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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 June 25, 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 0-25246 BROWN JORDAN INTERNATIONAL, INC.  Florida
    
    63-1127982(State or other jurisdiction
    
    (I.R.S. employerof incorporation or organization)
    
    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. x Yes o No Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). o Yes x No The number of shares of Common Stock, $.01 par value per share, of the
registrant outstanding as of October 1, 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 the 12 3/4% Senior Subordinated Notes Due 2007 Indenture and
the Senior Secured Notes due May 1, 2007.




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Brown Jordan International, Inc. INDEX TO ITEMS PagePART IITEM 1.
    
    Financial Statements Consolidated Balance Sheets as of June 25, 2004 (unaudited) and December 31, 2003
    
    
    3 Consolidated Statements of Operations (unaudited) for the three and six months ended June 25, 2004 and June 27, 2003
    
    
    4 Consolidated Statements of Cash Flows (unaudited) for the six months ended June 25, 2004 and June 27, 2003
    
    
    5 Notes to Unaudited Consolidated Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24ITEM 4.
    
    Controls and Procedures
    
    
    24PART IIITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    
    25Signatures
    
    
    26Amendment No. 2 to Loan and Security AgreementCFO Consent Pursuant to Section 302CFO Consent Pursuant to Section 906
  2




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PART I 
 ITEM 1. FINANCIAL STATEMENTS Brown Jordan International, Inc. and Subsidiaries 
 Consolidated Balance Sheets
 (Amounts in thousands, except share amounts)
 (Unaudited)June 25,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,076
    
    
    $
    1,910Accounts receivable, net
    
    
    55,197
    
    
    
    84,367Refundable income taxes
    
    
    1,739
    
    
    
    2,075Inventories, net
    
    
    38,523
    
    
    
    37,248Prepaid and other current assets
    
    
    11,376
    
    
    
    11,422Total current assets
    
    
    109,911
    
    
    
    137,022Property, plant and equipment, net
    
    
    22,951
    
    
    
    25,376Customer relationships, net
    
    
    16,814
    
    
    
    18,043Trademarks
    
    
    25,335
    
    
    
    25,335Goodwill
    
    
    91,254
    
    
    
    91,254Other assets, net
    
    
    8,677
    
    
    
    9,876Total assets
    
    $
    274,942
    
    
    $
    306,906Liabilities and stockholders deficitCurrent liabilities:Current portion of long-term debt
    
    $
    29,612
    
    
    $
    41,175Accounts payable
    
    
    17,122
    
    
    
    31,177Accrued interest
    
    
    8,213
    
    
    
    5,157Other accrued liabilities
    
    
    24,824
    
    
    
    23,878Total current liabilities
    
    
    79,771
    
    
    
    101,387Long-term debt, net of current portion
    
    
    240,712
    
    
    
    239,397Deferred income taxes
    
    
    4,045
    
    
    
    3,811Total liabilities
    
    
    324,528
    
    
    
    344,595Commitments and contingenciesStockholders deficitCommon stock  par value $.01 per share 1,000 shares authorized, issued and
outstanding at June 25, 2004 and December 31, 2003
    
    
    
    
    
    
    Additional paid in capital
    
    
    162,041
    
    
    
    162,041Accumulated deficit
    
    
    (211,413
    )
    
    
    (197,884
    )Accumulated other comprehensive loss
    
    
    (214
    )
    
    
    (1,846
    )Total stockholders deficit
    
    
    (49,586
    )
    
    
    (37,689
    )$
    274,942
    
    
    $
    306,906
 The accompanying notes are an integral part of these financial statements. 3




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Brown Jordan International, Inc. and Subsidiaries 
 Consolidated Statements of Operations
 (Amounts in thousands)
 (Unaudited)
    
    (Unaudited)Three Months Ended
    
    Six Months EndedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    84,377
    
    
    $
    89,573
    
    
    $
    187,871
    
    
    $
    192,675Cost of sales
    
    
    59,428
    
    
    
    63,501
    
    
    
    145,116
    
    
    
    147,501Gross profit
    
    
    24,949
    
    
    
    26,072
    
    
    
    42,755
    
    
    
    45,174Selling, general and administrative expense
    
    
    15,984
    
    
    
    12,130
    
    
    
    29,458
    
    
    
    25,776Amortization
    
    
    984
    
    
    
    774
    
    
    
    1,785
    
    
    
    1,476Operating income
    
    
    7,981
    
    
    
    13,168
    
    
    
    11,512
    
    
    
    17,922Interest expense, net
    
    
    15,690
    
    
    
    8,541
    
    
    
    25,041
    
    
    
    17,565(Loss) income before income taxes
    
    
    (7,709
    )
    
    
    4,627
    
    
    
    (13,529
    )
    
    
    357Income tax provision
    
    
    
    
    
    
    1,621
    
    
    
    
    
    
    
    147Net (loss) income
    
    $
    (7,709
    )
    
    $
    3,006
    
    
    $
    (13,529
    )
    
    $
    210
 The accompanying notes are an integral part of these financial statements. 4




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Brown Jordan International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands) (Unaudited)Six Months EndedJune 25,
    
    June 27,2004
    
    2003Operating activities:Net (loss) income
    
    $
    (13,529
    )
    
    $
    210Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Depreciation and amortization
    
    
    3,558
    
    
    
    3,240Non-cash interest charges
    
    
    8,805
    
    
    
    1,379Provision for (recovery of) doubtful accounts
    
    
    619
    
    
    
    (538
    )Provision for excess and obsolete inventory
    
    
    912
    
    
    
    1,172Loss on disposal of assets
    
    
    
    
    
    
    177Fixed asset impairment charge
    
    
    1,200
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    28,551
    
    
    
    26,600Refundable income taxes
    
    
    336
    
    
    
    4,012Inventories
    
    
    (2,187
    )
    
    
    (5,306
    )Prepaid expenses and other current assets
    
    
    (1,251
    )
    
    
    (940
    )Other assets
    
    
    309
    
    
    
    (1,178
    )Accounts payable
    
    
    (14,055
    )
    
    
    (6,819
    )Accrued interest
    
    
    3,056
    
    
    
    1,466Other accrued liabilities
    
    
    4,969
    
    
    
    (2,043
    )Deferred income taxes
    
    
    
    
    
    
    (471
    )Net cash provided by operating activities
    
    
    21,293
    
    
    
    20,961Investing activities:Capital expenditures
    
    
    (548
    )
    
    
    (955
    )Cash proceeds from sale of property, plant and equipment, net
    
    
    
    
    
    
    931Net cash used in investing activities
    
    
    (548
    )
    
    
    (24
    )Financing activities:Net payments under revolving credit agreements
    
    
    (11,563
    )
    
    
    (23,071
    )Proceeds from long-term debt
    
    
    135,000
    
    
    
    Payments on long-term debt
    
    
    (133,932
    )
    
    
    (4,375
    )Deferred financing costs
    
    
    (5,820
    )
    
    
    Settlement of interest swap agreement
    
    
    (3,264
    )
    
    
    Net cash used in financing activities
    
    
    (19,579
    )
    
    
    (27,446
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,166
    
    
    
    (6,509
    )Cash and cash equivalents at beginning of period
    
    
    1,910
    
    
    
    7,927Cash and cash equivalents at end of period
    
    $
    3,076
    
    
    $
    1,418Supplemental disclosures:Cash paid for interest
    
    $
    12,253
    
    
    $
    14,660Cash paid (refunded) for income taxes
    
    
    133
    
    
    
    (2,948
    )
 The accompanying notes are an integral part of these financial statements. 5




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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, which includes architectural design firms, restaurants and hospitality
chains. Site amenity products, which include 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, Holdings and the Company 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. 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
six month periods ended June 25, 2004 and June 27, 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




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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 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
    
    Six Months EndedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,2004
    
    2003
    
    2004
    
    2003Net (loss) income as reported
    
    $
    (7,709
    )
    
    $
    3,006
    
    
    $
    (13,529
    )
    
    $
    210Pro forma stock based compensation, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Pro forma net (loss) income
    
    $
    (7,709
    )
    
    $
    3,006
    
    
    $
    (13,529
    )
    
    $
    210Expected dividend yield
    
    zero
    
    zero
    
    zero
    
    zeroExpected stock price volatility
    
    zero
    
    zero
    
    zero
    
    zeroRisk free interest rate
    
    
    4.44
    %
    
    
    5.00
    %
    
    
    4.44
    %
    
    
    5.00
    %Expected life of options in years
    
    
    8
    
    
    
    9
    
    
    
    8
    
    
    
    9
 New Accounting Standards In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial Statements. FIN 46
addresses the consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications to FIN 46
(Revised Interpretations) resulting in multiple effective dates based on the
nature and creation date of the VIE. The Revised Interpretations must be
applied to all VIEs no later than the end of the first interim or annual
reporting period ending after March 15, 2004. However, prior to the required
application of the Revised Interpretations, its provisions must be adopted by
the end of the first interim or annual reporting period that ends after
December 15, 2003 (for the year ended December 31, 2003 for the Company) for
VIEs considered to be special purpose entities (SPEs). SPEs for this
provision include any entity whose activities are primarily related to
securitizations or other forms of asset-backed financings or single-lessee
leasing arrangements. The Company does not have any SPEs. The Company
completed its evaluation of the effect of adopting FIN 46 and has concluded
that there will be no impact on its financial position, results of operations
and cash flows. Also see Note 4 to the Unaudited Consolidated Financial
Statements for additional discussion. 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
bases of assets and liabilities using the enacted tax 7




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Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 2  Summary of Significant Accounting Policies  (continued) Income Taxes  (continued) 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 unlikely such benefit
will be realized. The effective tax rate for the three and six month periods
ended June 27, 2003 was 35.0% and 41.2%, 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 will be included
in the consolidated federal income tax return and certain consolidated state
income tax returns for the year ended December 31, 2003. Note 3  Inventories Inventories consist of the following: (Unaudited)June 25,
    
    December 31,(In thousands)
    
    2004
    
    2003Raw materials
    
    $
    29,896
    
    
    $
    23,867Work in process
    
    
    2,382
    
    
    
    2,234Finished goods
    
    
    6,245
    
    
    
    11,147$
    38,523
    
    
    $
    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 June 25, 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 an investment in the joint venture and is not required to provide
current or future funding. 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 another lender. 8




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Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 5  Long-Term Debt  (continued) New Financing Arrangements  (continued) 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
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 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 June 25, 2004,
the interest rate on the outstanding balance was 3.75% and was based on the
Eurodollar Rate. As of June 25, 2004, the Company had availability under the
Revolver of $13.8 million and cash on hand of $3.1 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 Bank Prime Loan
Rate per year based upon the face amount of the letters of credit. As of June
25, 2004, the Company had $7.2 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
maintained a minimum of $9.0 million of 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 9




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Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 5  Long-Term Debt  (continued) The Revolver  (continued) used to repay revolving credit borrowings. The balance outstanding under the
Revolver as of June 25, 2004 of $29.3 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 (EITF No. 95-22). The balance of the revolver
outstanding under the former senior credit facility of $40.9 million as of
December 31, 2003 was classified as current as the Company expected to
refinance the former senior credit facility. 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 will pay interest in arrears
on each March 31, June 30, September 30 and December 31 and on the maturity
date, which interest payment 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 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 June 25, 2004, the interest
rate on the outstanding balance was 10.11%. 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 then 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
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 $4.9 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. 10




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Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 5  Long-Term Debt  (continued) 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 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, 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. 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, of which
$34.9 million was repaid as of March 26, 2004). 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 is 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 are 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. 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. 11




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##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements 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 (Note 5). 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 June 27, 2003, the fair value of the swap was recorded as a liability of
$5.8 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 $0.4 million during the six month period ended June 27, 2003. The balance of
the change in fair value of $0.6 million during the six month period ended June
27, 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 plans to move the Medley facilitys operations to other Company plants
located in Haleyville, Alabama and Juarez, Mexico. The transition of the
manufacturing operations is expected to be completed by the end of September
2004. This initiative resulted in the elimination of approximately 120
positions; we expect that substantially all of these positions will be
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. The
Company is in the process of evaluating alternatives relating to the ultimate
disposition of the operating lease for the building at the Medley facility. The Company expects to incur costs of approximately $0.2 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. As of June 25, 2004, no employees have
been terminated and accordingly, no severance and related employee benefits
have been paid. The accrual balance as of June 25, 2004 of $0.3 million is
included in Other accrued liabilities in the Unaudited Consolidated Balance
Sheet. The $1.6 million of costs associated with the closing of the Medley Facility
was recorded as follows (in thousands): Retail
    
    Contract
    
    Shared
    
    ConsolidatedCharges included in Cost of Sales:Severance and other employee related costs
    
    $
    42
    
    
    $
    223
    
    
    $
    
    
    
    $
    265Inventory related charges
    
    
    20
    
    
    
    105
    
    
    
    
    
    
    
    125Property, plant and equipment
    
    
    192
    
    
    
    1,008
    
    
    
    
    
    
    
    1,200Total charges in Cost of Sales
    
    $
    254
    
    
    $
    1,336
    
    
    $
    
    
    
    $
    1,590Charges included in Selling, general and
administrative expense (SG&A):Severance and other employee related costs
    
    
    
    
    
    
    
    
    
    $
    36
    
    
    $
    36Total charges in SG&A
    
    $
    
    
    
    $
    
    
    
    $
    36
    
    
    $
    36Total charges related to the consolidation of
manufacturing operations
    
    $
    254
    
    
    $
    1,336
    
    
    $
    36
    
    
    $
    1,626
 12




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##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements Note 8  Related Party Transactions In December 1994, the Company entered into a ten-year agreement (the
Investment Services Agreement) with Trivest. Pursuant to the Investment
Services Agreement, Trivest provides corporate finance, financial relations,
strategic and capital planning and other management advice to the Company. The
Investment Services 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 Investment Services 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
Investment Services 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 six month periods ended June 25, 2004, the amount expensed
related to the Investment Services Agreement was $87,500, and $280,000,
respectively. For the three and six month periods ended June 27, 2003, the
amount expensed in selling, general and administration expense related to the
Investment Services Agreement was $162,600, and $385,000, respectively. 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
    
    Six Months EndedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003Components if net periodic benefit cost:Service cost
    
    $
    29
    
    
    $
    18
    
    
    $
    58
    
    
    $
    36Interest cost
    
    
    26
    
    
    
    23
    
    
    
    52
    
    
    
    46Expected return on plan assets
    
    
    (25
    )
    
    
    (20
    )
    
    
    (50
    )
    
    
    (40
    )Recognized net actuarial loss
    
    
    4
    
    
    
    1
    
    
    
    8
    
    
    
    2Net amortization and deferral of prior service cost
    
    
    5
    
    
    
    5
    
    
    
    10
    
    
    
    10Net periodic pension cost
    
    $
    39
    
    
    $
    27
    
    
    $
    78
    
    
    $
    54
 13




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##### 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. 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 June 25, 2004 (Unaudited)Net sales
    
    $
    49,465$
    
    
    
    34,912
    
    
    $
    
    
    
    $
    84,377Gross profit
    
    
    15,497
    
    
    
    9,452
    
    
    
    
    
    
    
    24,949Depreciation and amortization
    
    
    1,035
    
    
    
    241
    
    
    
    596
    
    
    
    1,872Expenditures for long lived assets
    
    
    36
    
    
    
    103
    
    
    
    184
    
    
    
    323Three Months Ended June 27, 2003 (Unaudited)Net sales
    
    $
    54,332$
    
    
    
    35,241
    
    
    $
    
    
    
    $
    89,573Gross profit
    
    
    13,571
    
    
    
    12,501
    
    
    
    
    
    
    
    26,072Depreciation and amortization
    
    
    826
    
    
    
    281
    
    
    
    511
    
    
    
    1,618Expenditures for long lived assets
    
    
    23
    
    
    
    3
    
    
    
    527
    
    
    
    553Six Months Ended June 25, 2004 (Unaudited)Net sales
    
    $
    128,431
    
    
    $
    59,440
    
    
    $
    
    
    
    $
    187,871Gross profit
    
    
    26,226
    
    
    
    16,529
    
    
    
    
    
    
    
    42,755Depreciation and amortization
    
    
    1,856
    
    
    
    513
    
    
    
    1,189
    
    
    
    3,558Expenditures for long lived assets
    
    
    40
    
    
    
    125
    
    
    
    383
    
    
    
    548Segment assets
    
    
    139,249
    
    
    
    52,511
    
    
    
    83,182
    
    
    
    274,942Six Months Ended June 27, 2003 (Unaudited)Net sales
    
    $
    133,923
    
    
    $
    58,752
    
    
    $
    
    
    
    $
    192,675Gross profit
    
    
    26,218
    
    
    
    18,956
    
    
    
    
    
    
    
    45,174Depreciation and amortization
    
    
    1,566
    
    
    
    566
    
    
    
    1,108
    
    
    
    3,240Expenditures for long lived assets
    
    
    39
    
    
    
    79
    
    
    
    837
    
    
    
    955Segment assets
    
    
    141,793
    
    
    
    51,062
    
    
    
    74,381
    
    
    
    267,236
 Note 11  Statements of Comprehensive Income (Loss) (Unaudited)
    
    (Unaudited)Three Months Ended
    
    Six Months EndedJune 25,
    
    June 27,
    
    June 25,
    
    June 27,2004
    
    2003
    
    2004
    
    2003(In thousands)Net (loss) income as reported
    
    $
    (7,709
    )
    
    $
    3,006
    
    
    $
    (13,529
    )
    
    $
    210Change in fair value of interest rate swap, net of tax
    
    
    
    
    
    
    (280
    )
    
    
    221
    
    
    
    (620
    )Settlement of interest rate swap, net of tax
    
    
    1,411
    
    
    
    
    
    
    
    1,411
    
    
    
    Comprehensive (loss) income
    
    $
    (6,298
    )
    
    $
    2,726
    
    
    $
    (11,897
    )
    
    $
    (410
    )
 See Note 6 for a discussion of the settlement of the interest rate swap. 14




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##### Table of Contents



Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements 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 accrual for the six months ended June 25, 2004 are summarized below: ProductWarranty(In thousands)
    
    CostBalance at December 31, 2003
    
    $
    2,065Warranty provision
    
    
    2,433Settlements made (in cash or in kind)
    
    
    (1,783
    )Balance at June 25, 2004
    
    $
    2,715
 Note 13  Subsequent Event During the forth quarter of 2004, the Companys President and Chief Executive
Officer and Executive Vice President and Chief Administrative Officer were
terminated without cause. Under the terms of their employment agreements each
are entitled to severance benefits. The Company will record $0.7 million of
severance costs in the in the fourth quarter of 2004. 15




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##### 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 plan to move
the Medley facilitys operations to other plants operated by us located in
Haleyville, Alabama and Juarez, Mexico. The transition of the manufacturing
operations is expected to be 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. See Note 7 to the Unaudited Consolidated Financial
Statements for additional information. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003 The following table sets forth net sales, gross profit and gross profit as a
percent of net sales for the three months ended June 25, 2004 and June 27, 2003
for each of our market channels (in thousands, except for percentages): (Unaudited)Three Months EndedJune 25, 2004
    
    June 27, 2003Net
    
    Gross
    
    Gross
    
    Net
    
    Gross
    
    GrossSales
    
    Profit
    
    Profit %
    
    Sales
    
    Profit
    
    Profit %Retail
    
    $
    49,465
    
    
    $
    15,497
    
    
    
    31.3
    %
    
    $
    54,332
    
    
    $
    13,571
    
    
    
    25.0
    %Contract
    
    
    34,912
    
    
    
    9,452
    
    
    
    27.1
    %
    
    
    35,241
    
    
    
    12,501
    
    
    
    35.5
    %Total
    
    $
    84,377
    
    
    $
    24,949
    
    
    
    29.6
    %
    
    $
    89,573
    
    
    $
    26,072
    
    
    
    29.1
    %
 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 EndedJune 25,
    
    June 27,(In thousands)
    
    2004
    
    2003Gross profit
    
    
    29.6
    %
    
    
    29.1
    %Selling, general and administrative expense
    
    
    18.9
    %
    
    
    13.5
    %Amortization
    
    
    1.2
    %
    
    
    0.9
    %Operating income
    
    
    9.5
    %
    
    
    14.7
    %Interest expense
    
    
    18.6
    %
    
    
    9.5
    %Income tax provision
    
    
    0.0
    %
    
    
    1.8
    %Net (loss) income
    
    
    (9.1
    %)
    
    
    3.4
    %
 16




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##### Table of Contents



COMPARISON OF THREE MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003 (continued) Net Sales.Consolidated net sales of $84.4 million in the second quarter of
2004 were $5.2 million or 5.8% lower than net sales for the same period in
2003. The decline in net sales in the second quarter of 2004 as compared to
the same period in the prior year was attributable to the retail business.
Within the retail business, the $4.9 million decrease in net sales in the 2004
period as compared to the same period in the prior year was attributable to
lower sales to national accounts of $11.4 million, largely due to pricing
pressures and our primary customer reducing inventory levels. The decrease in
sales to national accounts in the 2004 period was partially offset by a $ 6.5
million or 21.9% increase in shipments to specialty retail stores in the second
quarter of 2004 versus the same period in 2003, largely due to the favorable
impact of our expanded product offerings, including cast, woven and wrought
iron products, the significant redesign of Winston branded products and the
introduction of the Tommy Bahama brand, as well as improved economic conditions
in the marketplace. Contract net sales of $34.9 million for the second quarter
of 2004 were relatively consistent with net sales of $35.2 million in the same
period in 2003. Gross Profit. Gross profit in the second quarter of 2004 of $24.9 million
decreased $1.1 million or 4.3% as compared to gross profit of $26.1 million in
the second quarter of 2003. Gross profit as a percentage of net sales of 29.6%
for the 2004 period represents a slight improvement over the gross profit as a
percentage of net sales for the 2003 period of 29.1%. The overall decrease in
gross profit in the second quarter of 2004 was primarily attributable to the
contract business which experienced a $3.1 million decrease in gross margin
largely as a result of the recording of a $1.3 million charge for the closing
of the Medley Facility (Note 7 to the Unaudited Consolidated Financial
Statements) and, to a lesser extent, increased warranty related costs. Gross
profit improvements of $1.9 million in the retail business during the second
quarter of 2004 as compared to the same quarter in the prior year nearly offset
the decline in gross profit in the contract business. The improvements in the
retail business during the 2004 period were driven by favorable volume and
product mix within the business, partially offset by (i) a $0.3 million charge
relating to the closing of the Medley Facility, (ii) pricing pressures, and
(iii) additional allowances relating to our primary customer in the national
accounts business. Selling, General and Administrative Expenses. Selling, general and
administrative expenses (SG&A) for the second quarter of 2004 were $16.0
million, representing a $3.9 million, or 31.8% increase compared to the second
quarter of 2003. The increase in SG&A spending was primarily driven by (i)
approximately $1.0 million of reversals of reserves no longer needed in the
2003 period, largely related to bad debt reserves, (ii) increased bad debt
reserves of $0.5 million in the 2004 period, (iii) higher spending for legal
and professional services of $0.5 million, (iv) increased costs for design
royalties and advertising for the Tommy Bahama brand of $0.4 million, (v)
higher advertising costs related to collateral materials due to the product
line expansion of $0.2 million and (vi) higher commission expense of $0.2
million as a result of the higher levels of specialty retail sales. Amortization. Amortization expense of $1.0 million in the second 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
$13.2 million in the second quarter of 2003 (14.7% of net sales) to $8.0
million (9.5% of net sales) in the same period of 2004. Interest Expense. Interest expense increased $7.2 million in the second quarter
of 2004 to $15.7 million from $8.5 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 entering into new financing
arrangement in March 2004. See Notes 5 and 6 to the Unaudited Consolidated
Financial Statements. Benefit for Income Taxes. There are no income taxes reflected for the second
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 second quarter of
2004, because we believe it is unlikely such benefit will be realized. 17




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COMPARISON OF SIX MONTHS ENDED JUNE 25, 2004 AND JUNE 27, 2003 The following table sets forth net sales, gross profit and gross profit as a
percent of net sales for the six months ended June 25, 2004 and June 27, 2003
for each of our market channels (in thousands, except for percentages): (Unaudited)Six Months EndedJune 25, 2004
    
    June 27, 2003Net
    
    Gross
    
    Gross
    
    Net
    
    Gross
    
    GrossSales
    
    Profit
    
    Profit %
    
    Sales
    
    Profit
    
    Profit %Retail
    
    $
    128,431
    
    
    $
    26,226
    
    
    
    20.4
    %
    
    $
    133,923
    
    
    $
    26,218
    
    
    
    19.6
    %Contract
    
    
    59,440
    
    
    
    16,529
    
    
    
    27.8
    %
    
    
    58,752
    
    
    
    18,956
    
    
    
    32.3
    %Total
    
    $
    187,871
    
    
    $
    42,755
    
    
    
    22.8
    %
    
    $
    192,675
    
    
    $
    45,174
    
    
    
    23.4
    %
 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)Six Months EndedJune 25,
    
    June 27,(In thousands)
    
    2004
    
    2003Gross profit
    
    
    22.8
    %
    
    
    23.4
    %Selling, general and administrative expense
    
    
    15.7
    %
    
    
    13.4
    %Amortization
    
    
    1.0
    %
    
    
    0.8
    %Operating income
    
    
    6.1
    %
    
    
    9.3
    %Interest expense
    
    
    13.3
    %
    
    
    9.1
    %Income tax provision
    
    
    0.0
    %
    
    
    0.1
    %Net (loss) income
    
    
    (7.2
    %)
    
    
    0.1
    %
 Net Sales.Consolidated net sales of $187.9 million in the first six months of
2004 were $4.8 million lower than the same period in 2003. The decline in net
sales during the first six 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 $0.7 million or 1.2%, in the contract business. Within the
retail business, the year over year decline in net sales of $5.5 million was
attributable to sales to national accounts, largely due to pricing pressures,
the result of our primary customer reducing inventory levels and due to
increases in advertising allowances. Partially offsetting the decrease in
national account sales was a 28.5% increase in shipments to retail specialty
stores in the first six months of 2004 compared to the first six months of
2003. Approximately half 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 and Tommy
Bahama branded product. Of the remaining specialty retail net sales increase,
over half resulted from growth in the industry, with the balance of the
improvement resulting predominately from expanded distribution within existing
customers, resulting from new product development and our Elegant Outdoors
initiative. Contract sales of $59.4 million for the first six months of 2004
increased slightly over net sales of $58.8 million in the same period in 2003. Gross Profit. Gross profit in the first six months of 2004 of $42.8 million
represents a decrease of $2.4 million or 5.4% as compared to gross profit of
$45.2 million in the same period in 2003. Gross profit as a percentage of net
sales of 22.8% for the 2004 period represents a slight decline over the gross
profit as a percentage of net sales for the 2003 period of 23.4%. The overall
decrease in gross profit during the first six months of 2004 was attributable
to the contract business, which experienced a $2.4 million decrease in gross
margin. This decrease in gross profit in the contract business was largely due
to (i) the recording of a $1.3 million charge for the closing of the Medley
Facility, (ii) the reversal of $0.5 million of reserves no longer needed in the
2003 period related to inventory and warranty, (iii) unfavorable mix of product
sales and (iv) increased warranty related costs in the 2004 period. Gross
profit in the retail business for the first six months of 2004 of $26.2 million
was consistent with the same period in the prior year. Within the retail
business, higher gross profit from sales to specialty retail stores in the
first six months of 2004 as compared to the same period in the prior year
driven by (i) increased sales, (ii) volume 18




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driven favorable manufacturing variances and a favorable product mix, were
offset by lower gross profit from sales to national accounts and the recording
of a $0.3 million charge relating to the closing of a manufacturing facility in
the 2004 period. The lower gross margin on national account sales is primarily
attributable to pricing pressures and additional allowances. Selling, General and Administrative Expenses. SG&A expenses for the first six
months of 2004 were $29.5 million, representing a $3.7 million, or 14.3%
increase compared to SG&A expenses during the same period in 2003. The
increase in SG&A spending was driven by (i) approximately $1.0 million of
reversals of reserves no longer needed in the 2003 period, largely related to
bad debt reserves, (ii) higher commission expense of $0.7 million as a result
of the higher levels of specialty retail sales, (iii) increased bad debt
reserves in the 2004 period of $0.5 million, (iv) higher spending for legal and
professional services of $0.3 million, (v) increased costs for design royalties
and advertising for the Tommy Bahama brand of $0.5 million, and (vi) higher
advertising costs related to collateral materials of $0.4 million due to the
product line expansion. These increases were partially offset by lower costs
associated with sales promotions. Amortization. Amortization expense of $1.8 million in the first six 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
$17.9 million in the first six months of 2003 (9.3% of net sales) to $11.5
million (6.1% of net sales) in the same period of 2004. Interest Expense. Interest expense increased $7.4 million in the first six
months of 2004 to $25.0 million from $17.6 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. Benefit for Income Taxes. There are no income taxes reflected for the first
six 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 six months of
2004, because we believe it is unlikely such benefit will be realized. 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 January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial Statements. FIN 46
addresses the consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications to FIN 46
(Revised Interpretations) resulting in multiple effective dates based on the
nature and creation date of the VIE. The Revised Interpretations must be
applied to all VIEs no later than the end of the first interim or annual
reporting period ending after March 15, 2004. However, prior to the required
application of the Revised Interpretations, its provisions must be adopted by
the end of the first interim or annual reporting period that ends after
December 15, 2003 (for the year ended December 31, 2003 for us) for VIEs
considered to be special purpose entities (SPEs). SPEs for this provision
include any entity whose activities are primarily related to securitizations or
other forms of asset-backed financings or single-lessee leasing arrangements.
We do not have any SPEs. We have completed our evaluation of the effect of
adopting FIN 46 and we have concluded that there will be no impact on our
financial position, results of operations and cash flows. Also see Note 4 to
the Unaudited Consolidated Financial Statements for additional discussion. 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 19




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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 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 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 in the Unaudited Notes to 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 June 25, 2004, the interest rate on the outstanding balance under
the Revolver was 3.75% and was based on the Eurodollar Rate. As of June 25,
2004, we had availability of $13.8 million and cash on hand of $3.1 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 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. Fees associated with
the letters of credit are equal to the Bank Prime Loan Rate per year based upon
the face amount of the letters of credit. As of June 25, 2004, the Company had
$7.2 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 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, we are 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. 20




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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, which
interest payment 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 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 June 25, 2004, the interest rate on the outstanding balance was 10.11%. 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. 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 $4.9 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 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. Cash Flows from Operating Activities. During the first six months of 2004, cash
provided from operating activities was $21.3 million, compared to $21.0 million
for the same period of 2003. During the first six months of 2004, net cash
flow provided from accounts receivable, inventories and accounts payable was
approximately $2.2 million lower than the same period in 2003. Cash provided
from a reduction of accounts receivable was approximately $2.0 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 $3.1 million less cash was required for inventory
purchases largely due to the timing of purchase. 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 21




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(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 offset by an increase in
the use of cash to reduce accounts payable during the 2004 period. During the
six months ended June 25, 2004, we used approximately $7.0 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 $7.0 million in the 2004 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, and (iv)
decreases in the bonus accrual in the 2003 period resulting from the payment of
the bonus earned during 2002. Cash Flows from Investing Activities. During the first six months of 2004
investing activities consisted of capital expenditures of $0.5 million. During
the same period in 2003, we spent $1.0 million on capital expenditures and sold
several non-core assets, which generated proceeds of $0.9 million, resulting in
a small amount of cash used by investing activities. Capital spending in the
first six months of 2004 and 2003 was primarily for replacement machinery and
equipment. Cash Flows from Financing Activities. Net cash provided by financing activities
during the first six months of 2004 was $19.6 million compared to $27.4 million
for the same period of 2003. As discussed above under New Financings, 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 $4.9 million. We
also paid $0.9 million for legal and other professional fees during the 2004
period related to our former senior credit facility. During the first six
months of 2003, we made scheduled term loan principal payments of $4.4 million
and had net borrowings of $23.1 million against the revolving line of credit,
resulting in cash flow from financing activities of $27.4 million. ADEQUACY OF CAPITAL RESOURCES We believe that the structure of the new financings will provide additional
liquidity to support growth of the businesses, as well as provide increased
flexibility resulting from having no expected financial covenants or senior
debt amortization for the next three years. 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 will
continue to be adequate for the foreseeable future. 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 $13 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 ($4.9 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. We anticipate capital needs through 2004 will
consist primarily of the following: (i) interest payments due on outstanding
borrowings, (ii) increases in working capital driven by the growth of our
business, and (iii) the financing of capital expenditures. Aggregate capital expenditures are forecasted to be $1.2 million in 2004,
approximately $0.5 million of which was expended during the six months ended
June 25, 2004. RELATED PARTY TRANSACTIONS In December 1994, we entered into a ten-year agreement (the Investment
Services Agreement) with Trivest. Pursuant to the Investment Services
Agreement, Trivest provides corporate finance, financial relations, strategic
and capital planning and other management advice to us. The Investment
Services 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 June 25, 2004 and June 27,
2003, the amount expensed in selling, general and administrative expense was
$280,000, and $385,000, respectively. 22




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On March 31, 2004, in connection with our new financing arrangements, the
Investment Services 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
Investment Services 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. 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 six months ended June
25, 2004 we did not enter into foreign exchange forward contracts and there
were no contracts outstanding at June 25, 2004. We do not speculate in foreign
currency. Inflation has not had a significant impact on us in the past three years, and
management does not expect inflation to have a significant impact in the
foreseeable future. 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; 23




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
    
    the subordination of the Senior Subordinated Notes to the Revolver and Senior Notes, which are secured by substantially all
of our assets;
    
    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. 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. 
  ITEM 3.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The 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 Financial
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 Financial 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 Financial
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 Financial Officer,
there has been no change in our internal control over financial reporting
during the period ended June 25, 2004, identified in connection with that
evaluation, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. 24




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PART II 
  ITEM 6.
    EXHIBITS AND REPORTS ON FORM 8-K (a)
    
    
    10.1
    
    
    Second Amendment to Loan and Security Agreement entered into by and among Brown Jordan International, Inc., the
subsidiary guarantors and the Lenders and GMAC Commercial Finance LLC, as Agent for the Lenders, dated September
13, 2004.31.1
    
    
    Rule 13a-14(a) /15d-14(a) Certification of Principal Financial Officer32.1
    
    
    Section 1350 Certification of Principal Financial Officer
 25




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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: October 8, 2004
    By:

/s/ Vincent A. TortoriciVincent A. TortoriciChief Financial Officer 26