##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 24, 2004 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____to___ Commission file number 33-85476 BROWN JORDAN INTERNATIONAL, INC. 
  Florida
(State or other jurisdiction
of incorporation or organization)
    
    63-1127982
(I.R.S. employer
identification no.)
 1801 NORTH ANDREWS AVENUE, POMPANO BEACH, FLORIDA 33069
(Address of principal executive offices) (Zip Code) Registrants telephone number, including area code:
(954) 960-1100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes   x   No   
o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes   o   No   
x The number of shares of Common Stock, $.01 par value per share, of the registrant outstanding as of
December 31, 2004 was 1,000. The registrant has no securities registered pursuant to Sections 12(b)
or 12(g) nor are any securities listed or trading on any market. The registrant files periodic
reports under the Securities Exchange Act of 1934 solely to comply with requirements under that
certain Indenture related to the 12 3/4% Senior Subordinated Notes Due 2007, as amended.




---



##### Table of Contents



Brown Jordan International, Inc. INDEX TO ITEMS PagePART IITEM 1. Financial Statements Consolidated Balance Sheets as of September 24, 2004 (unaudited) and December 31, 2003
    
    
    3 Consolidated Statements of Operations (unaudited) for the three and nine months ended September 24, 2004 and September 26, 2003
    
    
    4 Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 24, 2004 and September 26, 2003
    
    
    5 Notes to Unaudited Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27ITEM 4. Controls and Procedures
    
    
    27PART
IIITEM 6. Exhibits
    
    
    28Signatures
    
    
    29RULE 13a-14(a)/15d-14(a) CERTIFICATION OF PRESIDENT & CEORULE 13a-14(a)/15d-14(a) CERTIFICATION OF CHIEF ACCOUNTING OFFICERSECTION 1350 CERTIFICATION OF CEOSECTION 1350 CERTIFICATION OF CHIEF ACCOUNTING OFFICER
 2




---



##### Table of Contents



PART I 
 ITEM 1. FINANCIAL STATEMENTS Brown Jordan International, Inc. and Subsidiaries 
 Consolidated Balance Sheets
 (Amounts in thousands, except share and per share amounts)
 (Unaudited)September 24,
    
    
    December 31,2004
    
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,725
    
    
    $
    1,910Accounts receivable, net
    
    
    41,679
    
    
    
    84,367Refundable income taxes
    
    
    1,734
    
    
    
    2,075Inventories, net
    
    
    37,960
    
    
    
    37,248Prepaid and other current assets
    
    
    10,770
    
    
    
    11,422Total current assets
    
    
    93,868
    
    
    
    137,022Property, plant and equipment, net
    
    
    22,527
    
    
    
    25,376Customer relationships, net
    
    
    16,199
    
    
    
    18,043Trademarks
    
    
    25,335
    
    
    
    25,335Goodwill
    
    
    91,254
    
    
    
    91,254Other assets, net
    
    
    8,412
    
    
    
    9,876Total assets
    
    $
    257,595
    
    
    $
    306,906Liabilities and stockholders deficitCurrent liabilities:Current portion of long-term debt
    
    $
    23,913
    
    
    $
    41,175Accounts payable
    
    
    19,838
    
    
    
    31,177Accrued interest
    
    
    5,017
    
    
    
    5,157Other accrued liabilities
    
    
    23,662
    
    
    
    23,878Total current liabilities
    
    
    72,430
    
    
    
    101,387Long-term debt, net of current portion
    
    
    240,835
    
    
    
    239,397Other long-term liabilities
    
    
    1,150
    
    
    
    Deferred income taxes
    
    
    4,045
    
    
    
    3,811Total liabilities
    
    
    318,460
    
    
    
    344,595Commitments and contingenciesStockholders deficitCommon stock  par value $.01 per share 1,000 shares authorized, issued and
outstanding at September 24, 2004 and December 31, 2003
    
    
    
    
    
    
    Additional paid in capital
    
    
    162,041
    
    
    
    162,041Accumulated deficit
    
    
    (222,692
    )
    
    
    (197,884
    )Accumulated other comprehensive loss
    
    
    (214
    )
    
    
    (1,846
    )Total stockholders deficit
    
    
    (60,865
    )
    
    
    (37,689
    )Total liabilities and stockholders deficit
    
    $
    257,595
    
    
    $
    306,906
 The accompanying notes are an integral part of these financial statements. 3




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries 
 Consolidated Statements of Operations
 (Amounts in thousands)
 (Unaudited)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 24,
    
    
    September 26,
    
    
    September 24,
    
    
    September 26,2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    54,387
    
    
    $
    54,810
    
    
    $
    242,258
    
    
    $
    247,485Cost of sales
    
    
    42,574
    
    
    
    35,801
    
    
    
    187,690
    
    
    
    183,302Gross profit
    
    
    11,813
    
    
    
    19,009
    
    
    
    54,568
    
    
    
    64,183Selling, general and administrative expense
    
    
    14,529
    
    
    
    11,631
    
    
    
    43,987
    
    
    
    37,407Amortization
    
    
    660
    
    
    
    686
    
    
    
    2,445
    
    
    
    2,162Operating (loss) income
    
    
    (3,376
    )
    
    
    6,692
    
    
    
    8,136
    
    
    
    24,614Interest expense, net
    
    
    7,903
    
    
    
    8,027
    
    
    
    32,944
    
    
    
    25,592Loss before income taxes
    
    
    (11,279
    )
    
    
    (1,335
    )
    
    
    (24,808
    )
    
    
    (978
    )Income tax (benefit)
    
    
    
    
    
    
    (354
    )
    
    
    
    
    
    
    (207
    )Net loss
    
    $
    (11,279
    )
    
    $
    (981
    )
    
    $
    (24,808
    )
    
    $
    (771
    )
 The accompanying notes are an integral part of these financial statements. 4




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows
 (Amounts in thousands)
 (Unaudited)Nine Months EndedSeptember 24,
    
    
    September 26,2004
    
    
    2003Operating activities:Net loss
    
    $
    (24,808
    )
    
    $
    (771
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,039
    
    
    
    4,904Non-cash interest charges
    
    
    9,283
    
    
    
    2,116Provision for (recovery of) doubtful accounts
    
    
    952
    
    
    
    (952
    )Provision for excess and obsolete inventory
    
    
    3,086
    
    
    
    442Loss on disposal of assets
    
    
    
    
    
    
    283Fixed asset impairment charge
    
    
    1,238
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    41,736
    
    
    
    35,445Refundable income taxes
    
    
    341
    
    
    
    4,012Inventories
    
    
    (3,798
    )
    
    
    (6,634
    )Prepaid expenses and other current assets
    
    
    (645
    )
    
    
    (2,230
    )Other assets
    
    
    284
    
    
    
    (1,523
    )Accounts payable
    
    
    (11,339
    )
    
    
    (8,439
    )Accrued interest
    
    
    (140
    )
    
    
    (2,084
    )Other accrued liabilities
    
    
    3,807
    
    
    
    (3,284
    )Other long-term liability
    
    
    1,150
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    (590
    )Net cash provided by operating activities
    
    
    26,186
    
    
    
    20,695Investing activities:Capital expenditures
    
    
    (984
    )
    
    
    (1,200
    )Cash proceeds from sale of property, plant and equipment, net
    
    
    
    
    
    
    1,191Net cash used in investing activities
    
    
    (984
    )
    
    
    (9
    )Financing activities:Net payments under revolving credit agreements
    
    
    (17,262
    )
    
    
    (19,989
    )Proceeds from long-term debt
    
    
    135,000
    
    
    
    Payments on long-term debt
    
    
    (133,932
    )
    
    
    (7,975
    )Deferred financing costs
    
    
    (5,929
    )
    
    
    Settlement of interest rate swap agreement
    
    
    (3,264
    )
    
    
    Net cash used in financing activities
    
    
    (25,387
    )
    
    
    (27,964
    )Net decrease in cash and cash equivalents
    
    
    (185
    )
    
    
    (7,278
    )Cash and cash equivalents at beginning of period
    
    
    1,910
    
    
    
    7,927Cash and cash equivalents at end of period
    
    $
    1,725
    
    
    $
    649Supplemental disclosures:Cash paid for interest
    
    $
    22,383
    
    
    $
    24,421Cash paid (refunded) for income taxes
    
    $
    88
    
    
    $
    (3,965
    )
 The accompanying notes are an integral part of these financial statements. 5




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries 
 Notes to Unaudited Consolidated Financial Statements
 Note 1  Business and Organization Business Brown Jordan International, Inc. (BJI or the Company) is engaged in the design, marketing,
manufacture and distribution of outdoor furniture, ready-to-assemble (RTA) furniture, contract
and hospitality seating products and site amenity products. The Company accesses the market through
the retail and contract channels. In the retail channel, BJIs furniture products are distributed
through specialty stores, national accounts and traditional furniture stores. BJIs RTA products
include promotionally priced furniture products and are distributed through the retail channel to
national accounts, catalog wholesalers and specialty retailers. BJIs contract and hospitality
furniture products are distributed through the contract channel to a customer base, that includes
architectural design firms, restaurants and hospitality chains. Site amenity products, such as park
benches, picnic tables and accessories, are marketed through distributors to the end user. The
Companys products are constructed of extruded and tubular aluminum, wrought iron, cast aluminum,
expanded mesh, sheet and tubular steel, wood and fabric. Organization Prior to the 2001 acquisition of the entity formerly known as Brown Jordan International, Inc.
(Former Brown Jordan), WinsLoew Furniture, Inc. (WinsLoew) completed a recapitalization
transaction wherein WinsLoew became a wholly owned subsidiary of a new holding company called WLFI
Holdings, Inc. (Holdings), a Florida corporation. All shares of WinsLoews common stock that were outstanding immediately prior to the merger
(850,497 shares) were converted into shares of common stock of Holdings. Each warrant or option to
purchase shares of WinsLoews common stock was converted into a warrant or option to purchase an
equivalent number of shares of common stock of Holdings. In addition, 1,000 shares of previously
unissued WinsLoew common stock were then issued to WLFI Holdings, Inc. Affiliates of Trivest
Partners, L. P. (Trivest) are majority shareholders of Holdings. Trivest and Holdings have
certain common shareholders, officers and directors. Because there was no change in the stock ownership of WinsLoew as a result of the recapitalization,
there was no change in the basis of the Companys assets or liabilities. Note 2  Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements of Brown Jordan International, Inc.
and subsidiaries are for interim periods and do not include all disclosures provided in the annual
consolidated financial statements. These unaudited consolidated financial statements should be read
in conjunction with the annual consolidated financial statements and notes thereto contained in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission. The Company closes each quarter on the last Friday of the
calendar quarter, and its fiscal year on the last day of the year. There were 91 days in each of
the fiscal quarters ended in September 24, 2004 and September 26, 2003, and 268 days for the nine
month period ended September 24, 2004 as compared to 269 days for the same nine month period in the
prior year. All material intercompany balances and transactions have been eliminated. The preparation of the
consolidated financial statements requires the use of estimates in the amounts reported. Actual
results may differ from those estimates. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain
all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the
results for the interim periods. The results of operations are presented for the Companys three
and nine month periods ended September 24, 2004 and September 26, 2003. The results of operations
for these periods are not necessarily indicative of the results to be expected for the full year. Reclassifications Certain prior period balances have been reclassified to conform to current period presentation. 6




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 2  Summary of Significant Accounting Policies  (continued) Stock Options As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to
follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25) and its interpretations in accounting for its stock options and other stock-based employee
compensation awards and the disclosure requirements of SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Under the provisions of APB No. 25, no compensation
expense has been recognized for stock option grants to employees, as the exercise prices are at or
greater than the fair value of shares at the date of the grant. The fair value of the options was
calculated using the minimum value methodology as allowed under SFAS No. 123 for companies that do
not have publicly traded equity. Pro forma impact on the Companys results is as follows: (Unaudited)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 24,
    
    
    September 26,
    
    
    September 24,
    
    
    September 26,2004
    
    
    2003
    
    
    2004
    
    
    2003Net loss as reported
    
    $
    (11,279
    )
    
    $
    (981
    )
    
    $
    (24,808
    )
    
    $
    (771
    )Pro forma stock based compensation, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pro forma net loss
    
    $
    (11,279
    )
    
    $
    (981
    )
    
    $
    (24,808
    )
    
    $
    (771
    )Expected dividend yield
    
    zero
    
    
    zero
    
    
    zero
    
    
    zeroExpected stock price volatility
    
    zero
    
    
    zero
    
    
    zero
    
    
    zeroRisk free interest rate
    
    
    3.66
    %
    
    
    5.00
    %
    
    
    3.66
    %
    
    
    5.00
    %Expected life of options in years
    
    
    8
    
    
    
    9
    
    
    
    8
    
    
    
    9
 There were no stock options granted for the three and nine month periods ending in September 24,
2004 and September 26, 2003. New Accounting Standards In December 2004, the
Financial Accounting Standards Board (FASB) issued FAS 123(R) Share-Based
Payment, that addresses the accounting for share-based payment transactions (for example, stock
options and awards of restricted stock) in which an employer receives employee-services in exchange
for equity securities of the company or liabilities that are based on the fair value of the
companys equity securities. This proposal, if finalized as proposed, would eliminate the use of
APB No. 25, and generally would require such transactions be accounted for using a fair-value-based
method and recording compensation expense rather than optional pro forma disclosure. This
accounting standard will not have a material effect on the Companys operations. In March, 2004 the Financial Accounting Standards Board (FASB) approved the consensus reached on
the Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The Issues objective is to provide
guidance for identifying other-than-temporarily impaired investments. EITF 03-1 also provides new
disclosure requirements for investments that are deemed to be temporarily impaired. In September
2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the
measurement and recognition guidance in EITF 03-1 until after further deliberations by the FASB.
This accounting standard will not have a material effect on the Companys operations. A variety of proposed or otherwise potential accounting standards are currently under study by
standard-setting organizations and various regulatory agencies. Because of the tentative and
preliminary nature of these proposed standards, management has not determined whether
implementation of such proposed standards would be material to the Companys consolidated financial
statements. 7




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 2  Summary of Significant Accounting Policies  (continued) Income Taxes The Company accounts for income taxes under the liability method pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under the liability method,
deferred tax assets and liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. Recognition of
deferred tax assets is limited to amounts considered by management to more likely than not be
realizable in future periods. Due to the recent losses recognized by the Company, a valuation allowance was recorded to offset
the income tax benefit related to the net operating losses generated in 2004, because the Company
believes it is more likely than not, that such benefit will not be realized. The Company will
continue to review its ability to utilize such benefits and until such time as management
determines that it is likely that these benefits will be realizable, the Company will continue to
record the valuation allowances to offset any income tax benefits. The effective tax rate for the
three and nine month periods ended September 26, 2003 was 35.4% and 33.3%, respectively. Pursuant to a tax sharing agreement between Holdings and the Company and its subsidiaries, the
Company was included in the consolidated federal income tax return and certain consolidated state
income tax returns of Holdings for all taxable periods ended on or prior to December 31, 2002 and
was included in the consolidated federal income tax return and certain consolidated state income
tax returns for the year ended December 31, 2003. Goodwill and Intangible Assets Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), in order to test its carrying
values for goodwill and other intangible assets on an annual basis to determine impairment. The
Company has elected October 1 as the date for performance of its annual impairment tests on
identified intangible assets with indefinite lives. Based on its recent historical operating
results, the impairment testing as of October 1, 2004 could result in a significant adjustment to
the carrying amounts of goodwill and trademarks. Prior to the publication of its annual report Form
10-K for the year ended December 31, 2004, the Company expects to conclude its testing for
impairment on its goodwill and trademarks, each with a carrying value of $91.3 million and $25.3
million respectively, as of September 24, 2004. Note 3  Inventories Inventories consist of the following: (Unaudited)September 24,
    
    
    December 31,(In thousands)
    
    2004
    
    
    2003Raw materials
    
    $
    27,875
    
    
    $
    23,867Work in process
    
    
    2,508
    
    
    
    2,234Finished goods
    
    
    7,577
    
    
    
    11,147$
    37,960
    
    
    $
    37,248
 Note 4  Investment in Joint Venture In December 2002, the Company entered into a joint venture with Shian Industry [Hong Kong] Company
Limited (Shian) to build a research and design center and a model showroom in Shanghai, China.
The facility, called the Center of Excellence, is dedicated exclusively to BJI products. The
Center of Excellence became fully operational as of the beginning of the second quarter of 2004. The Company has determined that its investment in the joint venture does not meet the criteria set
forth in FIN 46 such that consolidation of the results of operations and assets and liabilities of
the joint venture with the Companys results would be required; accordingly, the joint venture is
accounted for using the equity method of accounting. The carrying value of the investment in the
joint venture was $0 as of September 24, 8




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 4  Investment in Joint Venture  (continued) 2004 and December 31, 2003. BJIs share of the joint
venture losses
and an investment in the joint venture are not recorded in the accompanying Unaudited Consolidated
Financial Statements as BJI has not made a capital investment in the joint venture and is not
required to provide current or future funding. In November, 2004 the Company announced that this
joint venture and any agreements and obligations relating to it were terminated. Note 5  Long-Term Debt New Financing Arrangements On March 31, 2004, the Company entered into new financing arrangements that consist of a (i) Loan
and Security Agreement (Revolver), a $90.0 million asset based revolving credit facility with new
lenders and (ii) $135.0 million Senior Secured Notes due May 1, 2007 (Senior Notes) with other
lenders. Proceeds under these two new facilities were used to (i) repay all outstanding balances
under the Companys former senior credit facility, which was terminated on March 31, 2004, (ii) pay
all former indebtedness to Trivest, including an advance by Trivest for the interest payment to the
holders of the Companys senior subordinated notes ($6.9 million), a payment of $3.5 million to the
former lenders under the then former senior credit facility by Trivest with related fees and
interest ($3.9 million in total), financial advisors fees ($0.8 million) and management fees
accrued as of December 31, 2003, as well as fees earned and accrued through March 31, 2004 ($0.5
million in total), (iii) pay interest rate swap termination fees, and (iv) pay fees and expenses
relating to the new financing transactions. Upon the closing of the transactions, $189.2 million
($54.2 million under the Revolver and $135.0 million under the Senior Notes) was drawn under the
new facilities. The Company had been operating under a forbearance agreement with its former
lenders as of January 9, 2004 that, as amended, provided for a forbearance period through March 31,
2004, while the new financing was arranged. The termination of the former senior credit facility resulted in the write-off of deferred
financing fees of $4.9 million and the settlement of the obligation for the interest rate swap
(Note 6) in the quarter ended June 25, 2004. The write-off of deferred financing fees is included
in Interest expense, net in the accompanying Unaudited Consolidated Statements of Operations. The Revolver The Revolvers availability is based on a borrowing base consisting of the Companys eligible
accounts receivable and inventories. The interest rate on borrowings under the Revolver is based
on the base rate (which is defined as a variable rate of interest per annum equal to the highest of
the prime rate, reference rate, base rate or other similar rate as determined by the lender) plus
0.25% per year (the Bank Prime Loan Rate), or at the election of the Company, the applicable
London Interbank Offering Rate (LIBOR) plus 2.25% per year (the Eurodollar Rate). The Company
also pays an unused facility fee equal to 0.375% per annum on the average unused daily balance of
the Revolver. Borrowings under the Revolver are secured by a first priority lien on substantially
all of the Companys accounts receivable, inventories, fixed assets and intangible assets. The
Revolver contains a $10.0 million swing-line sub-facility (Swing-Line), which accrues interest at
the Bank Prime Loan Rate per year. The Revolver terminates on May 1, 2007, unless terminated
earlier by the Company. A termination fee of $0.9 million will be due to the lenders if the
Company elects to terminate prior to March 31, 2005. As of September 24, 2004, the interest rate
on the outstanding balance under the Revolver of $23.6 million was 5.0% and was based on the Bank
Prime Loan Rate. As of September 24, 2004, the Company had availability under the Revolver of
$12.2 million and cash on hand of $1.7 million. The Revolver also provides for a $15.0 million letter of credit sub-facility. The aggregate amount
of such letters of credit may not exceed the lesser of (i) $15.0 million, (ii) an amount equal to
the $90.0 million aggregate commitment under the Revolver less the aggregate outstanding principal
balance of the Revolver and Swing-Line or (iii) the borrowing base less the aggregate outstanding
principal balance of the Revolver and Swing-Line. However, the letters of credit with respect to
any of the Companys business segments (as defined in the Revolver) may not exceed the sum of (i)
the outstanding Revolver advances and Swing-Line loans to such business segment plus (ii) the
outstanding letters of credit to exceed such business units borrowing base. Fees associated with
the letters of credit are equal to the Eurodollar Rate margin per year based upon the face amount
of the letters of credit. As of September 24, 2004, the Company had $7.0 million of letters of
credit outstanding, primarily related to insurance programs and collateralization of an industrial
development obligation. The Revolver contains customary covenants and restrictions on the Companys and its subsidiaries
ability to issue additional debt or engage in certain activities and certain affirmative covenants,
including, but not limited to, reporting requirements. The Revolver, prior to the amendment on
September 13, 2004, specified that the Company must maintain a minimum of $5.0 million available
borrowing capacity at all times, and provided that the Company maintain a minimum of $9.0 million
of 9




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 5  Long-Term Debt  (continued) available borrowing capacity. The Revolver did not require compliance with financial covenants.
The amendment on September 13, 2004 specifies that if availability falls below $9.0 million on or
after December 31, 2004 and for any three consecutive business days during such month then ended,
the Company is subject to a fixed charge ratio. The Revolver also contains events of default
customary for credit agreements of this type, including failure to pay interest or principal when
due and cross-default provisions relating to the Companys other indebtedness in excess of $1.5
million. In the event of default and during the continuation thereof, borrowings under the
Revolver will bear interest, at the option of the lender, at the then
current Bank Prime Loan Rate plus 2.00% per annum or at the Eurodollar Rate plus 2.00% per annum. The Revolver includes both a subjective acceleration clause and a lockbox arrangement that requires
all lockbox receipts be used to repay revolving credit borrowings. The balance outstanding under the Revolver as of
September 24, 2004 of $23.6 million has been classified as Current portion of long-term debt in
the accompanying Unaudited Consolidated Balance Sheet, in accordance with the provisions of
Emerging Issues Task Force Issue No. 95-22, Balance Sheet Classification of Borrowings Outstanding
Under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lockbox
Arrangement. The $40.9 million balance of the revolver outstanding under the former senior
credit facility as of December 31, 2003 was classified as current as the Company expected to
refinance the former senior credit facility. As mentioned in Note 13 to the Unaudited Consolidated Financial Statements, the Company amended its
Revolver agreement on December 30, 2004. Senior Notes The Senior Notes, which mature May 1, 2007, bear interest at a rate of LIBOR plus 9.0% per annum,
reset quarterly. The Company pays interest in arrears on each March 31, June 30, September 30 and
December 31 and on the maturity date, with interest payments commencing June 30, 2004. The Senior
Notes are secured by a second priority lien on all of the Companys accounts receivable,
inventories, fixed assets and intangible assets and a first priority lien on the Companys capital
stock as well as the capital stock of all of the Companys domestic subsidiaries. The Senior Notes
are guaranteed by all of the Companys domestic subsidiaries (the Guarantors). The Guarantors
have fully, unconditionally, jointly and severally guaranteed the Companys obligations under the
Senior Notes. The Companys subsidiaries other than the Guarantors are minor within the meaning of
Rule 3-10(h)(6) of Regulation S-X of the Securities and Exchange Commission, and the Company has no
independent assets or operations within the meaning of Rule 3-10(h)(5) of Regulation S-X. Holdings
pledge of the Companys stock is non-recourse to Holdings. As of September 24, 2004, the interest
rate on the outstanding balance was 10.59%. The Company may redeem, at its option, the Senior Notes, in whole or in part, from time to time
after March 31, 2005 at the applicable redemption price as set forth below: Period
    
    Redemption PriceMarch 31, 2005 - March 31, 2006
    
    
    103.00
    %April 1, 2006 - September 30, 2006
    
    
    101.00
    %October 1, 2006 and thereafter
    
    
    100.00
    %
 In addition, the Company may, at its option, elect on one occasion occurring on or prior to the 60
days following the completion of the Companys audit for the year ended December 31, 2004 (but in
any event, no later than June 30, 2005), to redeem at a redemption price of 100% of the principal
amount thereof, plus accrued interest, a principal amount of the Senior Notes, not to exceed the
lesser of (i) 5.0% of the principal amount of the Senior Notes issued and (ii) the amount of excess
cash flow (as defined in the agreement) for the year ended December 31, 2004. The ability to
redeem Senior Notes in accordance with this provision is contingent on the requirement that (i) no
default or event of default shall have occurred and be continuing at such time, and (ii) that the
report of the Companys independent auditors in respect of the year ended December 31, 2004 is an
unqualified audit report. The Senior Notes contain various covenants customary for notes of a similar nature, including
limitations on the activities of the Company and its subsidiaries to, among other things, (i)
declare or pay cash dividends, (ii) modify the capital structure, (iii) acquire or retire
indebtedness that is subordinate to the Senior Notes, (iv) issue preferred stock, (v) create or
assume any indebtedness, (vi) sell, transfer or assign its properties or assets other than in the
ordinary course of business, (vii) create or assume liens, (viii) enter into sale and leaseback
transactions, and (ix) engage in mergers or acquisitions. In addition, the Senior Notes contain
affirmative covenants including, but not limited to maintenance of the Companys properties and 10




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 5  Long-Term Debt  (continued) reporting obligations. The Senior Notes also contain events of default customary for financing
agreements of this type; including failure to pay interest on principal when due and cross-default
provisions relating to the Companys other indebtedness in excess of $5.0 million. In the event of
default, holders of 33 1/3% or more in principal amount of the then outstanding Senior Notes may
declare the principal amount of all of the Senior Notes due and
payable immediately, by written notice to the Company, and upon such notice, such principal amount and any accrued and unpaid
interest shall be immediately due and payable. The Company paid $5.0 million in fees relating to the Revolver and the Senior Notes that will be
amortized to interest expense
over the 37-month period beginning March 31, 2004. Senior Subordinated Notes and Warrants In connection with the merger described in Note 1, the Company issued 105,000 units (Units)
consisting of $105 million aggregate principal amount at maturity of 12 3/4 % Senior Subordinated
Notes due 2007 (Notes) and Warrants (Warrants) to purchase of 24,129 shares of capital stock.
Each unit consists of $1,000 principal amount at maturity of Notes and a Warrant to purchase 0.2298
shares of common stock at an exercise price of $0.01 per share. The Warrants are exercisable on or
after certain events. Assuming full exercise of the Warrants, the aggregate number of shares would
approximate 2% of the common stock of Holdings. The Warrants expire on August 15, 2007. The Indenture (Indenture) under which the Notes are issued include provisions generally common in
such indentures including restrictions on dividends, additional indebtedness and asset sales. At
December 31, 2003, the Company was in compliance with such covenants. However, the Company failed
to make the scheduled semi-annual interest payment when due on February 15, 2004 ($6.9 million) and
August 15, 2004 ($6.7 million). The Company subsequently made these interest payments within the
cure period specified in the Notes and was in compliance with such covenants as of September 24,
2004. In March 2004, the Indenture was amended to, among other things, increase the level of permitted
indebtedness under the Amended Facility from an aggregate amount not to exceed the greater of $155
million, or the sum of $125 million, plus 60% of the inventory of the Company, plus 85% of the
accounts receivable of the Company to an aggregate amount not to exceed $195 million, or the sum of
$125 million, plus 60% of the inventory of the Company, plus 85% of the accounts receivable of the
Company. Senior Credit Facility (Amended Facility) As of December 31, 2003 and continuing through March 31, 2004, the Company was not in compliance
with certain provisions of its senior credit facility, including certain financial covenants
contained within the agreement. These violations constituted events of default. On January 9,
2004, the Company entered into a forbearance agreement with its lenders under the senior credit
facility that, as amended, (the Amended Facility) provided for a forbearance period through March
31, 2004 under which the senior lenders would not exercise certain rights and remedies that could
result from the Companys default. During the forbearance period, the Company arranged for new
financing with new lenders and repaid the Amended Facility in full by March 31, 2004, as discussed
above under New Financing Arrangements. The Amended Facility provided for borrowings of up to $215 million. The Amended Facility was
collateralized by substantially all of the assets of the Company and was secured by a pledge of the
capital stock of all the Companys domestic subsidiaries. The Amended Facility consisted of a
revolving line of credit (maximum of $50 million) and a term loan (aggregate of $165 million). The
revolving line of credit allowed the Company to borrow funds up to a certain percentage of eligible
inventories and accounts receivable. At the option of the Company, the interest rates under the
Amended Facility were either: (1) the base rate, which was the higher of the prime lending rate or
0.5% in excess of the federal funds effective rate, plus a margin, or (2) the adjusted LIBOR rate
plus a margin. The Amended Facility contained a floor of 2.5% on the LIBOR rate. The margins of
different loans under the Amended Facility varied according to a pricing grid. The margin for term
loans that were LIBOR based was 5.0% while the margin for revolving loans that were LIBOR based was
4.5%. Both LIBOR based term and revolving rates were based upon the Companys consolidated total
leverage ratio. Margins on base rate loans were the applicable LIBOR margin for such type loans
less 1.0%. The Amended Facility contained a $5.0 million swing-line sub-facility, which accrued
interest at the base rate per year. As of March 31, 2004, the Amended Facility was paid in full.
The Company also paid commitment fees at a rate per annum equal to 0.5% on the average daily excess
of revolving loan commitments over the sum of the aggregate principal amount of outstanding
revolving loans (but not any outstanding swing line loans) plus letter of credit usage. 11




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 5  Long-Term Debt  (continued) Under a Guaranty between the senior bank group and Trivest, Trivest agreed to advance to the
Company up to $13.4 million in respect of the Companys obligations in 2003 to pay interest on the
Companys Senior Subordinated Notes indebtedness. A
Reimbursement Agreement obligated the Company to reimburse Trivest for any funds paid by Trivest
pursuant to the Guaranty. As of December 31, 2003, the Guaranty was called upon by the senior bank
group. Trivest made a payment of $3.5 million to the lenders under the Amended Facility on the
Companys behalf. The Company repaid Trivest the $3.5 million, plus related
fees and interest of $0.4 million out of proceeds from the new financings, as discussed above under
New Financing Arrangements. With the pay off of the Amended Facility this Guaranty was terminated. Note 6  Interest Rate Swap On August 6, 2001, the Company entered into an interest rate swap agreement to fix the interest
rate on $100 million principal amount of variable rate debt outstanding under the Amended Facility.
The interest rate swap was designed to fix the adjusted LIBOR interest rate on $100 million at
5.09% through March 31, 2004 and on $80 million from March 31, 2004 to March 31, 2005. On March 31, 2004, the interest rate swap agreement was terminated in connection with the Companys
new financing arrangements (See Note 5 to the Unaudited Consolidated Financial Statements). As a
result of the termination of this contract, the Company settled its obligation for the interest
rate swap with a cash payment of $4.2 million, which represented the fair value of the interest
rate swap of $3.3 million and accrued interest of $0.9 million. The obligation for the interest
rate swap was included in Other accrued liabilities in the accompanying Consolidated Balance
Sheet. In addition, in connection with the termination of the interest rate swap, the Company
recognized in Interest expense, net in the accompanying Unaudited Statement of Operations, $2.4
million that was included in Other comprehensive income related to the change in the fair value
of the effective portion of the interest rate swap. As of September 26, 2003, the fair value of the swap was recorded as a liability of $4.8 million.
The portion of the change in fair value attributable to the ineffectiveness of the hedge is
recorded in the accompanying statement of operations as Interest expense, net and was a reduction
in interest expense of $0.7 million during the nine month period ended September 26, 2003. The
balance of the change in fair value of $0.9 million during the nine month period ended September
26, 2003 is recorded in Other comprehensive loss, net of tax. Note 7  Consolidation of Manufacturing Operations In May 2004, the Company announced its intention to close its manufacturing facility located in
Medley, Florida. The Medley facility manufactures furniture products for both the Retail and
Contract operating segments. The Company moved the Medley facilitys operations to other Company
plants located in Haleyville, Alabama and Juarez, Mexico. The transition of the manufacturing
operations was substantially completed by September 2004. This initiative resulted in the
elimination of approximately 120 positions; all of these positions were eliminated by September 30,
2004. As a result of this initiative, the Company recorded charges of $1.6 million in the second
quarter for (i) severance and other employee related costs ($0.3 million), (ii) a $0.1 million
charge for inventory that will no longer be required as a result of the facility consolidation and
(iii) $1.2 million in leasehold and equipment impairment, resulting from the write down to their
estimated net realizable value. In September 2004, the Company recorded an obligation of $2.2
million related to the ultimate disposition of the operating lease for the building at the Medley
facility. In total, as of September 24, 2004, the total obligations recorded for the closing and
restructuring of the Medley facility were $2.4 million, of which $1.2 million was short term and
$1.2 million long term. See Note 12 to the Unaudited Consolidated Financial Statements for more
information. The Company incurred costs of approximately $0.4 million during the third quarter for labor and
freight expenses associated with relocating inventory to the Haleyville and Juarez facilities and
for costs associated with cleaning up the facility once vacated. The Company expects to incur an
additional $0.2 million in restructuring expense in the fourth quarter of fiscal 2004. The cost associated with the closing of the Medley Facility was recorded as follows (in thousands): 12




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 7  Consolidation of Manufacturing Operations-(continued) For the three months ended September 24, 2004
    
    Retail
    
    
    Contract
    
    
    Shared
    
    
    ConsolidatedCharges included in Cost of Sales:Severance and other employee related costs
    
    $
    30
    
    
    $
    158
    
    
    $
    8
    
    
    $
    196Obligation under operating lease
    
    
    357
    
    
    
    1,876
    
    
    
    
    
    
    
    2,233Other associated costs
    
    
    33
    
    
    
    175
    
    
    
    
    
    
    
    208Total charges in Cost of Sales
    
    $
    420
    
    
    $
    2,209
    
    
    $
    8
    
    
    $
    2,637Charges included in Selling, general and
administrative expense (SG&A):Severance and other employee related costs
    
    $
    
    
    
    $
    
    
    
    $
    31
    
    
    $
    31Other associated costs
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8Total charges in SG&A
    
    $
    
    
    
    $
    
    
    
    $
    39
    
    
    $
    39Total charges related to the consolidation of
manufacturing operations
    
    $
    420
    
    
    $
    2,209
    
    
    $
    47
    
    
    $
    2,676
 For the nine months ended September 24, 2004
    
    Retail
    
    
    Contract
    
    
    Shared
    
    
    ConsolidatedCharges included in Cost of Sales:Severance and other employee related costs
    
    $
    72
    
    
    $
    381
    
    
    $
    8
    
    
    $
    461Inventory related charges
    
    
    20
    
    
    
    105
    
    
    
    
    
    
    
    125Obligation under operating lease
    
    
    357
    
    
    
    1,876
    
    
    
    
    
    
    
    2,233Other associated costs
    
    
    33
    
    
    
    175
    
    
    
    
    
    
    
    208Property, plant and equipment
    
    
    192
    
    
    
    1,008
    
    
    
    
    
    
    
    1,200Total charges in Cost of Sales
    
    $
    674
    
    
    $
    3,545
    
    
    $
    8
    
    
    $
    4,227Charges included in Selling, general and
administrative expense (SG&A):Severance and other employee related costs
    
    $
    
    
    
    $
    
    
    
    $
    67
    
    
    $
    67Other associated costs
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    8Total charges in SG&A
    
    $
    
    
    
    $
    
    
    
    $
    75
    
    
    $
    75Total charges related to the consolidation of
manufacturing operations
    
    $
    674
    
    
    $
    3,545
    
    
    $
    83
    
    
    $
    4,302
 The liabilities to record the restructuring and closing costs of the Medley facility are as follows: As of September 24, 2004
    
    Retail
    
    
    Contract
    
    
    Shared
    
    
    ConsolidatedOther accrued liabilities
    
    $
    193
    
    
    $
    1,014
    
    
    $
    17
    
    
    $
    1,224Other long-term liabilities
    
    
    184
    
    
    
    966
    
    
    
    
    
    
    
    1,150Total
    
    $
    377
    
    
    $
    1,980
    
    
    $
    17
    
    
    $
    2,374
 Accrued liabilities related to the consolidation of manufacturing operations are as follows: Original
    
    
    
    
    
    
    
    
    
    
    As ofLiability
    
    
    Increases
    
    
    Decreases
    
    
    September 24, 2004Other accrued liabilities
    
    $
    301
    
    
    $
    1,083
    
    
    $
    160
    
    
    $
    1,224Other long-term liabilities
    
    
    
    
    
    
    1,150
    
    
    
    
    
    
    
    1,150Total
    
    $
    301
    
    
    $
    2,233
    
    
    $
    160
    
    
    $
    2,374
 13




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 8  Related Party Transactions In August, 1999, the Company entered into a ten-year agreement (the Management Agreement) with
Trivest. Pursuant to the Management Agreement, Trivest provides corporate finance, financial
relations, strategic and capital planning and other management advice to the Company. The
Management Agreement, as amended from time to time, provides for an annual base compensation of
$750,000, which is to be adjusted annually for increases in the Consumer Price Index. For the year
ended December 31, 2003, the annual compensation was $770,000. Pursuant to the second amendment to
the Amended Facility, the Company expensed the entire management fee annually, but was restricted
to paying only $350,000 during the period of the second amendment. On March 31, 2004, in connection with the Companys new financing arrangements, the Management
Agreement with Trivest was amended to (i) provide for the payment of accrued, unpaid management
fees, (ii) provide for an additional incentive fee of $0.8 million for services provided in
connection with the new financing arrangements, (iii) reduce the annual base compensation to
$350,000 and (iv) provide for a component of compensation that is based on the Companys
performance (Performance Compensation), as defined in the amendment to the Management Agreement.
The Performance Compensation is not to exceed $400,000 in any year. The annual base compensation
will be adjusted annually to reflect any increase from the prior year in the Consumer Price Index,
with the first such adjustment to occur as of January 1, 2005. For the three and nine month periods ended September 24, 2004, the amount paid and expensed related
to the Management Agreement was $87,500 and $367,500, respectively. For the three and nine month
periods ended September 26, 2003, the amount expensed in selling, general and administration
expense related to the Management Agreement was $192,941 and $577,941, respectively, of which
$315,000 was accrued as of September 26, 2003. As a condition to the extension of the forbearance period under the Companys former Amended
Facility, Trivest provided the Company with an advance for the financing of the interest payment
due in February 2004 to holders of the Senior Subordinated Notes ($6.9 million). In addition, on
March 5, 2004, Trivest made a payment of $3.5 million to the Companys lenders under the Amended
Facility on the Companys behalf. In the second quarter of 2004, the Company: (i) repaid Trivest
for the advance of the $6.9 million interest payment on the Senior Subordinated Notes, (ii) repaid
Trivest for the advance of the $3.5 million interest payment, plus a guarantee fee and interest of
$0.4 million, (iii) paid management fees accrued as of December 31, 2003, as referred to above, as
well as fees earned and accrued through March 31, 2004 ($0.5 million in total) and (iv) paid a fee
of $0.8 million in connection with the Companys new financing arrangements, all out of the
proceeds from the new financing. See Note 5 to the Unaudited Consolidated Financial Statements for
additional discussion. Note 9  Employee Benefit Plan In December 2003, the FASB issued revised SFAS No. 132 (revised 2003), Employers Disclosure about
Pensions and Other Postretirement Benefits, which requires the components of net periodic pension
cost to be disclosed on an interim basis as follows: (Unaudited)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 24,
    
    
    September 26,
    
    
    September 24,
    
    
    September 26,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Components of net periodic benefit cost:Service cost
    
    $
    29
    
    
    $
    18
    
    
    $
    87
    
    
    $
    55Interest cost
    
    
    26
    
    
    
    23
    
    
    
    78
    
    
    
    68Expected return on plan assets
    
    
    (25
    )
    
    
    (20
    )
    
    
    (76
    )
    
    
    (59
    )Recognized net actuarial loss
    
    
    4
    
    
    
    1
    
    
    
    11
    
    
    
    1Net amortization and deferral of prior service cost
    
    
    5
    
    
    
    5
    
    
    
    17
    
    
    
    17Net periodic pension cost
    
    $
    39
    
    
    $
    27
    
    
    $
    117
    
    
    $
    82
 14




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 10  Operating Segments The Company has two segments organized and managed based on the market channel into which the
Companys products are sold. We are a premier designer, manufacturer and marketer of fine luxury
retail and contract furnishings. We sell our furniture products in the retail market to both
national and specialty accounts and in the contract market to commercial and institutional users.
Our retail product offerings include chairs, chaise lounges, tables, umbrellas, gazebos, cushions
and related accessories, which are generally constructed from aluminum, steel, wood or fiberglass.
Our contract products include the same type of products in addition to wood, metal and upholstered
chairs, sofas and loveseats, which are offered in a wide variety of finish and fabric options to
the contract market. In addition, our contract line includes a variety of tables, chairs, benches
and swings for the site amenity market. The Company evaluates performance and allocates resources based on gross profit. The accounting
policies for each segment are consistent with those set forth in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. There are no intersegment sales or transfers. The Company has no significant export revenues.
Shared assets include assets that relate to both the Retail and Contract segments. (In thousands)
    
    Retail
    
    
    Contract
    
    
    Shared
    
    
    ConsolidatedThree Months Ended September 24, 2004Net sales
    
    $
    25,262
    
    
    $
    29,125
    
    
    $
    
    
    
    $
    54,387Gross profit
    
    
    5,975
    
    
    
    5,838
    
    
    
    
    
    
    
    11,813Depreciation and amortization
    
    
    715
    
    
    
    285
    
    
    
    481
    
    
    
    1,481Expenditures for long lived assets
    
    
    20
    
    
    
    331
    
    
    
    83
    
    
    
    434Three Months Ended September 26, 2003Net sales
    
    $
    26,859
    
    
    $
    27,951
    
    
    $
    
    
    
    $
    54,810Gross profit
    
    
    10,166
    
    
    
    8,843
    
    
    
    
    
    
    
    19,009Depreciation and amortization
    
    
    742
    
    
    
    287
    
    
    
    676
    
    
    
    1,705Expenditures for long lived assets
    
    
    53
    
    
    
    61
    
    
    
    131
    
    
    
    245Nine Months Ended September 24, 2004Net sales
    
    $
    153,693
    
    
    $
    88,565
    
    
    $
    
    
    
    $
    242,258Gross profit
    
    
    32,202
    
    
    
    22,366
    
    
    
    
    
    
    
    54,568Depreciation and amortization
    
    
    2,571
    
    
    
    798
    
    
    
    1,670
    
    
    
    5,039Expenditures for long lived assets
    
    
    60
    
    
    
    456
    
    
    
    468
    
    
    
    984Segment assets as of September 24, 2004
    
    
    136,072
    
    
    
    53,673
    
    
    
    67,850
    
    
    
    257,595Nine Months Ended September 26, 2003Net sales
    
    $
    160,782
    
    
    $
    86,703
    
    
    $
    
    
    
    $
    247,485Gross profit
    
    
    36,384
    
    
    
    27,799
    
    
    
    
    
    
    
    64,183Depreciation and amortization
    
    
    2,308
    
    
    
    853
    
    
    
    1,743
    
    
    
    4,904Expenditures for long lived assets
    
    
    93
    
    
    
    140
    
    
    
    967
    
    
    
    1,200Segment assets as of September 26, 2003
    
    
    138,236
    
    
    
    53,532
    
    
    
    67,562
    
    
    
    259,330
 15




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 10  Operating Segments  (continued) (Unaudited)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 24,
    
    
    September 26,
    
    
    September 24,
    
    
    September 26,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Gross profit from reportable segments
    
    $
    11,813
    
    
    $
    19,009
    
    
    $
    54,568
    
    
    $
    64,183Unallocated amounts:Selling, general & administrative expense
    
    
    14,529
    
    
    
    11,631
    
    
    
    43,987
    
    
    
    37,407Amortization expense
    
    
    660
    
    
    
    686
    
    
    
    2,445
    
    
    
    2,162Interest expense, net
    
    
    7,903
    
    
    
    8,027
    
    
    
    32,944
    
    
    
    25,592Loss before income taxes
    
    $
    (11,279
    )
    
    $
    (1,335
    )
    
    $
    (24,808
    )
    
    $
    (978
    )
 Selling, general, and administrative expenses (which are not allocated to the reported business
segments), are comprised principally of overhead, payroll and related expenses, insurance, legal
and professional fees, and other selling expenses. Note 11  Statements of Comprehensive Income (Loss) (Unaudited)
    
    
    (Unaudited)Three Months Ended
    
    
    Nine Months EndedSeptember 24,
    
    
    September 26,
    
    
    September 24,
    
    
    September 26,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net loss as reported
    
    $
    (11,279
    )
    
    $
    (981
    )
    
    $
    (24,808
    )
    
    $
    (771
    )Change in fair value of interest rate swap, net of tax
    
    
    
    
    
    
    591
    
    
    
    221
    
    
    
    1,392Settlement of interest rate swap, net of tax
    
    
    
    
    
    
    
    
    
    
    1,411
    
    
    
    Comprehensive (loss) income
    
    $
    (11,279
    )
    
    $
    (390
    )
    
    $
    (23,176
    )
    
    $
    621
 See Note 6 to the Unaudited Consolidated Financial Statements for a discussion of the settlement of
the interest rate swap. Note 12  Commitments and Contingencies Warranty Costs The Company provides for the estimated cost of product warranties at the time revenue is
recognized. While the Company engages in product quality programs and processes, including actively
monitoring and evaluating the quality of its component suppliers, the Companys warranty obligation
is affected by product failure rates, material usage and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, material usage or service
delivery costs differ from the Companys estimates, revisions to the estimated warranty liability
would be required. The Company accrues for warranties based on historical experience and sales.
Changes in the product warranty accrued balance as of September 24, 2004 and December 31, 2003 are
summarized below: Product Warranty Liability as of:(Unaudited)September 24,
    
    
    December 31,(In thousands)
    
    2004
    
    
    2003Beginning Balance
    
    $
    2,065
    
    
    $
    2,135Warranty provision
    
    
    3,907
    
    
    
    4,588Settlements made (in cash or in kind)
    
    
    (4,493
    )
    
    
    (4,658
    )Ending Balance
    
    $
    1,479
    
    
    $
    2,065
 16




---



##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 12  Commitments and Contingencies  (continued) Litigation and Liability Claims From time to time, the Company is subject to legal proceedings and other claims arising in the
ordinary course of its business. Based primarily on discussions with counsel and management
familiar with the underlying disputes and except as described below, management believes that the
Company is not presently a party to any litigation, the outcome of which would have a material
adverse effect on its business, financial condition, results of operations or future prospects. Medley Facility Lease During the fourth quarter of 2004, the Company was notified by the landlord of the Medley facility
that it was in default of the lease. The Company is negotiating with the landlord regarding this
potential default and has turned possession of the facility back to the landlord. Management
intends to negotiate a settlement of this lease obligation, subject to liquidity constraints,
however the outcome cannot be determined with any certainty at this time. Asset Retirement Obligations The Company has no legal obligations associated with the retirement of tangible long-lived assets
to record in accordance with the provisions of SFAS No. 143, Accounting For Asset Retirement
Obligations for, or with regard to, any of its owned or leased facilities. Note 13  Subsequent Events During the fourth quarter of 2004, the Companys President and Chief Executive Officer and
Executive Vice President and Chief Administrative Officer were terminated without cause. The
Company will record severance costs of approximately $0.7 million related to the terminations in
the fourth quarter of 2004. On December 30, 2004 the Company amended the Revolver (Amendment No. 3) to allow up to $5.0 million
in additional borrowings above the borrowing base capacity, but the total borrowings under the
Revolver shall not exceed $90.0 million. In addition, the interest rate on the Revolver was amended
to bear interest at either the highest of the prime rate, reference rate, base rate or other
similar rate as determined by the lender plus 0.75% per year (the Bank Prime Loan Rate), or at
our election, the applicable London Interbank Offering Rate (LIBOR) plus 2.75% per year (the
Eurodollar Rate). The $5.0 million supplemental borrowings shall bear interest at either the Bank
Prime Loan Rate plus a margin of 2.50% per year, or at our election, the LIBOR rate plus a margin
of 4.50% per year. Pursuant to the Amendment, the Company must maintain undrawn availability under
the Revolver of not less than $5 million through January 31, 2005, increasing to $7.5 million
through February 10, 2005 and $9 million thereafter. The Amendment also deleted the fixed charge
coverage ratio covenant that had previously been in the Revolver. On December 31, 2004, the Company
borrowed $5.0 million under this amendment. The Company has announced its intention to negotiate with its Senior Subordinated Note holders and
has authorized an investment banking firm to negotiate with the holders of these notes regarding
the restructuring of the debt in order to lower cash interest payments beginning in February, 2005.
The agreement with the investment banking firm provides, among other things, monthly payments of
$0.1 million for three months, plus additional payments based on incentives. In December 2004, the Company announced, subject to board approval, its intention to close its
Southern Woods Products (SWP) Ready to Assemble facility in Sparta, Tennessee. Any costs to be
incurred with the closing of this facility will be recorded in the fourth quarter, 2004, or in the
filing period in which the decision is made and closing costs are determinable. 17




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are a premier designer, manufacturer and marketer of fine luxury retail and contract
furnishings. Our brand names include Casual Living, Brown Jordan, Winston, Loewenstein, Lodging by
Liberty, Wabash Valley, Charter, Texacraft, Vineyard, Tropic Craft, Southern Wood, Winston Woods,
Tommy Bahama, Woodsmiths, Pompeii, Tradewinds, Molla and Stuart Clark. We sell our furniture
products in the retail market to both national and specialty accounts and in the contract market to
commercial and institutional users. Our retail product offerings include chairs, chaise lounges,
tables, umbrellas, gazebos, cushions and related accessories, which are generally constructed from
aluminum, steel, wood or fiberglass. Our contract products include the same type of products in
addition to wood, metal and upholstered chairs, sofas and loveseats, which are offered in a wide
variety of finish and fabric options to the contract market. In addition, our contract line
includes a variety of tables, chairs, benches and swings for the site amenity market. CONSOLIDATION OF MANUFACTURING OPERATIONS In May 2004, we announced our intention to close our manufacturing facility located in Medley,
Florida. The Medley facility manufactures furniture products for both the retail and contract
operating segments. We moved the Medley facilitys operations to other plants operated by us
located in Haleyville, Alabama and Juarez, Mexico. The transition of the manufacturing operations
was substantially completed by the end of September 2004. As a result of this initiative, we
recognized a charge of $1.6 million in Cost of Sales during the second quarter, of which $1.3
million is included in the results for the contract business and $0.3 million is included in the
results for the retail business. In September 2004, the Company recorded an obligation of $2.2
million related to the ultimate disposition of the operating lease for the building at the Medley
facility. See Note 7 to the Unaudited Consolidated Financial Statements for additional
information. In December 2004, the Company announced its intention, subject to board approval, to close its
Southern Woods Products (SWP) Ready to Assemble facility in Sparta, Tennessee. Any costs incurrent
with the closing of this facility will be recorded in the fourth quarter, 2004, or in the filing
period in which the decision is made and closing costs are determinable. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 24, 2004 AND SEPTEMBER 26, 2003 The following table sets forth net sales, gross profit and gross profit as a percent of net sales
for the three months ended September 24, 2004 and September 26, 2003 for each of our market
channels (in thousands, except for percentages): (Unaudited)Three Months EndedSeptember 24, 2004
    
    
    September 26, 2003Net
    
    
    Gross
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    GrossSales
    
    
    Profit
    
    
    Profit %
    
    
    Sales
    
    
    Profit
    
    
    Profit %Retail
    
    $
    25,262
    
    
    $
    5,975
    
    
    
    23.7
    %
    
    $
    26,859
    
    
    $
    10,166
    
    
    
    37.9
    %Contract
    
    
    29,125
    
    
    
    5,838
    
    
    
    20.1
    %
    
    
    27,951
    
    
    
    8,843
    
    
    
    31.6
    %Total
    
    $
    54,387
    
    
    $
    11,813
    
    
    
    21.7
    %
    
    $
    54,810
    
    
    $
    19,009
    
    
    
    34.7
    %
 See Note 10 to Unaudited Consolidated Financial Statements for more information concerning our
reporting segments. The following table sets forth certain information relating to our operations expressed as a
percentage of net sales. (Unaudited)Three Months EndedSeptember 24,
    
    
    September 26,2004
    
    
    2003Gross profit
    
    
    21.7
    %
    
    
    34.7
    %Selling, general and administrative expense
    
    
    26.7
    %
    
    
    21.2
    %Amortization
    
    
    1.2
    %
    
    
    1.3
    %Operating (loss) income
    
    
    (6.2
    %)
    
    
    12.2
    %Interest expense
    
    
    14.5
    %
    
    
    14.7
    %Income tax provision
    
    
    0.0
    %
    
    
    (0.7
    %)Net loss
    
    
    (20.7
    %)
    
    
    (1.8
    %)
 18




---



##### Table of Contents



COMPARISON OF THREE MONTHS ENDED SEPTEMBER 24, 2004 AND SEPTEMBER 26, 2003 (continued) Net Sales. Consolidated net sales of $54.4 million in the third quarter of 2004 were $0.4 million
or 0.8% lower than net sales for the same period in 2003. The decline in net sales in the third
quarter of 2004 as compared to the same period in the prior year was attributable to a $1.6 million
decline in retail sales, offset by an increase of $1.2 million to contract net sales. Within the
retail business, net sales to specialty retail stores declined $0.9 million or 3.7%, while national
accounts declined $0.7 million. Net sales to specialty retail customers declined in the quarter due
to the slow end of the season retail sales causing dealers to delay purchases in order to reduce
inventory levels. Net sales to national accounts declined largely due to pricing pressures and our
primary customer reducing inventory levels. Contract net sales increased as a result of increased
shipments to our lodging customers during the third quarter. Gross Profit. Gross profit in the third quarter of 2004 of $11.8 million decreased $7.2 million or
37.9% as compared to gross profit of $19.0 million in the third quarter of 2003. Gross profit as a
percentage of net sales of 21.7% for the 2004 period represents a decrease from the gross profit as
a percentage of net sales for the 2003 period of 34.7%. The overall decrease in gross profit in the
third quarter of 2004 was partly attributable to the contract business which experienced a $3.0
million decrease in gross margin largely as a result of the recording of a $2.2 million charge for
the closing of the Medley Facility (Note 7 to the Unaudited Consolidated Financial Statements) and
the impact on margins of increased shipments to the lodging customers within the channel. Gross
profit in the retail business of $6.0 million or 23.7% during the third quarter of 2004 was lower
than the same quarter in the prior year. The decline in the retail business gross margin during
the 2004 period was driven by unfavorable volume and product mix within the business, increased
provision for excess and potentially obsolete inventories, additional allowances for the national
accounts business, and a $0.4 million charge for the closing of the Medley Facility. Selling, General and Administrative Expenses. Selling, general and administrative expenses (SG&A)
for the third quarter of 2004 were $14.5 million, representing a $2.9 million, or 24.9% increase
compared to the third quarter of 2003. The increase in SG&A spending was primarily driven by (i)
higher advertising costs related to collateral materials due to the product line expansion of $0.8
million, (ii) increased bad debt reserves of $0.7 million in the 2004 period, (iii) higher spending
for professional services of $0.6 million, (iv) higher general and group medical insurance costs of
$0.4 million, and (v) increased payroll costs of $0.3 million. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), in order to test its carrying
values for goodwill and other intangible assets on an annual basis to determine impairment. The
Company has elected October 1 as the date for performance of its annual impairment tests on
identified intangible assets with indefinite lives. Based on its recent historical operating
results, the impairment testing as of October 1, 2004 could result in a significant adjustment to
the carrying amounts of goodwill and trademarks. Prior to the publication of its annual report Form
10-K for the year ended December 31, 2004, the Company expects to conclude its testing for
impairment on its goodwill and trademarks, each with a carrying value of $91.3 million and $25.3
million respectively, as of September 24, 2004. Amortization. Amortization expense of $0.7 million in the third quarter of 2004 relating to the
amortization of certain intangible assets was consistent with the same period for the prior year. Operating Income. As a result of the above, operating income decreased from $6.7 million in the
third quarter of 2003 (12.2% of net sales) to a loss of $3.4 million (6.2% of net sales) in the
same period of 2004. Interest Expense. Interest expense remained consistent in the third quarter of 2004 at $7.9 million
as compared to the same period in 2003. The new financing in March 2004 (see Note 5 to the
Unaudited Consolidated Financial Statements) had a minimal effect on interest expense. Income Tax Benefit. There are no income taxes reflected for the third quarter of 2004 as we have
recorded a full valuation allowance to offset the income tax benefit that resulted from the net
loss in the third quarter of 2004, because we believe it is more likely than not, that such benefit
will not be realized. The Company will continue to review its ability to utilize such benefits and
until such time as management determines that it is likely that these benefits will be realizable,
the Company will continue to record the valuation allowances to offset any income tax benefits. 19




---



##### Table of Contents



COMPARISON OF NINE MONTHS ENDED SEPTEMBER 24, 2004 AND SEPTEMBER 26, 2003 The following table sets forth net sales, gross profit and gross profit as a percent of net sales
for the nine months ended September 24, 2004 and September 26, 2003 for each of our market channels
(in thousands, except for percentages): (Unaudited)Nine Months EndedSeptember 24, 2004
    
    

September 26, 2003Net
    
    
    Gross
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    GrossSales
    
    
    Profit
    
    
    Profit %
    
    
    Sales
    
    
    Profit
    
    
    Profit %Retail
    
    $
    153,693
    
    
    $
    32,201
    
    
    
    21.0
    %
    
    $
    160,782
    
    
    $
    36,384
    
    
    
    22.6
    %Contract
    
    
    88,565
    
    
    
    22,367
    
    
    
    25.3
    %
    
    
    86,703
    
    
    
    27,799
    
    
    
    32.1
    %Total
    
    $
    242,258
    
    
    $
    54,568
    
    
    
    22.5
    %
    
    $
    247,485
    
    
    $
    64,183
    
    
    
    25.9
    %
 See Note 10 to Unaudited Consolidated Financial Statements for more information concerning our
operating segments. The following table sets forth certain information relating to our operations expressed as a
percentage of net sales. (Unaudited)Nine Months EndedSeptember 24,
    
    
    September 26,2004
    
    
    2003Gross profit
    
    
    22.5
    %
    
    
    25.9
    %Selling, general and administrative expense
    
    
    18.2
    %
    
    
    15.1
    %Amortization
    
    
    1.0
    %
    
    
    0.9
    %Operating income
    
    
    3.4
    %
    
    
    10.0
    %Interest expense
    
    
    13.6
    %
    
    
    10.3
    %Income tax provision
    
    
    0.0
    %
    
    
    0.1
    %Net (loss)
    
    
    (10.2
    %)
    
    
    (0.3
    %)
 Net Sales.Consolidated net sales of $242.2 million in the first nine months of 2004 were $5.2
million lower than the same period in 2003. The decline in net sales during the first nine months
of 2004 as compared to the same period in the prior year was driven by the retail business,
partially offset by an increase in net sales of $1.9 million or 2.1%, in the contract business.
Within the retail business, net sales to national accounts decreased $19.3 million or 21.0%, but
was offset by a $12.2 million, or 17.7% increase in shipments to retail specialty stores in the
first nine months of 2004 compared to the first nine months of 2003. The decline in net sales to
national accounts was primarily the result of our primary customer reducing inventory levels, an
increase in allowances, and pricing pressures. Approximately 75% of the increase in specialty
retail net sales in the 2004 period resulted from the introduction of new product lines under
various brands manufactured from cast aluminum, woven, teak and wrought iron, Tommy Bahama branded
product, and the expansion of the product offerings for two of the specialty retail brands. Of the
remaining specialty retail net sales increase, the balance resulted from expanded distribution
within existing customers and our Elegant Outdoors initiative. Contract sales of $88.6 million
for the first nine months of 2004 increased slightly over net sales of $86.7 million in the same
period in 2003. Gross Profit. Gross profit in the first nine months of 2004 of $54.6 million represents a decrease
of $9.6 million or 15.0% as compared to gross profit of $64.2 million in the same period in 2003.
Gross profit as a percentage of net sales of 22.5% for the 2004 period represents a slight decline
versus the gross profit as a percentage of net sales for the 2003 period of 25.9%. The overall
decrease in gross profit during the first nine months of 2004 was attributable to the contract
business, which experienced a $5.4 million decrease in gross margin, and the retail business which
was $4.2 million lower than the same period in the prior year. The decrease in gross profit in the
contract business was largely due to (i) the recording of a $3.6 million charge for the closing of
the Medley Facility, (ii) an unfavorable mix of product sales, and (iii) increased warranty related
costs in the 2004 period. Within the retail business, gross margin on net sales decreased compared
to the same period in the prior year as a result of lower revenue and lower gross profit from sales
to national accounts, and the recording of a $0.7 million charge relating to the closing of a
manufacturing facility in the 2004 period. The lower gross margin as a percentage of net sales on
national 20




---



##### Table of Contents



account sales is primarily attributable to pricing pressures, additional allowances, and provision
for excess and potentially obsolete inventory. The gross margin on net sales to specialty retail
stores in the first nine months of 2004 as compared to the same period in the prior year was down
slightly from 37.1% in the 2003 period compared to 34.4% in the 2004 period. This decline resulted
from an unfavorable product mix and the $0.7 million charge for the facility closing, offset by
favorable volume driven variances. Selling, General and Administrative Expenses. SG&A expenses for the first nine months of 2004 were
$44.0 million, representing a $6.6 million, or 17.6% increase compared to SG&A expenses during the
same period in 2003. The increase in SG&A spending was driven by (i) higher advertising costs
related to collateral materials of $1.2 million due to the product line expansion, (ii)
approximately $1.0 million of reversals of reserves no longer needed in the 2003 period, largely
related to bad debt reserves, (iii) increased payroll and payroll related benefits in the amount of
$1.0 million, (iv) increased bad debt reserves in the 2004 period of $0.9 million, (v) higher
spending for outside legal and professional services of $0.8 million, (vi) higher commission
expense of $0.6 million as a result of the higher levels of specialty retail sales, (vii) increased
business insurance of $0.4 million, and (viii) increased travel costs of $0.3 million. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), in order to test its carrying
values for goodwill and other intangible assets on an annual basis to determine impairment. The
Company has elected October 1 as the date for performance of its annual impairment tests on
identified intangible assets with indefinite lives. Based on its recent historical operating
results, the impairment testing as of October 1, 2004 could result in a significant adjustment to
the carrying amounts of goodwill and trademarks. Prior to the publication of its annual report Form
10-K for the year ended December 31, 2004, the Company expects to conclude its testing for
impairment on its goodwill and trademarks, each with a carrying value of $91.3 million and $25.3
million respectively, as of September 24, 2004. Amortization. Amortization expense of $2.4 million in the first nine months of 2004 relating to the
amortization of certain intangible assets was consistent with the same period for the prior year. Operating Income. As a result of the above, operating income decreased from $24.6 million in the
first nine months of 2003 (10.0% of net sales) to $8.1 million (3.4% of net sales) in the same
period of 2004. Interest Expense. Interest expense increased $7.4 million in the first nine months of 2004 to $33.0
million from $25.6 million in the same period of 2003. The higher level of interest expense in the
2004 period is due to the write-off of deferred financing costs ($4.9 million) and the settlement
of the interest rate swap ($2.4 million) as a result of the Companys entering into a new financing
arrangement in March 2004. Income Tax Benefit. There are no income taxes reflected for the first nine months of 2004 as we
have recorded a full valuation allowance to offset the income tax benefit that resulted from the
net loss in the first nine months of 2004, because we believe it is more likely than not, that such
benefit will not be realized. The Company will continue to review its ability to utilize such
benefits and until such time as management determines that it is likely that these benefits will be
realizable, will continue to record the valuation allowances to offset any income tax benefits. SEASONALITY AND QUARTERLY INFORMATION Sales of retail products are typically higher in the first and fourth quarters as a result of
higher demand for outdoor furniture in advance of summer use. Weather conditions during the peak
retail selling season and the resulting impact on consumer purchases of outdoor furniture products
can also affect sales of outdoor products. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board (FASB) issued FAS 123(R), Share-Based
Payment, that addresses the accounting for share-based payment transactions (for example, stock
options and awards of restricted stock) in which an employer receives employee-services in exchange
for equity securities of the company or liabilities that are based on the fair value of the
companys equity securities. This proposal, if finalized as proposed, would eliminate the use of
APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require such
transactions be accounted for using a fair-value-based method and recording compensation expense
rather than optional pro forma disclosure. This accounting standard will not have a material effect
on the Companys operations. In March, 2004 the Financial Accounting Standards Board (FASB) approved the consensus reached on
the Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain 21




---



##### Table of Contents



Investments. The Issues objective is to provide guidance for identifying other-than-temporarily
impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are
deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP)
EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1
until after further deliberations by the FASB. This accounting standard will not have a material
effect on the Companys operations. A variety of proposed or otherwise potential accounting standards are currently under study by
standard-setting organizations and various regulatory agencies. Because of the tentative and
preliminary nature of these proposed standards, management has not determined whether
implementation of such proposed standards would be material to the Companys consolidated financial
statements. LIQUIDITY AND CAPITAL RESOURCES New Financing Arrangements As of December 31, 2003 and continuing through March 26, 2004, we were not in compliance with
certain provisions of our former senior credit facility, including certain financial covenants in
that agreement. These violations constituted events of default. On January 9, 2004, we entered
into a forbearance agreement with our lenders under the former senior credit facility that, as
amended, provided for a forbearance period through March 31, 2004. During the forbearance period,
we arranged financing with new lenders and repaid the former senior credit facility in full. The
terms of the new financing arrangements are summarized below. We entered into new financing arrangements on March 31, 2004, that consisted of a (i) Loan and
Security Agreement (Revolver), a $90.0 million asset based revolving credit facility with new
lenders and (ii) $135.0 million Senior Secured Notes due May 1, 2007 (Senior Notes) with another
lender. Proceeds under these new facilities were used to (i) repay all outstanding balances under
our former senior credit facility, which was terminated on March 31, 2004, (ii) pay all former
indebtedness to Trivest, including an advance by Trivest for the financing of the interest payment
to the Holders of the Companys Senior Subordinated Notes ($6.9 million), a payment of $3.5 million
paid to the former lenders under the then former senior credit facility by Trivest with related
fees and interest ($3.9 million in total), financial advisors fees ($0.8 million) and management
fees accrued as of December 31, 2003, as well as fees earned and accrued through March 31, 2004
($0.5 million in total), (iii) pay interest rate swap termination fees, and (iv) pay fees and
expenses relating to the new financing transactions. Upon the closing of the transactions, $189.2
million ($54.2 million under the Revolver and $135.0 million under the Senior Notes) was drawn
under the new facilities. The termination of the former senior credit facility resulted in the write-off of deferred
financing fees of $4.9 million and the settlement of the obligation for the interest rate swap
(Note 6 to the Unaudited Consolidated Financial Statements) in the quarter ended June 25, 2004.
The write-off of deferred financing fees is included in Interest expense, net in the accompanying
Unaudited Consolidated Statements of Operations. The Revolver The Revolvers availability is based on a borrowing base consisting of the Borrowers eligible
accounts receivable and inventory. The interest rate on borrowings under the Revolver is based on
the base rate (which is defined as a variable rate of interest per annum equal to the highest of
the prime rate, reference rate, base rate or other similar rate as determined by the lender) plus
0.25% per year (the Bank Prime Loan Rate), or at our election, the applicable London Interbank
Offering Rate (LIBOR) plus 2.25% per year (the Eurodollar Rate). We also pay an unused
facility fee equal to 0.375% per annum on the average unused daily balance of the Revolver.
Borrowings under the Revolver are secured by a first priority lien on substantially all our
accounts receivable, inventory, fixed assets and intangible assets. The Revolver contains a $10.0
million swing-line sub-facility (Swing-Line), which accrues interest at the Bank Prime Loan Rate
per year. The Revolver terminates on May 1, 2007, unless we terminate it earlier. We must pay a
$0.9 million termination fee if we elect to terminate the Revolver on or prior to March 31, 2005.
As of September 24, 2004, the interest rate on the outstanding balance under the Revolver was 5.0%
and was based on the Bank Prime Loan Rate. As of September 24, 2004, we had availability of $12.2
million and cash on hand of $1.7 million. The Revolver also provides for a $15.0 million letter of credit sub-facility. The aggregate amount
of such letters of credit may not exceed the least of (i) $15.0 million, (ii) an amount equal to
the $90.0 million aggregate commitment under the Revolver less the aggregate outstanding principal
balance of the Revolver and Swing-Line or (iii) the borrowing base less the aggregate outstanding
principal balance of the Revolver and Swing-Line. However, the letters of credit with respect to
any of our business segments (as defined in the Revolver) may not exceed the sum of (i) the
outstanding Revolver advances and Swing-Line loans to such business segment plus (ii) the
outstanding letters of credit to exceed such business units borrowing base. 22




---



##### Table of Contents



Fees associated with the letters of credit are equal to the Eurodollar Rate margin per year based
upon the face amount of the letters of credit. As of September 24, 2004, the Company had $7.0
million of letters of credit outstanding, primarily related to insurance programs and
collateralization of an industrial development obligation. The Revolver contains customary covenants and restrictions on our and our subsidiaries ability to
issue additional debt or engage in certain activities and certain affirmative covenants, including,
but not limited to, reporting requirements. The Revolver, prior to the amendment on September 13,
2004, specified that we must maintain a minimum of $5.0 million available borrowing capacity at all
times, and provided that we maintained a minimum of $9.0 million of available borrowing capacity,
the Revolver did not require compliance with financial covenants. The amendment to the Revolver on
September 13, 2004 specified that if availability fell below $9.0 million on or after December 31,
2004 and for any three consecutive business days during such month then ended, we would be subject
to a fixed charge ratio. The Revolver also contains events of default customary for credit
agreements of this type, including failure to pay interest or principal when due and cross-default
provisions relating to our other indebtedness in excess of $1.5 million. In the event of default
and during the continuation thereof, borrowings under the Revolver will bear interest, at the
option of the lender, at the then current Bank Prime Rate plus 2.00% per annum or at the Eurodollar
Rate plus 2.00% per annum. As of December 17, 2004, availability was $9.3 million under the
Revolver. On December 30, 2004 the Company amended the Revolver to allow up to $5.0 million in additional
borrowings above the borrowing base capacity, but the total borrowings under the Revolver shall not
exceed $90.0 million. In addition, the interest rate on the Revolver was amended to bear interest
at either, the highest of the prime rate, reference rate, base rate or other similar rate as
determined by the lender plus 0.75% per year (the Bank Prime Loan Rate), or at our election, the
applicable London Interbank Offering Rate (LIBOR) plus 2.75% per year (the Eurodollar Rate).
The $5.0 million supplemental borrowings shall bear interest at either the Bank Prime Loan Rate
plus a margin of 2.50% per year, or at our election, the LIBOR rate plus a margin of 4.50% per
year. The supplemental borrowings are subordinate to the borrowings under the Revolver with respect
to repayment. Pursuant to this amendment, the Company must maintain undrawn availability under the
Revolver of not less than $5 million through January 31, 2005, increasing to $7.5 million through
February 10, 2005 and $9 million thereafter. This amendment also deleted the fixed charge coverage
ratio covenant that had previously been in the Revolver. On December 31, 2004, the Company borrowed
$5.0 million under this amendment. Senior Notes The Senior Notes, which mature May 1, 2007, bear interest at a rate of LIBOR plus 9.0% per annum,
reset quarterly. We will pay interest in arrears on each March 31, June 30, September 30 and
December 31 and on the maturity date, with interest payments commencing, June 30, 2004. The Senior
Notes are secured by a second priority lien on substantially all of our accounts receivable,
inventories, fixed assets and intangible assets and a first priority lien on our capital stock as
well as the capital stock of all of our domestic subsidiaries. The Senior Notes are guaranteed by
all of our domestic subsidiaries (the Guarantors). The Guarantors have fully, unconditionally,
jointly and severally guaranteed the obligations under the Senior Notes. Our subsidiaries other
than the Guarantors are minor within the meaning of Rule 3-10(h)(6) of Regulation S-X of the
Securities and Exchange Commission, and we have no independent assets or operations within the
meaning of Rule 3-10(h)(5) of Regulation S-X. Holdings pledge of our stock is non-recourse to
Holdings. As of September 24, 2004, the interest rate on the outstanding balance was 10.59%. We may redeem, at our option, the Senior Notes, in whole or in part, from time to time after March
31, 2005 at applicable redemption prices ranging from 103.0% to 100.0% of face value. In addition,
we may, at our option, elect on one occasion occurring on or prior to the 60 days following the
completion of our audit for the year ended December 31, 2004 (but in any event, no later than June
30, 2005), to redeem at a redemption price of 100% of the principal amount thereof, plus accrued
interest, a principal amount of the Senior Notes, not to exceed the lesser of (i) 5.0% of the
principal amount of the Senior Notes issued and (ii) the amount of excess cash flow (as defined in
the agreement) for the year ended December 31, 2004. The ability to redeem Senior Notes in
accordance with this provision is contingent on the requirement that (i) no default or event of
default shall have occurred and be continuing as such time, and (ii) that the report of our
independent auditors in respect of the year ended December 31, 2004 is an unqualified audit
report. The Senior Notes contain various covenants customary for notes of a similar nature, including
limitations on our activities and the activities of our subsidiaries to, among other things, (i)
declare or pay cash dividends, (ii) modify the capital structure, (iii) acquire or retire
indebtedness that is subordinate to the Senior Notes, (iv) issue preferred stock, (v) create or
assume any indebtedness, (vi) sell, transfer or assign our properties or assets other than in the
ordinary course of business, (vii) create or assume liens, (viii) enter into sale and leaseback
transactions, or (ix) engage in mergers or acquisitions. In addition, the Senior Notes contain
affirmative covenants including, but not limited to maintenance of our properties and reporting
obligations. The Senior Notes also contain events of default customary for financing agreements of
this type, including failure to pay interest on principal when due and cross-default provisions
relating to our other indebtedness in excess of $5.0 million. 23




---



##### Table of Contents



In the event of default,
holders of 33 1/3% or more in principal amount of the then outstanding
Senior Notes may declare the principal amount of all of the Senior Notes due and payable
immediately, by written notice to us, and upon such notice, such principal amount and any accrued
and unpaid interest shall be immediately due and payable. We paid approximately $5.0 million in fees relating to the Revolver and the Senior Notes that will
be amortized to interest expense over the 37-month period beginning March 31, 2004. Senior Subordinated Notes and Warrants In connection with the merger described in Note 1 to the Unaudited Consolidated Financial
Statements, we issued 105,000 units (Units) consisting of $105 million aggregate principal
amount at maturity of 12 3/4 % Senior Subordinated Notes due 2007 (Notes) and Warrants
(Warrants) to purchase of 24,129 shares of capital stock. Each unit consists of $1,000 principal
amount at maturity of Notes and a Warrant to purchase 0.2298 shares of common stock at an exercise
price of $0.01 per share. The Warrants are exercisable on or after certain events. Assuming full
exercise of the Warrants, the aggregate number of shares would approximate 2%of the common stock of
Holdings. The Warrants expire on August 15, 2007. The 12 3/4% Senior Subordinated Notes Due 2007 Indenture (Indenture) under which the Notes are
issued include provisions generally common in such indentures including restrictions on dividends,
additional indebtedness and asset sales. At December 31, 2003, we were in compliance with such
covenants. However, we failed to make the scheduled semi-annual interest payment when due on
February 15, 2004 ($6.9 million) and August 15, 2004 ($6.7 million). We subsequently made these
interest payments within the cure period specified in the Notes. The Company has announced its intention to negotiate with its senior subordinated note holders and
has authorized an investment banking firm to negotiate with the holders of these notes regarding
the restructuring of the debt in order to lower cash interest payments beginning in February, 2005. Cash Flows from Operating Activities. During the first nine months of 2004, cash provided from
operating activities was $26.2 million, compared to $20.7 million for the same period of 2003.
During the first nine months of 2004, net cash flow provided from accounts receivable, inventories
and accounts payable was approximately $6.2 million higher than the same period in 2003. Cash
provided from a reduction of accounts receivable was approximately $6.3 million higher in the 2004
period, primarily due to the timing of national account shipments, partially offset by increased
accounts receivable for the specialty retail business driven by higher May and June sales levels.
Additionally, during the 2004 period, approximately $2.8 million less cash was required for
inventory purchases largely due to the timing of purchases. Notwithstanding the lower use of cash
for inventory, nominal levels of inventory are higher on a year over year basis largely as a result
of additional stock keeping units (SKUs) and fabrics to support the growth in the specialty
retail business. The positive impact on cash flow from accounts receivable and inventory in the
2004 period as compared to the same period in 2003 is partially offset by an increase in the use of
cash to reduce accounts payable during the 2004 period. During the nine months ended September 24,
2004, we used approximately $2.9 million more cash for accounts payable than the same period in the
prior year primarily as a result of the timing of payments for national accounts products. The
increase in accrued interest in the 2004 period is attributable to the timing of interest payments
versus the 2003 period. The increase in cash provided by Other accrued liabilities of
approximately $7.1 million in the 2004 period versus the same period in 2003 is primarily due to
(i) increases in the self-insurance reserves for medical, workers compensation and product
liability, (ii) increased customer deposits primarily related to the contract business, largely due
to timing, (iii) decreases in income tax related accounts driven by the timing of payments as well
as the Companys net operating losses, (iv) decreases in the bonus accrual in the 2003 period
resulting from the payment of the bonus earned during 2002, and (v) increase for obligations
relating to the closing of the Medley Facility (Note 7 to the Unaudited Consolidated Financial
Statements). Cash Flows from Investing Activities. During the first nine months of 2004 investing activities
consisted of capital expenditures of $1.0 million. During the same period in 2003, we spent $1.2
million on capital expenditures and sold several non-core assets, which generated proceeds of $1.2
million, resulting in a small amount of cash used by investing activities. Capital spending in the
first nine months of 2004 and 2003 was primarily for replacement machinery and equipment. Cash Flows from Financing Activities. Net cash used in financing activities during the first nine
months of 2004 was $25.4 million compared to a usage of $28.0 million for the same period of 2003.
As discussed above under New Financing Arrangements, on March 31, 2004 we refinanced the former
credit facility, resulting in the repayment of $130.1 million outstanding under the term loan, in
addition, we made scheduled term loan payments of $3.8 million, of which the funds to pay $3.5
million was advanced to us by Trivest, which we repaid out of the proceeds from the new financing
arrangements. As a result of the new financings, we also settled the interest rate swap ($4.2
million) and paid legal and other professional fees directly related to the new financings of $5.0
million. We also paid $0.9 million for legal and other professional fees during the 24




---



##### Table of Contents



2004 period related to our former senior credit facility. During the first nine months of 2003, we
made scheduled term loan principal payments of $8.0 million and had net borrowings of $20.0 million
against the revolving line of credit, resulting in a use of cash flow from financing activities of
$28.0 million. ADEQUACY OF CAPITAL RESOURCES Our short-term cash needs are primarily for debt service and working capital requirements. We have
historically financed our short-term liquidity needs with cash flow generated from operations and
from borrowings under a revolving line of credit. Based on our liquidity projections, we believe
that available capital resources should continue to be adequate for the short term period. However,
longer term liquidity will be dependent on a combination of factors including the Companys ability
to generate increased cash from operations and lower debt service obligations. In that regard, the
Company is negotiating with its senior subordinated debt holders, through an investment banking
firm, to restructure its debt and interest payments commencing in February, 2005. Nominally, net debt (defined as the sum of Current portion of long-term debt and Long-term
debt, net of current portion less Cash and cash equivalents) is approximately $8.2 million
higher than the year ago period. This increase in net debt was caused by (i) cash expended in
connection with the new financing arrangements ($5.0 million), (ii) settlement of the interest rate
swap ($4.2 million), and (iii) other net changes in working capital more fully described in Cash
Flows from Operating Activities above. Operating cash flows are closely correlated to demand for our products. A decrease in demand for
our products would impact the availability of these internally generated funds. Our capital needs
for the remainder of fiscal 2004 consist primarily of the following: (i) interest payments due on
outstanding borrowings, (ii) increases in working capital driven by the needs of our business, and
(iii) the financing of capital expenditures. Aggregate capital expenditures are forecasted to be $1.2 million in 2004, approximately $1.0
million of which was expended during the nine months ended September 24, 2004. RELATED PARTY TRANSACTIONS In August, 1999, we entered into a ten-year agreement (the  Management Agreement) with Trivest.
Pursuant to the Management Agreement, Trivest provides corporate finance, financial relations,
strategic and capital planning and other management advice to us. The Management Agreement, as
amended from time to time, provides for an annual base compensation of $750,000, which is to be
adjusted annually for increases in the Consumer Price Index. For the year ended December 31, 2003,
the annual compensation was $770,000. For the period ended September 24, 2004 and September 26,
2003, the amount expensed in selling, general and administrative expense was $367,500, and
$577,941, respectively. On March 31, 2004, in connection with our new financing arrangements, the Management Agreement with
Trivest was amended to (i) provide for the payment of accrued, unpaid management fees, (ii) provide
for an additional incentive fee of $0.8 million for services provided in connection with the new
financing arrangements, (iii) reduce the annual base compensation to $350,000 and (iv) provide for
a component of compensation that is based on our performance (Performance Compensation), as
defined in the amendment to the Management Agreement. The Performance Compensation is not to exceed
$400,000 in any year. The annual base compensation will be adjusted annually to reflect any
increase from the prior year in the Consumer Price Index, with the first such adjustment to occur
as of January 1, 2005. As a condition to the extension of the forbearance period under our former senior credit facility,
Trivest provided us with an advance for the financing of the interest payment due in February 2004
to holders of the Senior Subordinated Notes ($6.9 million). In addition, on March 5, 2004, Trivest
made a payment of $3.5 million to our lenders under the Amended Facility on our behalf. In the
second quarter of 2004, we: (i) repaid Trivest for the advance of the $6.9 million interest
payment on the Senior Subordinated Notes, (ii) repaid Trivest for the $3.5 million advance of the
interest payment, plus a guarantee fee and interest of $0.4 million, (iii) paid management fees
accrued as of December 31, 2003, as referred to above, as well as fees earned and accrued through
March 31, 2004 ($0.5 million in total) and (iv) paid a fee of $0.8 million in connection with our
new financing arrangements, all out of the proceeds from the new financing. See Notes 5 and 8 to the Unaudited Consolidated Financial Statements for additional discussion. 25




---



##### Table of Contents



FOREIGN EXCHANGE FLUCTUATIONS AND EFFECTS OF INFLATION We purchase some raw materials from several Italian suppliers. In addition, we fund some expenses
for our Juarez, Mexico manufacturing facility. These transactions expose us to the effects of
fluctuations in the value of the U.S. dollar versus the Euro and Mexican Peso. If the U.S. dollar
declines in value versus these foreign currencies, we will pay more in U.S. dollars for these
transactions. To reduce our exposure to loss from such potential foreign exchange fluctuations, we
will occasionally enter into foreign exchange forward contracts. These contracts allow us to buy
Euros and Mexican Pesos at a predetermined exchange rate and thereby transfer the risk of
subsequent exchange rate fluctuations to a third party. During the nine months ended September 24,
2004 we did not enter into foreign exchange forward contracts and there were no contracts
outstanding at September 24, 2004. We do not speculate in foreign currency. Inflation has not had a significant impact on us in the past three years, however we continue to
evaluate the market risk on prices for raw materials that make up our products. CRITICAL ACCOUNTING POLICIES Managements discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On
an on going basis, we evaluate our estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, intangible assets, income taxes, warranty
obligations, pensions and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. There have been no significant changes in our critical accounting policies as disclosed in the Form
10-K dated December 31, 2003, as filed with the Securities and Exchange Commission. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This filing contains certain forward-looking statements about our financial condition, results of
operations and business within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. You can find many of these statements by looking for
words like will, should, believes, expects, anticipates, estimates, intends, may,
pro forma, or similar expressions used in this filing. These forward-looking statements are
subject to assumptions, risks and uncertainties, which may cause our results to be materially
different from the future results expressed or implied in such forward-looking statements,
including those relating to the following:  
    our level of leverage;
    our ability to meet debt service obligations;
    the subordination of the Senior Subordinated Notes to the Revolver and Senior Notes, which are secured by substantially
all of our assets and our proposed negotiations with the senior subordinated debt holders;
    the restrictions imposed upon us by our Senior Subordinated Notes and the Revolver and Senior Notes;
    the competitive and cyclical nature of the furniture manufacturing industry; and
    general domestic and global economic conditions, including inflationary pressures that may affect the prices of raw
materials. You are cautioned not to place undue reliance on any forward-looking statements, which speak only
as of the date of this filing. We do not undertake any responsibility to release publicly any revisions to these forward-looking
statements to take into account events or circumstances that occur after the date of this filing.
Additionally, we do not undertake any responsibility to provide updates on the occurrence of any
unanticipated events which may cause actual results to differ from those expressed or implied by
the forward-looking statements contained in this filing. 26




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in the Companys financial statements represents the potential changes in
the interest rates that affect the variable portion of its financial obligations. The Company
manages this exposure through regular operating and financing activities, and, when deemed
appropriate, through the use of derivative interest rate swap agreements. The Company canceled its
only interest rate swap agreement earlier this year and has no present plans to re-engage this
strategy in the foreseeable future. Should the interest rate fluctuate by 10%, the variable rate
debt, consisting of the Revolver and the Senior Notes (face amounts of $90 million and $135
million respectively) would have experienced a change in the actual interest expense in the amounts
of $0.4 million for the Third quarter, 2004 and $1.4 million for the nine month period ending
September, 24, 2004. See note 5 to the Unaudited Consolidated Financial Statements for additional
information. The other information required by this item is contained in Managements Discussion and Analysis
of Financial Condition and Results of Operations, under the heading Foreign Exchange Fluctuations
and Effects of Inflation. 
 ITEM 4. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Accounting Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this Quarterly Report.
Based upon that evaluation, our Chief Executive Officer and Chief Accounting Officer concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
Quarterly Report in accumulating and communicating to our management, including our Chief Executive
Officer and Chief Accounting Officer, material information required to be included in the reports
we file or submit under the Securities Exchange Act of 1934 as appropriate to allow timely
decisions regarding required disclosure. Based on an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Accounting Officer, there has been no change in our
internal control over financial reporting during the period ended September 24, 2004, identified in
connection with that evaluation, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 27




---



##### Table of Contents



PART II 
 ITEM 6. EXHIBITS 31.1
    
    
    Rule 13a-14(a) /15d-14(a) Certification of President and Chief Executive Officer31.2
    
    
    Rule 13a-14(a) /15d-14(a) Certification of Chief Accounting Officer32.1
    
    
    Section 1350 Certification of President and Chief Executive Officer32.2
    
    
    Section 1350 Certification of Chief Accounting Officer
 28




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the 12 3/4 Senior Subordinated Notes Due 2007 Indenture and the
Senior Secured Notes due May 1, 2007, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized. Brown Jordan International, Inc.Date: January 12, 2005
    By:

/s/ Vincent A. TortoriciVincent A. TortoriciChief Accounting Officer 29