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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
claims. The Company currently has a claim for approximately $7.6 mil-
lion pending against it arising out of the bankruptcy of a customer filed 
in 2001. The Company was named a critical vendor by the bankruptcy 
court and, accordingly, was paid in full for all outstanding receivables. 
The claim alleges that the Company received preferential payments 
from the customer during the ninety days before the customer filed for 
bankruptcy protection. The claim was brought in February 2003. The 
Company has recorded an accrual with respect to this contingency, in 
an amount substantially less than the full amount of the claim, which 
represents the best estimate within the range of likely exposure and 
intends to vigorously defend against the claim. Given the nature of this 
claim, it is possible that the ultimate outcome could differ from the 
recorded amount. It is our opinion, after consultation with legal coun-
sel, that additional liabilities, if any, resulting from these matters, are 
not expected to have a material adverse effect on our financial condi -
tion, although such matters could have a material effect on our 
quarterly or annual operating results and cash flows when resolved in 
a future period.
Looking Ahead
The Company is encouraged by indications that the economy is recov-
ering and is cautiously optimistic that the office furniture industry will 
begin to rebound in the second half of 2004. Global Insight, BIFMA’s 
forecasting consultant, increased its estimate for the industry shipment 
growth from 2.4% to 5.6% in 2004, with first quarter flat and improving 
as the year progresses. 
The hearth segment is impacted by the housing market, 
which may experience a slight decline from record high levels, but is 
expected to remain at healthy levels. Management believes its strong 
brand recognition and new innovative product introductions in addition 
to strengthening distribution will allow it to grow its hearth segment.
On January 5, 2004, the Company completed the acquisition 
of Paoli Inc., a leading provider of wood case goods and seating. The 
Company intends to continue to build on Paoli’s strong position in the 
market and excellent selling capabilities while leveraging its lean enter-
prise practices to achieve greater cost efficiencies and improved 
customer performance.
The Company’s strategy is to grow its business through 
aggressive investment in building its brands, enhancing its strong 
member-owner culture, and remaining focused on its rapid continu -
ous improvement program to continue to build best total cost. The 
Company plans to reinvest a large portion of its cost savings from plant 
consolidations and its rapid continuous improvement program to con-
tinue to build brands, product solutions, and selling models. 
Because of the following factors, as well as other variables 
affecting the Company’s operating results, past financial performance 
may not be a reliable indicator of future performance, and historical 
trends should not be used to anticipate results or trends in future 
periods:
• competition within the office furniture and fireplace industries, 
including competition from imported products and competitive 
pricing; 
• increases in the cost of raw materials, including steel, which is the 
Company’s largest raw material category;
• increases in the cost of health care benefits provided by the 
Company;
• reduced demand for the Company’s storage products caused by 
changes in office technology, including the change from paper record 
storage to electronic record storage; 
• the effects of economic conditions on demand for office furniture, 
customer insolvencies and related bad debts, and claims against the 
Company that it received preferential payments; 
• changes in demand and order patterns from the Company’s customers, 
particularly its top ten customers, which represented approximately