Results of Operations 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 GROSS PROFIT NET SALES Recent Accounting Pronouncements SELLING AND ADMINISTRATIVE EXPENSES Self-insurance reserves  – The Company is partially self-insured  for general liability, product liability, workers’ compensation, and  certain employee health benefits. The general, product, and workers’  compensation liabilities are managed using a wholly owned insurance  captive; the related liabilities are included in the accompanying finan- cial statements. The Company’s policy is to accrue amounts in  accordance with the actuarially determined liabilities. The actuarial  valuations are based on historical information along with certain  assumptions about future events. Changes in assumptions for such  matters as claims, medical costs, and changes in actual experience  could cause these estimates to change in the near term.  Stock-based compensation – The Company accounts for its  stock-option plan using Accounting Principles Board Opinion No. 25,  “Accounting for Stock Issued to Employees,” which results in no charge  to earnings when options are issued at fair market value. SFAS No. 123,  “Accounting for Stock-Based Compensation” issued subsequent to APB  No. 25 and amended by SFAS No. 148 “Accounting for Stock-Based  Compensation – Transition and Disclosure” defines a fair value-based  method of accounting for employee stock options but allows companies  to continue to measure compensation cost for employee stock options  using the intrinsic value based method described in APB No. 25. The Company has no immediate plans at this time to volun- tarily change its accounting policy to the fair value based method;  however, the Company continues to evaluate this alternative. In accor- dance with SFAS No. 148, the Company has been disclosing in the Notes  to the Consolidated Financial Statements the impact on net income and  earnings per share had the fair value based method been adopted. If the  fair value method had been adopted, net income for 2003, 2002, and  2001 would have been $3 million, $2.2 million, and $1.4 million lower  than reported and earnings per share would have been reduced approx- imately $0.06, $0.04 and $0.02 per diluted share, respectively. See the Notes to the Consolidated Financial Statements for a full  description of recent accounting pronouncements including the respec- tive expected dates of adoption and effects on results of operations and  financial conditions. The following table sets forth the percentage of consolidated net sales  represented by certain items reflected in the Company’s statements of  income for the periods indicated. Net sales increased 3.7% in 2003 and decreased 5.6% in 2002. The  increase in 2003 was due to the extra week in 2003 as a result of the  Company’s 52/53-week fiscal year and strong performance in the hearth  products segment. The decrease in 2002 was due to the decline in the  office furniture market due to unstable economic conditions and the  deletion of less profitable product lines in the hearth products segment. Gross profit as a percent of net sales improved 1.0 percentage point in  2003 as compared to fiscal 2002 and 1.3 percentage points in 2002 as  compared to 2001. The improvement in both periods was a result of the  continued net benefits of rapid continuous improvement, restructuring  initiatives, business simplification, new products, and improved price  realization. Included in 2003 gross profit was $6.7 million of acceler- ated depreciation, which reduced gross profits 0.4 percentage points.  The Company expects to mitigate any future increases in material costs  through various initiatives, including alternative materials and sup- pliers and its rapid continuous improvement program. Selling and administrative expenses, excluding restructuring charges,  increased 5.8% in 2003 and decreased 2.2% in 2002. The increase in  2003 was due to additional investment of approximately $14 million in  brand building and selling initiatives, and increased freight costs of  $7 million due to rate increases, fuel surcharges, and volume. The  decrease in 2002 was due to no longer amortizing goodwill and certain  other intangible assets of approximately $9 million and lower overall  34 Fiscal  2003 2002  2001 Net sales  100.0% 100.0%  100.0% Cost of products sold  63.6 64.6  65.9 Gross profit  36.4 35.4  34.1 Selling and  administrative expenses  27.4 26.8  25.9 Restructuring related charges  0.5 0.2  1.3 Operating income  8.5 8.4  6.9 Interest income (net)  0.1 (0.1)  (0.4) Income before income taxes  8.6 8.3  6.5 Income taxes  3.0 2.9  2.3 Net income  5.6% 5.4%  4.2%