UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

For the quarterly period ended

September 24, 2004

For the transition period from ____to___

Commission file number 33-85476

BROWN JORDAN INTERNATIONAL, INC.

1801 NORTH ANDREWS AVENUE, POMPANO BEACH, FLORIDA 33069
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:
(954) 960-1100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   x   No    o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   o   No    x

The number of shares of Common Stock, $.01 par value per share, of the registrant outstanding as of December 31, 2004 was 1,000. The registrant has no securities registered pursuant to Sections 12(b) or 12(g) nor are any securities listed or trading on any market. The registrant files periodic reports under the Securities Exchange Act of 1934 solely to comply with requirements under that certain Indenture related to the 12 3/4% Senior Subordinated Notes Due 2007, as amended.

Brown Jordan International, Inc.

INDEX TO ITEMS

2

PART I

ITEM 1. FINANCIAL STATEMENTS

Brown Jordan International, Inc. and Subsidiaries

The accompanying notes are an integral part of these financial statements.

3

Brown Jordan International, Inc. and Subsidiaries

The accompanying notes are an integral part of these financial statements.

4

Brown Jordan International, Inc. and Subsidiaries

The accompanying notes are an integral part of these financial statements.

5

Brown Jordan International, Inc. and Subsidiaries

Note 1 — Business and Organization

Business

Brown Jordan International, Inc. (“BJI” or the “Company”) is engaged in the design, marketing, manufacture and distribution of outdoor furniture, ready-to-assemble (“RTA”) furniture, contract and hospitality seating products and site amenity products. The Company accesses the market through the retail and contract channels. In the retail channel, BJI’s furniture products are distributed through specialty stores, national accounts and traditional furniture stores. BJI’s RTA products include promotionally priced furniture products and are distributed through the retail channel to national accounts, catalog wholesalers and specialty retailers. BJI’s contract and hospitality furniture products are distributed through the contract channel to a customer base, that includes architectural design firms, restaurants and hospitality chains. Site amenity products, such as park benches, picnic tables and accessories, are marketed through distributors to the end user. The Company’s products are constructed of extruded and tubular aluminum, wrought iron, cast aluminum, expanded mesh, sheet and tubular steel, wood and fabric.

Organization

Prior to the 2001 acquisition of the entity formerly known as Brown Jordan International, Inc. (“Former Brown Jordan”), WinsLoew Furniture, Inc. (“WinsLoew”) completed a recapitalization transaction wherein WinsLoew became a wholly owned subsidiary of a new holding company called WLFI Holdings, Inc. (“Holdings”), a Florida corporation.

All shares of WinsLoew’s common stock that were outstanding immediately prior to the merger (850,497 shares) were converted into shares of common stock of Holdings. Each warrant or option to purchase shares of WinsLoew’s common stock was converted into a warrant or option to purchase an equivalent number of shares of common stock of Holdings. In addition, 1,000 shares of previously unissued WinsLoew common stock were then issued to WLFI Holdings, Inc. Affiliates of Trivest Partners, L. P. (“Trivest”) are majority shareholders of Holdings. Trivest and Holdings have certain common shareholders, officers and directors.

Because there was no change in the stock ownership of WinsLoew as a result of the recapitalization, there was no change in the basis of the Company’s assets or liabilities.

Note 2 — Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of Brown Jordan International, Inc. and subsidiaries are for interim periods and do not include all disclosures provided in the annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission. The Company closes each quarter on the last Friday of the calendar quarter, and its fiscal year on the last day of the year. There were 91 days in each of the fiscal quarters ended in September 24, 2004 and September 26, 2003, and 268 days for the nine month period ended September 24, 2004 as compared to 269 days for the same nine month period in the prior year.

All material intercompany balances and transactions have been eliminated. The preparation of the consolidated financial statements requires the use of estimates in the amounts reported. Actual results may differ from those estimates.

In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the results for the interim periods. The results of operations are presented for the Company’s three and nine month periods ended September 24, 2004 and September 26, 2003. The results of operations for these periods are not necessarily indicative of the results to be expected for the full year.

Reclassifications

Certain prior period balances have been reclassified to conform to current period presentation.

6

Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Note 2 — Summary of Significant Accounting Policies — (continued)

Stock Options

As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and its interpretations in accounting for its stock options and other stock-based employee compensation awards and the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the provisions of APB No. 25, no compensation expense has been recognized for stock option grants to employees, as the exercise prices are at or greater than the fair value of shares at the date of the grant. The fair value of the options was calculated using the minimum value methodology as allowed under SFAS No. 123 for companies that do not have publicly traded equity.

Pro forma impact on the Company’s results is as follows:

There were no stock options granted for the three and nine month periods ending in September 24, 2004 and September 26, 2003.

New Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued FAS 123(R) Share-Based Payment, that addresses the accounting for share-based payment transactions (for example, stock options and awards of restricted stock) in which an employer receives employee-services in exchange for equity securities of the company or liabilities that are based on the fair value of the company’s equity securities. This proposal, if finalized as proposed, would eliminate the use of APB No. 25, and generally would require such transactions be accounted for using a fair-value-based method and recording compensation expense rather than optional pro forma disclosure. This accounting standard will not have a material effect on the Company’s operations.

In March, 2004 the Financial Accounting Standards Board (FASB) approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Issue’s objective is to provide guidance for identifying other-than-temporarily impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-1 that delays the effective date of the measurement and recognition guidance in EITF 03-1 until after further deliberations by the FASB. This accounting standard will not have a material effect on the Company’s operations.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.

7

Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Note 2 — Summary of Significant Accounting Policies — (continued)

Income Taxes

The Company accounts for income taxes under the liability method pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to more likely than not be realizable in future periods.

Due to the recent losses recognized by the Company, a valuation allowance was recorded to offset the income tax benefit related to the net operating losses generated in 2004, because the Company believes it is more likely than not, that such benefit will not be realized. The Company will continue to review its ability to utilize such benefits and until such time as management determines that it is likely that these benefits will be realizable, the Company will continue to record the valuation allowances to offset any income tax benefits. The effective tax rate for the three and nine month periods ended September 26, 2003 was 35.4% and 33.3%, respectively.

Pursuant to a tax sharing agreement between Holdings and the Company and its subsidiaries, the Company was included in the consolidated federal income tax return and certain consolidated state income tax returns of Holdings for all taxable periods ended on or prior to December 31, 2002 and was included in the consolidated federal income tax return and certain consolidated state income tax returns for the year ended December 31, 2003.

Goodwill and Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), in order to test its carrying values for goodwill and other intangible assets on an annual basis to determine impairment. The Company has elected October 1 as the date for performance of its annual impairment tests on identified intangible assets with indefinite lives. Based on its recent historical operating results, the impairment testing as of October 1, 2004 could result in a significant adjustment to the carrying amounts of goodwill and trademarks. Prior to the publication of its annual report Form 10-K for the year ended December 31, 2004, the Company expects to conclude its testing for impairment on its goodwill and trademarks, each with a carrying value of $91.3 million and $25.3 million respectively, as of September 24, 2004.

Note 3 — Inventories

Inventories consist of the following:

Note 4 — Investment in Joint Venture

In December 2002, the Company entered into a joint venture with Shian Industry [Hong Kong] Company Limited (“Shian”) to build a research and design center and a model showroom in Shanghai, China. The facility, called the “Center of Excellence,” is dedicated exclusively to BJI products. The Center of Excellence became fully operational as of the beginning of the second quarter of 2004.

The Company has determined that its investment in the joint venture does not meet the criteria set forth in FIN 46 such that consolidation of the results of operations and assets and liabilities of the joint venture with the Company’s results would be required; accordingly, the joint venture is accounted for using the equity method of accounting. The carrying value of the investment in the joint venture was $0 as of September 24,

8

Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Note 4 — Investment in Joint Venture — (continued)

2004 and December 31, 2003. BJI’s share of the joint venture losses and an investment in the joint venture are not recorded in the accompanying Unaudited Consolidated Financial Statements as BJI has not made a capital investment in the joint venture and is not required to provide current or future funding. In November, 2004 the Company announced that this joint venture and any agreements and obligations relating to it were terminated.

Note 5 — Long-Term Debt

New Financing Arrangements

On March 31, 2004, the Company entered into new financing arrangements that consist of a (i) Loan and Security Agreement (“Revolver”), a $90.0 million asset based revolving credit facility with new lenders and (ii) $135.0 million Senior Secured Notes due May 1, 2007 (“Senior Notes”) with other lenders. Proceeds under these two new facilities were used to (i) repay all outstanding balances under the Company’s former senior credit facility, which was terminated on March 31, 2004, (ii) pay all former indebtedness to Trivest, including an advance by Trivest for the interest payment to the holders of the Company’s senior subordinated notes ($6.9 million), a payment of $3.5 million to the former lenders under the then former senior credit facility by Trivest with related fees and interest ($3.9 million in total), financial advisors’ fees ($0.8 million) and management fees accrued as of December 31, 2003, as well as fees earned and accrued through March 31, 2004 ($0.5 million in total), (iii) pay interest rate swap termination fees, and (iv) pay fees and expenses relating to the new financing transactions. Upon the closing of the transactions, $189.2 million ($54.2 million under the Revolver and $135.0 million under the Senior Notes) was drawn under the new facilities. The Company had been operating under a forbearance agreement with its former lenders as of January 9, 2004 that, as amended, provided for a forbearance period through March 31, 2004, while the new financing was arranged.

The termination of the former senior credit facility resulted in the write-off of deferred financing fees of $4.9 million and the settlement of the obligation for the interest rate swap (Note 6) in the quarter ended June 25, 2004. The write-off of deferred financing fees is included in “Interest expense, net” in the accompanying Unaudited Consolidated Statements of Operations.

The Revolver

The Revolver’s availability is based on a borrowing base consisting of the Company’s eligible accounts receivable and inventories. The interest rate on borrowings under the Revolver is based on the base rate (which is defined as a variable rate of interest per annum equal to the highest of the prime rate, reference rate, base rate or other similar rate as determined by the lender) plus 0.25% per year (the “Bank Prime Loan Rate”), or at the election of the Company, the applicable London Interbank Offering Rate (“LIBOR”) plus 2.25% per year (the “Eurodollar Rate”). The Company also pays an unused facility fee equal to 0.375% per annum on the average unused daily balance of the Revolver. Borrowings under the Revolver are secured by a first priority lien on substantially all of the Company’s accounts receivable, inventories, fixed assets and intangible assets. The Revolver contains a $10.0 million swing-line sub-facility (“Swing-Line”), which accrues interest at the Bank Prime Loan Rate per year. The Revolver terminates on May 1, 2007, unless terminated earlier by the Company. A termination fee of $0.9 million will be due to the lenders if the Company elects to terminate prior to March 31, 2005. As of September 24, 2004, the interest rate on the outstanding balance under the Revolver of $23.6 million was 5.0% and was based on the Bank Prime Loan Rate. As of September 24, 2004, the Company had availability under the Revolver of $12.2 million and cash on hand of $1.7 million.

The Revolver also provides for a $15.0 million letter of credit sub-facility. The aggregate amount of such letters of credit may not exceed the lesser of (i) $15.0 million, (ii) an amount equal to the $90.0 million aggregate commitment under the Revolver less the aggregate outstanding principal balance of the Revolver and Swing-Line or (iii) the borrowing base less the aggregate outstanding principal balance of the Revolver and Swing-Line. However, the letters of credit with respect to any of the Company’s business segments (as defined in the Revolver) may not exceed the sum of (i) the outstanding Revolver advances and Swing-Line loans to such business segment plus (ii) the outstanding letters of credit to exceed such business unit’s borrowing base. Fees associated with the letters of credit are equal to the Eurodollar Rate margin per year based upon the face amount of the letters of credit. As of September 24, 2004, the Company had $7.0 million of letters of credit outstanding, primarily related to insurance programs and collateralization of an industrial development obligation.

The Revolver contains customary covenants and restrictions on the Company’s and its subsidiaries’ ability to issue additional debt or engage in certain activities and certain affirmative covenants, including, but not limited to, reporting requirements. The Revolver, prior to the amendment on September 13, 2004, specified that the Company must maintain a minimum of $5.0 million available borrowing capacity at all times, and provided that the Company maintain a minimum of $9.0 million of

9

Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Note 5 — Long-Term Debt — (continued)

available borrowing capacity. The Revolver did not require compliance with financial covenants. The amendment on September 13, 2004 specifies that if availability falls below $9.0 million on or after December 31, 2004 and for any three consecutive business days during such month then ended, the Company is subject to a fixed charge ratio. The Revolver also contains events of default customary for credit agreements of this type, including failure to pay interest or principal when due and cross-default provisions relating to the Company’s other indebtedness in excess of $1.5 million. In the event of default and during the continuation thereof, borrowings under the Revolver will bear interest, at the option of the lender, at the then current Bank Prime Loan Rate plus 2.00% per annum or at the Eurodollar Rate plus 2.00% per annum.

The Revolver includes both a subjective acceleration clause and a lockbox arrangement that requires all lockbox receipts be used to repay revolving credit borrowings. The balance outstanding under the Revolver as of September 24, 2004 of $23.6 million has been classified as “Current portion of long-term debt” in the accompanying Unaudited Consolidated Balance Sheet, in accordance with the provisions of Emerging Issues Task Force Issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding Under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lockbox Arrangement.” The $40.9 million balance of the revolver outstanding under the former senior credit facility as of December 31, 2003 was classified as current as the Company expected to refinance the former senior credit facility.

As mentioned in Note 13 to the Unaudited Consolidated Financial Statements, the Company amended its Revolver agreement on December 30, 2004.

Senior Notes

The Senior Notes, which mature May 1, 2007, bear interest at a rate of LIBOR plus 9.0% per annum, reset quarterly. The Company pays interest in arrears on each March 31, June 30, September 30 and December 31 and on the maturity date, with interest payments commencing June 30, 2004. The Senior Notes are secured by a second priority lien on all of the Company’s accounts receivable, inventories, fixed assets and intangible assets and a first priority lien on the Company’s capital stock as well as the capital stock of all of the Company’s domestic subsidiaries. The Senior Notes are guaranteed by all of the Company’s domestic subsidiaries (the “Guarantors”). The Guarantors have fully, unconditionally, jointly and severally guaranteed the Company’s obligations under the Senior Notes. The Company’s subsidiaries other than the Guarantors are minor within the meaning of Rule 3-10(h)(6) of Regulation S-X of the Securities and Exchange Commission, and the Company has no independent assets or operations within the meaning of Rule 3-10(h)(5) of Regulation S-X. Holdings’ pledge of the Company’s stock is non-recourse to Holdings. As of September 24, 2004, the interest rate on the outstanding balance was 10.59%.

     The Company may redeem, at its option, the Senior Notes, in whole or in part, from time to time after March 31, 2005 at the applicable redemption price as set forth below:

In addition, the Company may, at its option, elect on one occasion occurring on or prior to the 60 days following the completion of the Company’s audit for the year ended December 31, 2004 (but in any event, no later than June 30, 2005), to redeem at a redemption price of 100% of the principal amount thereof, plus accrued interest, a principal amount of the Senior Notes, not to exceed the lesser of (i) 5.0% of the principal amount of the Senior Notes issued and (ii) the amount of excess cash flow (as defined in the agreement) for the year ended December 31, 2004. The ability to redeem Senior Notes in accordance with this provision is contingent on the requirement that (i) no default or event of default shall have occurred and be continuing at such time, and (ii) that the report of the Company’s independent auditors in respect of the year ended December 31, 2004 is an “unqualified” audit report.

The Senior Notes contain various covenants customary for notes of a similar nature, including limitations on the activities of the Company and its subsidiaries to, among other things, (i) declare or pay cash dividends, (ii) modify the capital structure, (iii) acquire or retire indebtedness that is subordinate to the Senior Notes, (iv) issue preferred stock, (v) create or assume any indebtedness, (vi) sell, transfer or assign its properties or assets other than in the ordinary course of business, (vii) create or assume liens, (viii) enter into sale and leaseback transactions, and (ix) engage in mergers or acquisitions. In addition, the Senior Notes contain affirmative covenants including, but not limited to maintenance of the Company’s properties and

10

Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Note 5 — Long-Term Debt — (continued)

reporting obligations. The Senior Notes also contain events of default customary for financing agreements of this type; including failure to pay interest on principal when due and cross-default provisions relating to the Company’s other indebtedness in excess of $5.0 million. In the event of default, holders of 33 1/3% or more in principal amount of the then outstanding Senior Notes may declare the principal amount of all of the Senior Notes due and payable immediately, by written notice to the Company, and upon such notice, such principal amount and any accrued and unpaid interest shall be immediately due and payable.

The Company paid $5.0 million in fees relating to the Revolver and the Senior Notes that will be amortized to interest expense
over the 37-month period beginning March 31, 2004.

Senior Subordinated Notes and Warrants

In connection with the merger described in Note 1, the Company issued 105,000 units (“Units”) consisting of $105 million aggregate principal amount at maturity of 12 3/4 % Senior Subordinated Notes due 2007 (“Notes”) and Warrants (“Warrants”) to purchase of 24,129 shares of capital stock. Each unit consists of $1,000 principal amount at maturity of Notes and a Warrant to purchase 0.2298 shares of common stock at an exercise price of $0.01 per share. The Warrants are exercisable on or after certain events. Assuming full exercise of the Warrants, the aggregate number of shares would approximate 2% of the common stock of Holdings. The Warrants expire on August 15, 2007.

The Indenture (“Indenture”) under which the Notes are issued include provisions generally common in such indentures including restrictions on dividends, additional indebtedness and asset sales. At December 31, 2003, the Company was in compliance with such covenants. However, the Company failed to make the scheduled semi-annual interest payment when due on February 15, 2004 ($6.9 million) and August 15, 2004 ($6.7 million). The Company subsequently made these interest payments within the cure period specified in the Notes and was in compliance with such covenants as of September 24, 2004.

In March 2004, the Indenture was amended to, among other things, increase the level of permitted indebtedness under the Amended Facility from an aggregate amount not to exceed the greater of $155 million, or the sum of $125 million, plus 60% of the inventory of the Company, plus 85% of the accounts receivable of the Company to an aggregate amount not to exceed $195 million, or the sum of $125 million, plus 60% of the inventory of the Company, plus 85% of the accounts receivable of the Company.

Senior Credit Facility (“Amended Facility”)

As of December 31, 2003 and continuing through March 31, 2004, the Company was not in compliance with certain provisions of its senior credit facility, including certain financial covenants contained within the agreement. These violations constituted events of default. On January 9, 2004, the Company entered into a forbearance agreement with its lenders under the senior credit facility that, as amended, (the “Amended Facility”) provided for a forbearance period through March 31, 2004 under which the senior lenders would not exercise certain rights and remedies that could result from the Company’s default. During the forbearance period, the Company arranged for new financing with new lenders and repaid the Amended Facility in full by March 31, 2004, as discussed above under “New Financing Arrangements.”

The Amended Facility provided for borrowings of up to $215 million. The Amended Facility was collateralized by substantially all of the assets of the Company and was secured by a pledge of the capital stock of all the Company’s domestic subsidiaries. The Amended Facility consisted of a revolving line of credit (maximum of $50 million) and a term loan (aggregate of $165 million). The revolving line of credit allowed the Company to borrow funds up to a certain percentage of eligible inventories and accounts receivable. At the option of the Company, the interest rates under the Amended Facility were either: (1) the base rate, which was the higher of the prime lending rate or 0.5% in excess of the federal funds effective rate, plus a margin, or (2) the adjusted LIBOR rate plus a margin. The Amended Facility contained a floor of 2.5% on the LIBOR rate. The margins of different loans under the Amended Facility varied according to a pricing grid. The margin for term loans that were LIBOR based was 5.0% while the margin for revolving loans that were LIBOR based was 4.5%. Both LIBOR based term and revolving rates were based upon the Company’s consolidated total leverage ratio. Margins on base rate loans were the applicable LIBOR margin for such type loans less 1.0%. The Amended Facility contained a $5.0 million swing-line sub-facility, which accrued interest at the base rate per year. As of March 31, 2004, the Amended Facility was paid in full. The Company also paid commitment fees at a rate per annum equal to 0.5% on the average daily excess of revolving loan commitments over the sum of the aggregate principal amount of outstanding revolving loans (but not any outstanding swing line loans) plus letter of credit usage.

11

Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Note 5 — Long-Term Debt — (continued)

Under a Guaranty between the senior bank group and Trivest, Trivest agreed to advance to the Company up to $13.4 million in respect of the Company’s obligations in 2003 to pay interest on the Company’s Senior Subordinated Notes indebtedness. A Reimbursement Agreement obligated the Company to reimburse Trivest for any funds paid by Trivest pursuant to the Guaranty. As of December 31, 2003, the Guaranty was called upon by the senior bank group. Trivest made a payment of $3.5 million to the lenders under the Amended Facility on the Company’s behalf. The Company repaid Trivest the $3.5 million, plus related fees and interest of $0.4 million out of proceeds from the new financings, as discussed above under New Financing Arrangements. With the pay off of the Amended Facility this Guaranty was terminated.

Note 6 — Interest Rate Swap

On August 6, 2001, the Company entered into an interest rate swap agreement to fix the interest rate on $100 million principal amount of variable rate debt outstanding under the Amended Facility. The interest rate swap was designed to fix the adjusted LIBOR interest rate on $100 million at 5.09% through March 31, 2004 and on $80 million from March 31, 2004 to March 31, 2005.

On March 31, 2004, the interest rate swap agreement was terminated in connection with the Company’s new financing arrangements (See Note 5 to the Unaudited Consolidated Financial Statements). As a result of the termination of this contract, the Company settled its obligation for the interest rate swap with a cash payment of $4.2 million, which represented the fair value of the interest rate swap of $3.3 million and accrued interest of $0.9 million. The obligation for the interest rate swap was included in “Other accrued liabilities” in the accompanying Consolidated Balance Sheet. In addition, in connection with the termination of the interest rate swap, the Company recognized in “Interest expense, net” in the accompanying Unaudited Statement of Operations, $2.4 million that was included in “Other comprehensive income” related to the change in the fair value of the effective portion of the interest rate swap.

As of September 26, 2003, the fair value of the swap was recorded as a liability of $4.8 million. The portion of the change in fair value attributable to the ineffectiveness of the hedge is recorded in the accompanying statement of operations as “Interest expense, net” and was a reduction in interest expense of $0.7 million during the nine month period ended September 26, 2003. The balance of the change in fair value of $0.9 million during the nine month period ended September 26, 2003 is recorded in “Other comprehensive loss”, net of tax.

Note 7 — Consolidation of Manufacturing Operations

In May 2004, the Company announced its intention to close its manufacturing facility located in Medley, Florida. The Medley facility manufactures furniture products for both the Retail and Contract operating segments. The Company moved the Medley facility’s operations to other Company plants located in Haleyville, Alabama and Juarez, Mexico. The transition of the manufacturing operations was substantially completed by September 2004. This initiative resulted in the elimination of approximately 120 positions; all of these positions were eliminated by September 30, 2004. As a result of this initiative, the Company recorded charges of $1.6 million in the second quarter for (i) severance and other employee related costs ($0.3 million), (ii) a $0.1 million charge for inventory that will no longer be required as a result of the facility consolidation and (iii) $1.2 million in leasehold and equipment impairment, resulting from the write down to their estimated net realizable value. In September 2004, the Company recorded an obligation of $2.2 million related to the ultimate disposition of the operating lease for the building at the Medley facility. In total, as of September 24, 2004, the total obligations recorded for the closing and restructuring of the Medley facility were $2.4 million, of which $1.2 million was short term and $1.2 million long term. See Note 12 to the Unaudited Consolidated Financial Statements for more information.

The Company incurred costs of approximately $0.4 million during the third quarter for labor and freight expenses associated with relocating inventory to the Haleyville and Juarez facilities and for costs associated with cleaning up the facility once vacated. The Company expects to incur an additional $0.2 million in restructuring expense in the fourth quarter of fiscal 2004.

The cost associated with the closing of the Medley Facility was recorded as follows (in thousands):

12

Brown Jordan International, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements

Note 7 — Consolidation of Manufacturing Operations-(continued)