Agreements. Each of Bandag and the Selling
Shareholder has the full right, power and authority to enter into this
Agreement and the U.S. Purchase Agreement and to sell, transfer and deliver
the Securities to be sold by the Selling Shareholder under this Agreement
and the U.S. Purchase Agreement. The execution and delivery of this
Agreement and the U.S. Purchase Agreement and the sale and delivery of the
Securities to be sold by the Selling Shareholder and the consummation of
the transactions contemplated herein and under the U.S. Purchase Agreement
and compliance by each of Bandag and the Selling Shareholder with its
obligations hereunder and under the U.S. Purchase Agreement have been duly
authorized by each of Bandag and the Selling Shareholder and do not and
will not, whether with or without the giving of notice or passage of time
or both, conflict with or

12
<PAGE>

constitute a breach of, or default under, or result in the creation or
imposition of any tax, lien, charge or encumbrance upon the Securities to
be sold by the Selling Shareholder or any property or assets of Bandag or
the Selling Shareholder pursuant to any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, license, lease or other agreement
or instrument to which Bandag or the Selling Shareholder is a party or by
which Bandag or the Selling Shareholder may be bound, or to which any of
the property or assets of Bandag or the Selling Shareholder is subject, nor
will such action result in any violation of the provisions of the charter
or by-laws or other organizational instrument of Bandag or the Selling
Shareholder, if applicable, or any applicable treaty, law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
Bandag or the Selling Shareholder or any of its properties.

(iii) Good and Marketable Title. The Selling Shareholder has and
will at the Closing Time have good and marketable title to the Securities
to be sold by the Selling Shareholder hereunder and under the U.S. Purchase
Agreement, free and clear of any security interest, mortgage, pledge, lien,
charge, claim, equity or encumbrance of any kind, other than pursuant to
this Agreement and the U.S. Purchase Agreement; and upon delivery of such
Securities and payment of the purchase price therefor as herein
contemplated, assuming each such Underwriter has no notice of any adverse
claim, each of the Underwriters will receive good and marketable title to
the Securities purchased by it from the Selling Shareholder, free and clear
of any security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind.

(iv) Absence of Manipulation. Neither Bandag nor the Selling
Shareholder has taken, and neither will take, directly or indirectly, any
action which is designed to or which has constituted or which might
reasonably be expected to cause or result in stabilization or manipulation
of the price of, and none of Bandag, the Selling Shareholder or any
affiliated purchaser (as such term is defined in Rule 100 under Regulation
M) has or will, directly or indirectly, bid for, purchased or attempted to
induce any person to bid for or purchase any security of the Company to
facilitate the sale or resale of the Securities.

13
<PAGE>

contemplated by this Agreement or the U.S. Purchase Agreement, except such
as may have previously been made or obtained or as may be required under
the 1933 Act or the 1933 Act Regulations or state securities laws.

(vi) No Association with NASD. Except for Edgar D. Janotta, Senior
Director at William Blair & Co., L.L.C. and a director of Bandag, none of
Bandag, the Selling Stockholder nor any of their respective affiliates
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section 1(m) of the By-
laws of the National Association of Securities Dealers, Inc.), any member
firm of the National Association of Securities Dealers, Inc.

(c) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the Lead
Managers or to counsel for the International Managers shall be deemed a
representation and warranty by the Company to each International Manager as to
the matters covered thereby; and any certificates signed by or on behalf of
Bandag or the Selling Shareholder as such and delivered to the Global
Coordinator, the Lead Managers or to counsel for the International Managers
pursuant to the terms of this Agreement shall be deemed a representation or
warranty by Bandag or the Selling Shareholder, as the case may be, to each
International Manager as to the matters covered thereby.

SECTION 2. Sale and Delivery to International Managers; Closing.

(a) Initial International Securities. On the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, (i) the Company and (ii) Bandag and the Selling Shareholder,
severally and not jointly, each agrees to sell to each International Manager,
severally and not jointly, and each International Manager, severally and not
jointly, agrees to purchase from the Company and Bandag and the Selling
Shareholder , at the price per share set forth in Schedule C, that proportion of
the number of Initial International Securities set forth in Schedule B opposite
the name of the Company or the Selling Shareholder, as the case may be, which
the number of Initial International Securities set forth in Schedule A opposite
the name of such International Manager, plus any additional number of Initial
International Securities which such International Manager may become obligated
to purchase pursuant to the provisions of Section 10 hereof, bears to the total
number of Initial International Securities subject, in each case, to such
adjustments among the International Managers as the Lead Managers in their sole
discretion shall make to eliminate any sales or purchasers of fractional
securities.

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<PAGE>

(b) International Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
International Managers, severally and not jointly, to purchase up to an
additional 101,850 shares of Common Stock at the price per share set forth in
Schedule B, at the price per share set forth in Schedule C less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial International Securities but not payable on the
International Option Securities (but only if the Company establishes a record
date for such dividend or distribution which is prior to the Date of Delivery
(as defined below) for the International Option Securities). The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial International Securities upon notice by the Global Coordinator to the
Company setting forth the number of International Option Securities as to which
the several International Managers are then exercising the option and the time
and date of payment and delivery for such International Option Securities. Any
such time and date of delivery for the International Option Securities (a "Date
of Delivery") shall be determined by the Global Coordinator, but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the International Option Securities, each
of the International Managers, acting severally and not jointly, will purchase
that proportion of the total number of International Option Securities then
being purchased which the number of Initial International Securities set forth
in Schedule A opposite the name of such International Manager bears to the total
number of Initial International Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.

(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Sidley
& Austin, One First National Plaza, Chicago, Illinois 60603, or at such other
place as shall be agreed upon by the Global Coordinator, the Company, Bandag and
the Selling Shareholder, at 9:00 A.M. (Eastern time) on the third (fourth, if
the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such date
as shall be agreed upon by the Global Coordinator, the Company and Bandag and
the Selling Shareholder (such time and date of payment and delivery being herein
called "Closing Time").

In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such

15
<PAGE>

International Option Securities shall be made at the above-mentioned offices, or
at such other place as shall be agreed upon by the Global Coordinator and the
Company, on each Date of Delivery as specified in the notice from the Global
Coordinator to the Company.

Payment shall be made to the Company and the Selling Shareholder by wire
transfer of immediately available funds to a bank account designated by the
Company and the Selling Shareholder, as the case may be, against delivery to the
Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such International Manager from its obligations
hereunder.

(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.

SECTION 3. Covenants of the Company. The Company covenants with each
International Manager as follows:

(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and will notify the Global
Coordinator immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become
effective, or any supplement to the Prospectuses or any amended
Prospectuses shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to
the Prospectuses or for additional information, and (iv) of the issuance by
the

16
<PAGE>

Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus, or of the suspension of the qualification of
the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b)
and will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b) was
received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.

(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or
to the Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or
otherwise, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or use,
as the case may be, and will not file or use any such document to which the
Global Coordinator or counsel for the International Managers shall
reasonably object.

(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Lead Managers and counsel for the International
Managers, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein and documents incorporated
or deemed to be incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the Lead
Managers, without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the International Managers. The copies of the Registration Statement
and each amendment thereto furnished to the International Managers will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.

(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the
Company hereby consents to the use of such copies for purposes permitted by
the 1933 Act. The Company will furnish to each International Manager,
without charge, during the period when the International Prospectus is
required to

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<PAGE>

be delivered under the 1933 Act or the 1934 Act, such number of copies of
the International Prospectus (as amended or supplemented) as such
International Manager may reasonably request. The International Prospectus
and any amendments or supplements thereto furnished to the International
Managers will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.

(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and
the 1934 Act Regulations so as to permit the completion of the distribution
of the Securities as contemplated in this Agreement, the U.S. Purchase
Agreement and in the Prospectuses. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the International
Managers or for the Company, to amend the Registration Statement or amend
or supplement any Prospectus in order that the Prospectuses will not
include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of
such counsel, at any such time to amend the Registration Statement or amend
or supplement any Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare
and file with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or to
make the Registration Statement or the Prospectuses comply with such
requirements, and the Company will furnish to the International Managers
such number of copies of such amendment or supplement as the International
Managers may reasonably request.

(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the International Managers, to qualify the Securities
for offering and sale under the applicable securities laws of such states
and other jurisdictions (domestic or foreign) as the Global Coordinator may
reasonably designate and to maintain such qualifications in effect for a
period of not less than one year from the later of the effective date of
the Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is
not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In
each jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such

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<PAGE>

jurisdiction to continue such qualification in effect for a period of not
less than one year from the effective date of the Registration Statement
and any Rule 462(b) Registration Statement.

(g) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.

(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".

(i) Listing. The Company will use its best efforts to effect the
quotation of the Securities on the Nasdaq National Market.

(j) Restriction on Sale of Securities. During a period of 90 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of any share of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act (other than on Form S-8) with respect to any of the foregoing or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing sentence shall not apply to (A) the Securities to be sold
hereunder or under the U.S. Purchase Agreement, (B) any shares of Common
Stock issued by the Company upon the exercise of an option, right or
warrant or the conversion of a security outstanding on the date hereof and
referred to in the Prospectuses, (C) any shares of Common Stock, or other
securities convertible into or exercisable or exchangeable for Common
Stock, issued or options or contracts to purchase Common Stock granted or
entered into pursuant to existing employee benefit plans of the Company
referred to in the Prospectuses or (D) any shares of Common Stock, or other
securities convertible into or exercisable or exchangeable for Common
Stock, issued or options or contracts to purchase Common Stock pursuant to
any non-employee director stock plan or dividend reinvestment plan or the
Company's shareholder rights plan.

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<PAGE>

(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the 1934 Act Regulations.

SECTION 4. Payment of Expenses.

(a) Expenses. The Company and Bandag and the Selling Shareholder
will pay or cause to be paid all expenses incident to the performance of
their obligations under this Agreement, including (i) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits) as originally filed and of each amendment thereto,
(ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may
be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and delivery of
the certificates for the Securities to the Underwriters, including any
stock or other transfer taxes and any stamp or other duties payable upon
the sale, issuance or delivery of the Securities to the Underwriters and
the transfer of the Securities between the U.S. Underwriters and the
International Managers, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, if any, (v) the qualification of
the Securities under securities laws in accordance with the provisions of
Section 3(f) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection therewith and
in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriters of
copies of each preliminary prospectus, any Term Sheets and of the
Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the
Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of
any transfer agent or registrar for the Securities and (ix) the filing fees
incident to, and the reasonable fees and disbursements of counsel to the
Underwriters in connection with, the review by the National Association of
Securities Dealers, Inc. (the "NASD") of the terms of the sale of the
Securities and (x) the fees and expenses incurred in connection with the
inclusion of the Securities being issued by the Company in the Nasdaq
National Market.

It is understood, however, that except as provided in this Section and
Section 6 hereof, the Underwriters will pay all their own costs and
expenses, including the fees and disbursements of their counsel, and any
advertisement expenses connected with any offers they may make.

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<PAGE>

(b) Expenses of Bandag and the Selling Shareholder. Bandag and the
Selling Shareholder will pay all expenses incident to the performance of
its obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital
duties and stock transfer taxes, if any, payable upon the sale of the
Securities to the Underwriters, and their transfer between the Underwriters
pursuant to an agreement between such Underwriters, and (ii) the fees and
disbursements of their counsel and accountants.

(c) Termination of Agreement. If this Agreement is terminated by the
Lead Managers in accordance with the provisions of Section 5, Section
9(a)(i) or Section 11 hereof, the Company and Bandag and the Selling
Shareholder shall reimburse the International Managers for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the International Managers.

(d) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company and Bandag and the Selling
Shareholder may make for the sharing of such costs and expenses.

SECTION 5. Conditions of International Managers' Obligations. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company and Bandag and the
Selling Shareholder contained in Section 1 hereof or in certificates of any
officer of the Company or any subsidiary of the Company or Bandag and the
Selling Shareholder delivered pursuant to the provisions hereof, to the
performance by the Company and Bandag and the Selling Shareholder of their
respective covenants and other obligations hereunder, and to the following
further conditions:

(a) Effectiveness of Registration Statement; Filing of Prospectus.
The Registration Statement, including any Rule 462(b) Registration
Statement, has become effective and at Closing Time no stop order
suspending the effectiveness of the Registration Statement shall have been
issued under the 1933 Act or proceedings therefor initiated or threatened
by the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the International Managers. A prospectus
containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the

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<PAGE>

requirements of Rule 430A) or, if the Company has elected to rely upon Rule
434, a Term Sheet shall have been filed with the Commission in accordance
with Rule 424(b).

(b) Opinion of Counsel for Company. At Closing Time, the Lead
Manager(s) shall have received the favorable opinion, dated as of Closing
Time, of Stanley, Lande & Hunter, counsel for the Company, Jones, Day,
Reavis & Pogue, counsel for the Company, and James I. Johnson, Vice
President, General Counsel and Secretary of the Company, in form and
substance satisfactory to counsel for the International Managers, together
with signed or reproduced copies of such letter for each of the other
International Managers to the effect set forth in Exhibits A-1, A-2 and A-3
hereto.

(c) Opinion of Counsel for Bandag and the Selling Shareholder. At
the Closing Time, the Lead Managers shall have received the favorable
opinion, dated as of Closing Time, of Foley & Lardner, counsel for Bandag
and the Selling Shareholder, in form and substance satisfactory to counsel
for the International Managers, together with signed or reproduced copies
of such letter for each of the other International Managers to the effect
set forth in Exhibit B hereto.

(d) Opinion of Counsel for International Managers. At Closing Time,
the Lead Manager(s) shall have received the favorable opinion, dated as of
Closing Time, of Sidley & Austin, counsel for the International Managers,
together with signed or reproduced copies of such letter for each of the
other International Managers with respect to the matters set forth in
Exhibit C. In giving such opinion such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the State of
New York and the federal law of the United States, upon the opinions of
counsel satisfactory to the Lead Managers. Such counsel may also state
that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.

(e) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and
the Lead Manager(s) shall have received a certificate of the President or a
Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to

22
<PAGE>

the effect that (i) there has been no such material adverse change, (ii)
the representations and warranties in Section 1(a) hereof are true and
correct with the same force and effect as though expressly made at and as
of Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to Closing Time, and (iv) no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are threatened by the
Commission.

(f) Certificate of Bandag and the Selling Shareholder. At Closing
time, the Lead Managers shall have received a certificate of a duly
authorized officer of each of Bandag and the Selling Shareholder, dated as
of Closing Time, to the effect that (i) the representations and warranties
of each of Bandag and the Selling Shareholder contained in Section 1(b)
hereof are true and correct in all respects with the same force and effect
as though expressly made at and as of Closing Time and (ii) each of Bandag
and the Selling Shareholder has complied in all material respects with all
agreements and all conditions on its part to be performed under this
Agreement at or prior to Closing Time.

(g) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Lead Managers shall have received from Arthur Andersen LLP a
letter dated such date, in form and substance satisfactory to the Lead
Managers to the effect set forth in Annex A hereto, together with signed or
reproduced copies of such letter for each of the other International
Managers containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to
the financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.

(h) Bring-down Comfort Letter. At Closing Time, the Lead Manager(s)
shall have received from Arthur Andersen LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section, except that the
specified date referred to shall be a date not more than three business
days prior to Closing Time.

(i) Approval of Listing. At Closing Time, the Securities shall have
been approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.

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<PAGE>

(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.

(k) Purchase of Initial U.S. Securities. Contemporaneously with the
purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased
the Initial U.S. Securities under the U.S. Purchase Agreement.

(l) Lock-up Agreements. At the date of this Agreement, the Lead
Managers shall have an agreement substantially in the form of Exhibit D
hereto signed by the persons listed on Schedule E hereto.

(m) Conditions to Purchase of International Option Securities. In the
event that the International Managers exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the International
Option Securities, the representations and warranties of the Company
contained herein and the statements in any certificates furnished by the
Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery,
the Lead Managers shall have received:

(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(e) hereof remains true and correct as of such Date of
Delivery.

(ii) Opinion of Counsel for Company. The favorable opinion of
Stanley, Lande and Hunter, counsel for the Company, Jones, Day, Reavis
& Pogue, counsel for the Company, and James I. Johnson, Vice
President, General Counsel and Secretary of the Company, in form and
substance satisfactory to counsel for the International Managers,
dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(b) hereof.

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<PAGE>

(iii) Opinion of Counsel for International Managers. The
favorable opinion of Sidley & Austin, counsel for the International
Managers, dated such Date of Delivery, relating to the International
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(d)
hereof.

(iv) Bring-down Comfort Letter. A letter from Arthur Andersen
LLP, in form and substance satisfactory to the Lead Managers and dated
such Date of Delivery, substantially in the same form and substance as
the letter furnished to the Lead Managers pursuant to Section 5(g)
hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days
prior to such Date of Delivery.

(n) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the International Managers shall have been furnished
with such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company and
Bandag and the Selling Shareholder in connection with the issuance and sale
of the Securities as herein contemplated shall be satisfactory in form and
substance to the Lead Managers and counsel for the International Managers.

(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to
purchase the relevant Option Securities may be terminated by the Lead
Manager(s) by notice to the Company at any time at or prior to Closing Time
or such Date of Delivery, as the case may be, and such termination shall
be without liability of any party to any other party except as provided in
Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such
termination and remain in full force and effect.

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<PAGE>

SECTION 6. Indemnification.

(a) Indemnification of International Managers by the Company. The
Company agrees to indemnify and hold harmless each International Manager
and each person, if any, who controls any International Manager within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as
follows:

(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement
or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;

(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and

(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;

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<PAGE>

provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense (i) to the extent arising out of
any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information furnished
to the Company by any International Manager through the Lead Manager(s)
expressly for use in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if
applicable, or any preliminary prospectus or the International Prospectus
(or any amendment or supplement thereto) and (ii) with respect to any
preliminary prospectus to the extent that any such loss, liability, claim,
damage or expense of such International Manager results solely from the
fact that such International Manager sold Securities to a person as to whom
the Company shall establish that there was not sent by commercially
reasonably means, at or prior to the written confirmation of such sale, a
copy of the appropriate Prospectus in any case where such delivery is
required by the 1933 Act, if the Company has previously furnished copies
thereof in sufficient quantity to such International Manager and the loss,
claim, damage or liability of such International Manger results from an
untrue statement or omission of a material fact contained in a preliminary
prospectus that was corrected in the appropriate Prospectus (not including
documents incorporated by reference therein).

(b) Indemnification of International Managers and the Company by
Bandag and the Selling Shareholder. Bandag and the Selling Shareholder,
jointly and severally, agree to indemnify and hold harmless each
International Manager and each person, if any, who controls any
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act and the Company and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act as against any and all loss, liability, claim,
damage and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and Rule 434 Information, if applicable, or the omission or
alleged omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any preliminary prospectus
or the Prospectuses (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by
Bandag or the Selling Shareholder expressly for use therein; and will
reimburse each International Manager and the Company for any legal or other
expenses reasonably incurred by such International Manager or the Company
in

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<PAGE>

connection with investigating or defending any such action or claim as such
expenses are incurred.

(c) Indemnification of Company, Directors and Officers and Bandag and
the Selling Shareholder. Each International Manager severally agrees to
indemnify and hold harmless the Company, its directors, each of its
officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act, and Bandag and the Selling Shareholder and
each person, if any, who controls either Bandag or the Selling Shareholder
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934
Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or any preliminary international
prospectus or the International Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information
furnished to the Company by such International Manager through the Lead
Managers expressly for use in the Registration Statement (or any amendment
thereto) or such preliminary prospectus or the International Prospectus (or
any amendment or supplement thereto).

(d) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each
indemnifying party of any action commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof
and in any event shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement. In the case of
parties indemnified pursuant to Sections 6(a) and 6(b) above, counsel to
the indemnified parties shall be selected by Merrill Lynch, and, in the
case of parties indemnified pursuant to Section 6(c) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying
party may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except
with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable
for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions
in the same jurisdiction arising out of the same general allegations or
circumstances. An indemnifying party may, without the prior written
consent of the indemnified parties, settle or compromise or consent to the
entry of any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened,
or any claim

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<PAGE>

whatsoever in respect of which indemnification or contribution could be
sought under this Section 6 or Section 7 hereof (whether or not the
indemnified parties are actual or potential parties thereto), if such
settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as
to or an admission of fault, culpability or a failure to act by or on
behalf of any indemnified party.

(e) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written
consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified
party in accordance with such request prior to the date of such settlement.
Notwithstanding the immediately preceding sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, an indemnifying
party shall not be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its consent if such indemnifying party
(i) reimburses such indemnified party in accordance with such request to
the extent it considers such request to be reasonable and (ii) provides
written notice to the indemnified party substantiating the unpaid balance
as unreasonable, in each case prior to the date of such settlement.

(f) Other Agreements with Respect to Indemnification. The provisions
of this Section shall not affect any agreements among the Company and
Bandag and the Selling Shareholder with respect to indemnification.

SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and Bandag and the Selling Shareholder on the one hand and the
International Managers on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and Bandag and the Selling Shareholder on the one
hand and of the International Managers on the other hand in connection with the
statements or omissions

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<PAGE>

which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.

The relative benefits received by the Company and Bandag and the Selling
Shareholder on the one hand and the International Managers on the other hand in
connection with the offering of the International Securities pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the International Securities pursuant to this
Agreement (before deducting expenses) received by the Company and Bandag and the
Selling Shareholder and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location on
the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.

The relative fault of the Company and Bandag and the Selling Shareholder on
the one hand and the International Managers on the other hand shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company and Bandag
and the Selling Shareholder or by the International Managers and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.

The Company, Bandag, the Selling Shareholder and the International Managers
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the International
Managers were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 7. The aggregate amount of losses, liabilities,
claims, damages and expenses incurred by an indemnified party and referred to
above in this Section 7 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in investigating, preparing or
defending against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
based upon any such untrue or alleged untrue statement or omission or alleged
omission.

Notwithstanding the provisions of this Section 7, no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the International Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such International Managers has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.

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<PAGE>

For purposes of this Section 7, each person, if any, who controls an
International Managers within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company, Bandag or the Selling Shareholder within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same
rights to contribution as the Company or Bandag and the Selling Shareholder, as
the case may be. The International Managers' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the number of
Initial International Securities set forth opposite their respective names in
Schedule A hereto and not joint.

The provisions of this Section shall not affect any agreement among the
Company and Bandag and the Selling Shareholder with respect to contribution.

SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries or Bandag and the Selling Shareholder submitted pursuant hereto,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any International Manager or controlling
person, or by or on behalf of the Company or Bandag and the Selling Shareholder,
and shall survive delivery of the Securities to the International Managers.

SECTION 9. Termination of Agreement.

(a) Termination; General. The Lead Managers may terminate this Agreement,
by notice to the Company and Bandag and the Selling Shareholder, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the International Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or the international financial markets, any outbreak of hostilities or
escalation of any existing hostilities or other calamity or crisis or any change
or development involving a prospective change

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<PAGE>

in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the Lead
Managers, impracticable to market the International Securities or to enforce
contracts for the sale of the International Securities, or (iii) if trading in
any securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the New
York Stock Exchange or in the Nasdaq National Market has been suspended or
materially limited, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices have been required, by such exchange or by such system
or by order of the Commission, the National Association of Securities Dealers,
Inc. or any other governmental authority, or (iv) if a banking moratorium has
been declared by either Federal or New York authorities.

(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.

SECTION 10. Default by One or More of the International Managers. If
one or more of the International Managers shall fail at Closing Time or a Date
of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Lead Managers
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting International Managers, or any other underwriters,
to purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Lead Managers shall not have completed such arrangements within such 24-hour
period, then:

(a) if the number of Defaulted Securities does not exceed 10% of the
number of International Securities to be purchased on such date, each of
the non-defaulting International Managers shall be obligated, severally and
not jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting International Managers, or

(b) if the number of Defaulted Securities exceeds 10% of the number of
International Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing Time,
the obligation of the International Managers to purchase and of the Company
to sell the Option Securities to be purchased and

32
<PAGE>

sold on such Date of Delivery shall terminate without liability on the part
of any non-defaulting International Manager.

No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.

In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either (i) the Lead
Managers or (ii) the Company or Bandag and the Selling Shareholder shall have
the right to postpone Closing Time, or the Company or the Lead Managers shall
have the right to postpone the relevant Date of Delivery, as the case may be,
for a period not exceeding seven days in order to effect any required changes in
the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "International Manager" includes any
person substituted for an International Manager under this Section 10.

SECTION 11. Default by Bandag and the Selling Shareholder or the
Company. (a) If Bandag and the Selling Shareholder shall fail at Closing Time
to sell and deliver the number of Securities which the Selling Shareholder is
obligated to sell hereunder, then the International Managers may, at the option
of the Lead Managers, by notice from the Lead Managers to the Company and Bandag
and the Selling Shareholder, either (a) terminate this Agreement without any
liability on the fault of any non-defaulting party except that the provisions of
Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to
purchase the Securities which the Company has agreed to sell hereunder. No
action taken pursuant to this Section 11 shall relieve Bandag and the Selling
Shareholder from liability, if any, in respect of such default.

In the event of a default by Bandag and the Selling Shareholder as referred
to in this Section 11, each of the Lead Managers and the Company shall have the
right to postpone Closing Time or Date of Delivery for a period not exceeding
seven days in order to effect any required change in the Registration Statement
or Prospectus or in any other documents or arrangements.

33
<PAGE>

4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to
this Section shall relieve the Company from liability, if any, in respect of
such default.

SECTION 12. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers at 233 South
Wacker Drive, 5500 Sears Tower, Chicago, Illinois 60606, attention of Michael G.
O'Grady; notices to the Company shall be directed to it at 414 East Third
Street, P.O. Box 1109, Muscatine, Iowa 52761-7109, attention of General Counsel;
notices to Bandag shall be directed to it at 2905 North Highway 61, Muscatine,
Iowa 52761, attention of Warren W. Heidbreder, Vice President, Finance; and
notices to the Selling Shareholder shall be directed to it c/o Bandag,
Incorporated at 2905 North Highway 61, Muscatine, Iowa 52761, attention of Frank
B. Hall, Secretary.

SECTION 13. Parties. This Agreement shall each inure to the benefit of
and be binding upon the International Managers, the Company and Bandag and the
Selling Shareholder and their respective successors. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the International Managers, the Company
and Bandag and the Selling Shareholder and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the International Managers, the
Company and Bandag and the Selling Shareholder and their respective successors,
and said controlling persons and officers and directors and their heirs and
legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any International Manager shall be
deemed to be a successor by reason merely of such purchase.

SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.

SECTION 15. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.

34
<PAGE>

If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company, Bandag and the Selling Shareholder a
counterpart hereof, whereupon this instrument, along with all counterparts, will
become a binding agreement between the International Managers, the Company and
Bandag and the Selling Shareholder in accordance with its terms.

Very truly yours,

HON INDUSTRIES INC.

By: ____________________________________
Title:

BANDAG, INCORPORATED

By: ____________________________________
Title:

BTC, INC.

By: ___________________________________
Title:

CONFIRMED AND ACCEPTED,
as of the date first above written:

MERRILL LYNCH INTERNATIONAL
WILLIAM BLAIR & COMPANY, L.L.C.
ROBERT W. BAIRD & CO. INCORPORATED
MCDONALD & COMPANY SECURITIES, INC.

By: MERRILL LYNCH INTERNATIONAL

By _______________________________
Authorized Signatory

For themselves and as Lead Managers of the
other International Managers named in Schedule A hereto.

35
<PAGE>

SCHEDULE A

Number of Initial
Name of International Manager International Securities
- ----------------------------- ------------------------
<S> <C>
Merrill Lynch International..........
William Blair & Co., L.L.C...........
Robert W. Baird & Co. Incorporated...
McDonald & Company Securities, Inc...

Total
===========
</TABLE>

Sch A-1
<PAGE>

SCHEDULE B

<TABLE>
<CAPTION>
Number of Initial Maximum Number of
International International Option
Securities to be Sold Securities to be Sold
--------------------- ---------------------
<S> <C> <C>
HON INDUSTRIES INC. 200,000 101,850

BANDAG, INCORPORATED 479,000
_______ _______
Total 679,000 101,850
======= =======
</TABLE>

Sch B-1
<PAGE>

SCHEDULE C

HON INDUSTRIES INC.

3,395,000 Shares of Common Stock
(Par Value $1.00 Per Share)

1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $_______.

2. The purchase price per share for the International Securities to be
paid by the several International Managers shall be $_______, being an amount
equal to the initial public offering price set forth above less $_______ per
share; provided that the purchase price per share for any International Option
Securities purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial International
Securities but not payable on the International Option Securities (but only if
the Company establishes a record date for such dividend or distribution which is
prior to the Date of Delivery for the International Option Securities).

Sch C-1
<PAGE>

SCHEDULE D

Hearth Technologies, Inc.
Holga Inc.
BPI Inc.
The Gunlocke Company
HON Export Limited
T.M. Export Inc.
Allsteel, Inc.

Sch D-1
<PAGE>

SCHEDULE E

Sch E-1
<PAGE>

Exhibit A-1

FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)

FORM OF OPINION OF STANLEY, LANDE & HUNTER
------------------------------------------

A1-1
<PAGE>

Exhibit A-2

FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)

FORM OF OPINION OF JONES, DAY, REAVIS & POGUE
---------------------------------------------

A2-1
<PAGE>

Exhibit A-3

FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)

FORM OF OPINION OF JAMES I. JOHNSON
-----------------------------------

A3-1
<PAGE>

Exhibit B

FORM OF OPINION OF COUNSEL FOR BANDAG AND THE SELLING SHAREHOLDER TO BE
DELIVERED PURSUANT TO SECTION 5(c)

B-1
<PAGE>

Exhibit C

FORM OF OPINION OF COUNSEL
FOR THE INTERNATIONAL MANAGERS

C-1
<PAGE>

Exhibit D

[Form of lock-up from directors and executive officers pursuant to Section 5(1)]

October __, 1997

Re: Proposed Public Offering by HON INDUSTRIES Inc.

Dear Sirs:

D-1
<PAGE>

L.L.C., Robert W. Baird & Co. Incorporated and McDonald & Company Securities,
Inc. propose to enter into a U.S. Purchase Agreement and an International
Purchase Agreement (collectively, the "Purchase Agreements") with the Company,
Bandag, Incorporated and the Selling Shareholder (as defined in the Purchase
Agreements) providing for the public offering of shares (the "Securities") of
the Company's common stock, par value $1.00 per share (the "Common Stock"). In
recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder and an officer and/or director of the Company, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned agrees with each underwriter to be
named in the Purchase Agreements that, during a period of 90 days from the date
of the Purchase Agreements, the undersigned will not, without the prior written
consent of Merrill Lynch, directly or indirectly, in any open market transaction
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant for the sale of, or otherwise dispose of or transfer any shares of the
Company's Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of ownership
of the Common Stock, whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise.

Very truly yours,

Signature: ___________________________

Print Name: _________________________

D-2
<PAGE>

Annex A

[FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(g)]

We are independent public accountants with respect to the Company within
the meaning of the 1933 Act and the applicable published 1933 Act Regulations.

Annex A-1
<PAGE>

shareholders' equity of the Company and its subsidiaries or any
increase in the long-term debt of the Company and its subsidiaries, in
each case as compared with amounts shown in the latest balance sheet
included in the Registration Statement, except in each case for
changes, decreases or increases that the Registration Statement
discloses have occurred or may occur; or

Annex A-2

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a point of in
this registration statement.

/s/ Arthur Andersen LLP

Chicago, Illinois
October 20, 1997

<PAGE>

EXHIBIT 23.3

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 30, 1996, in Amendment No. 2 to the
Registration Statement (Form S-3 No. 333-36433) and related Prospectus of HON
INDUSTRIES Inc. for the registration of 3,395,000 shares of its common stock.

We also consent to the incorporation by reference therein of our report
dated January 30, 1996 with respect to the financial statement schedule of HON
INDUSTRIES Inc. for the years ended December 30, 1995 and December 31, 1994,
included in the Annual Report (Form 10-K) for 1996 filed with the Securities
and Exchange Commission.

/s/ Ernst & Young LLP

Chicago, Illinois
October 20, 1997