Server: Microsoft-IIS/3.0 Date: Thu, 18 Dec 1997 02:45:46 GMT Content-Type: text/html Accept-Ranges: bytes Last-Modified: Fri, 26 Sep 1997 14:42:37 GMT Content-Length: 11498 To Our Share Owners
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July 25, 1997

What courses of action can we pursue to keep our company growing and prospering?

We continually ask ourselves this question. Given our passion to exceed customer expectations, we're constantly striving for new and more effective ways to design, build and sell our products and services.

We know that by satisfying customer needs, financial performance will continue to grow and ultimately, so will the value of your investment. This year's record sales and earnings, and outstanding Share Owner return, provide ample evidence for the validity of that approach.

The improvements within our company have been many: Investments in corporate-wide information technology. Employee training. Quality system registrations. New, rigorous performance measures such as "economic profit" which adds the cost of capital invested as a line item in calculating profitability.

Some have been completed, and others are always continuing. These "building blocks" have transformed Kimball International into a much more market-responsive, flexible and competitive company.

This foundation of excellence forms the basis for a realigned senior management to lead Kimball into a more intense phase of growth and to benefit from opportunities in the furniture, electronics, processed wood products and other potential new markets of tomorrow.

Fiscal 1997 set sales and earnings records

These "building blocks" of success have helped us achieve a record performance in fiscal 1997.

Revenues and income reached the highest levels in the company's history. Net sales grew seven percent to a record $992.0 million. Earnings jumped 28 percent to an all-time high of $57.7 million, or $2.79 per Class B share. Fiscal 1996 earnings were $45.1 million ($2.16 per Class B share), a figure which included a $1.9 million charge to exit the domestic piano product line. Earnings growth was 23 percent without the exit costs.

Overall, operations generated $122 million of cash flow, nearly double the previous year's amount. After paying dividends and reinvesting capital back into the company, net cash flow was a record $54 million. Fiscal 1997's strong performance improved the company's already healthy balance sheet, giving us enormous flexibility to fund future growth.

It was yet another year of strength. Sales set a record for a sixth straight year. Earnings were higher for the fourth consecutive year. Gross profit margins and net income as a percentage of sales were the highest since 1992. Return on capital increased significantly. The Board of Directors raised the quarterly dividend rate 12 percent.

This performance in fiscal 1997 was fueled by our two largest segments -- Furniture and Cabinets and Electronic Contract Assemblies. Manufacturing process improvements, coupled with leveraging gains in sales volumes, created significant growth in operating profits. In the smallest segment, Processed Wood Products and Other, sales remained flat and income declined.

Office and lodging furniture are strong

The Furniture and Cabinets segment, which represents 62 percent of Kimball revenues, provided the largest share of Kimball's growth. Sales increased six percent to $617.2 million and operating income rose 32 percent to $44.2 million.

All major office furniture product lines -- systems, casegoods, seating and storage -- were in strong demand and generated significant increases in revenues. Sales growth of systems and value-priced furniture outpaced the industry. Well-received new products such as the Interworks system and demand for existing products such as the mid-priced casegoods line Arrowwood contributed to expanded orders.

In the Lodging Group, sales soared as the hospitality industry refurbishing cycle continued. Prestigious hotel properties ordered significant quantities of custom-built furniture. Lodging furniture sales to major chains increased while sales to the healthcare industry also continued to rise.

Within the Cabinet and Furniture Group, lower customer demand as the result of shifting TV cabinet production schedules and changing technologies resulted in lower revenues. Sales of other major contract products, such as home furniture and audio speaker cabinets, also declined. However, the excess manufacturing capacity was used to supplement production of lodging products.

Electronics continues its brisk expansion

Representing 32 percent of Kimball's overall sales, the Electronic Contract Assemblies segment is the company's second largest segment. During fiscal 1997, sales increased 11 percent to $315.8 million. Manufacturing efficiencies resulting from expanded sales helped boost operating income from $21.4 million to $29.7 million.

The Electronics Group continues to diversify its customer and product base. New computer assemblies expand the list of products made for computer, network and telecommunications companies, and additional automotive products are slated to join the manufacture of electronic anti-lock braking system controls.

Two percent of the Electronics Group's sales growth came from Elmo Semiconductor Corp., which was acquired in 1996. Elmo's design, research and production skills, particularly in the advanced multichip module area, expand Kimball's capabilities as the Electronics Group positions itself as a full-service contract electronics provider.

Processed Wood Products sales remain flat

In the smallest segment, Processed Wood Products and Other, sales remained flat at $59.0 million while operating income fell seven percent to $7.1 million.

These business units remained key intercompany suppliers as sales to Kimball's furniture operations increased. Higher internal demand and changes in the product mix contributed to a decline in sales to outside customers. Overall in the segment, sales increases for dimension, lumber and metal parts products were offset by lower plastics, laminates and veneer sales.

The Building Blocks of Success

Throughout this annual report, we discuss specific initiatives and practices which form the "building blocks" for the company's success.

Changes in executive responsibilities that took effect July 1, 1997, help ensure Kimball's continued success and positioning for healthy growth. President Douglas A. Habig became Chairman and Chief Executive Officer. Chief Financial Officer and Treasurer James C. Thyen was named President. After 15 years as Chairman, Thomas L. Habig became Vice Chairman and will continue to be active in company management. Director of Accounting Robert F. Schneider was appointed Chief Financial Officer, and Secretary Gary P. Critser assumed the additional responsibility of Treasurer.

Six other senior executives also accepted expanded responsibilities. From the first day, this team began aggressively pursuing the company's strategic goals, taking actions to enhance competitiveness and to grow sales and profits.

Together with the company's nearly 9,000 employees, Kimball leadership will employ the many processes and tools necessary to grow. That includes ensuring office furniture customers receive the Total Best Solution. Formalizing quality systems. Redesigning and standardizing furniture components. Bringing new operating information systems on line. And much more.

Whatever the task, the work of improvement and growth is never ending. We have set forth an aggressive, yet workable, expansion strategy which already is producing visible results.

We have the vision, the people and the desire to reach our goals. We appreciate your support as we strive to achieve an ever-increasing return on your investment in Kimball International.


Douglas A. Habig
Chairman
Chief Executive Officer


Thomas L. Habig
Vice Chairman


James C. Thyen
President

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