44 45
H O N  I N D U S T R I E S  I n c .  a n d  S U B S I D I A R I E S
P R O D U C T  D E V E L O P M E N T  C O S T S
Product development costs relating to the development of new prod -
ucts and processes, including significant improvements and refinements 
to existing products, are expensed as incurred. These costs include sala-
ries, contractor fees, building costs, utilities, and administrative fees. 
The amounts charged against income were $25,791,000 in 2003, 
$25,849,000 in 2002, and $21,415,000 in 2001. 
S T O C K - B A S E D  C O M P E N S A T I O N
The Company accounts for its stock option plan using Accounting 
Principles Board Opinion No. 25, “Accounting for Stock Issued to 
Employees,” whereby stock-based employee compensation is reflected 
in net income as all options granted under the plan had an exercise 
price equal to the market value of the underlying common stock 
on the date of grant. SFAS No. 123, “Accounting for Stock-Based 
Compensation” issued subsequent to APB No. 25 and amended by 
SFAS No. 148, “Accounting for Stock-Based Compensation — Trans-
ition and Disclosure” defines a fair value-based method of accounting 
for employees’ stock options but allows companies to continue to 
measure compensation cost for employee stock options using the 
intrinsic value-based method described in APB No. 25.
The following table illustrates the effect on net income 
and earnings per share if the Company had applied the fair value 
recognition provisions of SFAS No. 123, “Accounting for Stock-Based 
Compensation,” as amended by SFAS No. 148 “Accounting for Stock-
Based Compensation — Transition and Disclosure,” to stock-based 
employee compensation.
(In thousands) 2003 2002 2001 
Net income, as reported $ 98.1 $ 91.4 $ 74.4
Deduct: Total stock-based 
 employee compensation 
 expense determined under fair 
 value-based method for all 
 awards, net of related tax effects    (3.0)   (2.2)  (1.4)
Pro forma net income $ 95.1 $ 89.2 $ 73.0 
Earnings per share:
 Basic – as reported $ 1.69 $ 1.55 $ 1.26
 Basic – pro forma $ 1.64 $ 1.52 $ 1.24
 Diluted – as reported $ 1.68 $ 1.55 $ 1.26
 Diluted – pro forma $ 1.62 $ 1.51 $ 1.24
Increase in expense in 2003 is due to accelerated vesting upon the 
retirement of plan participants.
I N C O M E  T A X E S
The Company accounts for income taxes under SFAS No. 109, 
“Accounting for Income Taxes.” This Statement uses an asset and lia -
bility approach that requires the recognition of deferred tax assets and 
liabilities for the expected future tax consequences of events that have 
been recognized in the Company’s financial statements or tax returns. 
Deferred income taxes are provided to reflect the differences between 
the tax bases of assets and liabilities and their reported amounts in the 
financial statements.
E A R N I N G S  P E R  S H A R E
Basic earnings per share are based on the weighted-average number of 
common shares outstanding during the year. Shares potentially issu -
able under options and deferred restricted stock have been considered 
outstanding for purposes of the diluted earnings per share calculation.
U S E  O F  E S T I M A T E S
The preparation of financial statements in conformity with accounting 
principles generally accepted in the United States requires manage -
ment to make estimates and assumptions that affect the amounts 
reported in the financial statements and accompanying notes. The 
more significant areas requiring the use of management estimates 
relate to allowance for doubtful accounts, inventory reserves, market -
ing program accruals, warranty accruals, accruals for self-insured 
medical claims, workers’ compensation, legal contingencies, general 
liability and auto insurance claims, and useful lives for depreciation 
and amortization. Actual results could differ from those estimates.
S E L F - I N S U R A N C E
The Company is partially self-insured for general and product liability,