<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended May 30, 1999.
or
[ ] 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: 333-67975
ALBECCA INC.
(Exact name of registrant as specified in its charter)
GEORGIA 39-1389732
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3900 Steve Reynolds Boulevard, Norcross, Georgia 30093
(Address of principal executive offices) (Zip Code)
(770) 279-5210
(Registrant's telephone number, including area code)
Indicate by checkmark 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 .
1
<PAGE> 2
ALBECCA INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of August 30, 1998 (audited)
and May 30, 1999 (unaudited)................................................................ 3
Consolidated Statements of Operations
for the three and nine months ended
May 31, 1998 (unaudited) and May 30, 1999 (unaudited)....................................... 4
Consolidated Statements of Cash Flows
for the nine months ended
May 31, 1998 (unaudited) and May 30, 1999 (unaudited)....................................... 5
Notes to the Consolidated Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.............................................................. 20
Signatures...................................................................................................... 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALBECCA INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
August 30, May 30,
1998 1999
--------- ---------
(unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 54,884 $ 40,474
Accounts receivable, less allowances for doubtful accounts of
$5,859 and $6,658 at August 30, 1998 and May 30, 1999 50,785 51,891
Inventories 75,819 72,607
Other current assets 7,024 8,267
--------- ---------
Total current assets 188,512 173,239
PROPERTY, PLANT and EQUIPMENT, net 61,758 58,206
OTHER LONG-TERM ASSETS 55,652 55,719
--------- ---------
$ 305,922 $ 287,164
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 35,205 $ 28,931
Accounts payable 28,165 25,580
Accrued liabilities 27,992 34,708
--------- ---------
Total current liabilities 91,362 89,219
--------- ---------
LONG-TERM DEBT, less current maturities 227,564 218,338
--------- ---------
OTHER LONG-TERM LIABILITIES 12,640 11,149
--------- ---------
SHAREHOLDERS' DEFICIT:
Preferred Stock -- --
Class A common stock 4 4
Class B common stock 166 166
Additional paid-in capital 7,326 7,326
Accumulated deficit (24,029) (27,834)
Cumulative foreign currency translation adjustment (9,111) (11,204)
--------- ---------
Total shareholders' deficit (25,644) (31,542)
--------- ---------
$ 305,922 $ 287,164
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE> 4
ALBECCA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -------------------------
May 31, May 30, May 31, May 30,
1998 1999 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 93,055 $ 96,224 $ 292,869 $ 297,523
Cost of sales 52,749 55,765 167,442 170,272
-------- -------- --------- ---------
Gross profit 40,306 40,459 125,427 127,251
Operating expenses 31,619 33,932 98,386 105,770
Restructuring charges -- 1,245 -- 1,491
-------- -------- --------- ---------
Operating income 8,687 5,282 27,041 19,990
Interest income -- (604) -- (1,623)
Interest expense 2,759 6,245 7,472 19,914
-------- -------- --------- ---------
Income (loss) before provision for
income taxes, minority interest
and extraordinary item 5,928 (359) 19,569 1,699
Provision for income taxes 865 539 2,575 1,849
Minority interest 19 107 377 355
-------- -------- --------- ---------
Income (loss) before extraordinary
item 5,044 (1,005) 16,617 (505)
Extraordinary gain on retirement
of debt, net of income taxes -- 1,008 -- 1,008
-------- -------- --------- ---------
Net income $ 5,044 $ 3 $ 16,617 $ 503
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
ALBECCA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
May 31, May 30,
1998 1999
--------- ---------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 16,617 $ 503
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 377 355
Depreciation and amortization 5,723 6,619
Loss on disposal of property, plant and equipment 16 483
Extraordinary gain on retirement of debt -- (1,008)
Changes in operating assets and liabilities:
Accounts receivable (2,942) (2,704)
Inventories 2,224 1,876
Other current assets (1,443) (1,001)
Accounts payable (5,803) (1,745)
Accrued liabilities 424 8,990
Other (623) (1,632)
--------- ---------
Net cash provided by operating activities 14,570 10,736
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,642) (4,520)
Acquisitions of businesses, net (28,062) (3,594)
Proceeds from sales of property, plant and equipment 404 1,624
Changes in other long-term assets (939) (822)
--------- ---------
Net cash used in investing activities (35,239) (7,312)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities 83,372 26,679
Repayments of revolving credit facilities (50,673) (25,411)
Proceeds from long-term debt 13,318 14,486
Repayments of long-term debt (13,213) (27,490)
Distributions to shareholders (10,300) (4,308)
--------- ---------
Net cash provided by (used in) financing activities 22,504 (16,044)
--------- ---------
EFFECT OF EXCHANGE RATE ON CASH (441) (1,790)
--------- ---------
NET INCREASE (DECREASE) IN CASH 1,394 (14,410)
Cash and cash equivalents at beginning of period 5,301 54,884
--------- ---------
Cash and cash equivalents at end of period $ 6,695 $ 40,474
========= =========
SUPPLEMENTAL INFORMATION:
Interest paid $ 7,853 $ 14,969
========= =========
Income taxes paid $ 2,109 $ 2,531
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. INTERIM FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Albecca
Inc. ("Albecca", the "Company") and its subsidiaries. Through June 25, 1998,
Albecca Inc. and Larson-Juhl International LLC were owned and controlled by the
same shareholders. Effective June 26, 1998, the members of Larson-Juhl
International LLC contributed their respective equity interests to Albecca Inc.,
whereby Larson-Juhl International LLC became a wholly owned subsidiary of the
Company. The combination has been treated in a manner similar to a
pooling-of-interests, and as such, the accompanying consolidated financial
statements have been restated to include the financial statements of Larson-Juhl
International LLC for all periods presented.
The unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, the unaudited interim consolidated financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair presentation have been included. On
a quarterly basis, the Company's results may vary. The results of operations for
any interim period are not necessarily indicative of the results of operations
to be expected for a full year. For further information, refer to the
consolidated financial statements and accompanying footnotes included in the
Company's Registration Statement on Form S-4 as declared effective by the SEC on
February 12, 1999.
Note 2. USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses reported in the consolidated financial statements. Actual
results could differ from those based upon such estimates and assumptions.
Note 3. INCOME TAXES
Albecca Inc. is an S corporation and two of its subsidiaries, Larson-Juhl
US LLC, and Larson-Juhl International LLC, are limited liability companies. Each
is treated as a pass-through entity under the Internal Revenue Code. They are
not subject to federal and certain state income taxes. As a result, the related
taxable income is included in the tax returns of the shareholders and members of
the respective companies. The Company makes distributions to shareholders to pay
their income tax obligations as a result of the Company's status as an S
corporation. The provision for income taxes included in the accompanying
consolidated financial statements primarily relates to certain state and foreign
income taxes.
Note 4. RESTRUCTURING CHARGES
In the third quarter ended May 30, 1999, the company initiated a
restructuring plan related to one of its facilities in Sweden and recorded a
restructuring charge to operations of $1,020,000. Management made the decision
to close this operation in Sweden because the facilities were deemed to be
duplicative. This charge included severance costs for 25 team members
approximating $275,000, a $700,000 write-down of the owned facility to the
estimated realizeable value on the future sale of the building, and other exit
costs, including post-closure maintenance and administration costs of $45,000.
As of May 30, 1999, the 25 team members remained at the facility to fill open
orders, sell remaining assets, collect existing accounts receivable and clean
up the facility in preparation for the closure. Management anticipates the plan
of closure will be completed prior to May 2000.
6
<PAGE> 7
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Additionally, during the third quarter ended May 30, 1999, the Company initiated
a plan to close its operation located in New Zealand, and recorded a charge of
$225,000 related to this closure. The plan to close the operation in New Zealand
was adopted following a series of under-performing quarters, at which time
management determined that the Company's resources, both financial and
managerial, could be more effectively invested in operations with a greater
potential return than in this region of the world. These costs primarily consist
of $48,000 in severance costs for 9 team members, $75,000 for the write-down of
machinery and equipment to its net realizable value for its future sale and
$102,000 of other exit costs, including lease terminations, post-maintenance and
other administration costs. Management anticipates the plan of closure will be
completed prior to September 1999.
Previously Reported Restructuring Plans (unaudited). During the quarter ended
May 30, 1999, with respect to the closure of the Company's plastic moulding
manufacturing operations in the United Kingdom, all 59 team members had been
terminated. The owned facility has been sold, resulting in no additional loss.
With respect to the closure of the Company's distribution operations in Greece,
as of May 30, 1999, 1 team member remained at the facility to complete the final
shut-down and administrative related activities.
With respect to the Company's closure of its duplicate facilities in the U.S.,
as of May 30, 1999, all 17 original team members had been terminated.
At May 30, 1999, as it relates to the Company's fiscal 1998 and 1999
restructuring plans, approximately $1,435,000 of restructuring charges remained
in accrued liabilities, representing severance and other termination costs of
approximately $421,000 and approximately $1,014,000 of lease termination and
other exit costs.
A summary of previously reported (unaudited) restructuring plans and activity
and restructuring plans adopted during the third quarter ended May 30, 1999
consists of the following estimated accrued future cash/non-cash requirements:
<TABLE>
<CAPTION>
CLOSURE OF THE UNITED KINGDOM
PLASTIC MOULDING MANUFACTURING Severance and
OPERATIONS: Write-down of other Lease
property and termination termination and
equipment benefits exit costs Total
------------- ------------- --------------- ---------
<S> <C> <C> <C> <C>
1998 Provision (fourth quarter) $ 359,000 $ 230,000 $ 881,000 $1,470,000
Non-cash 359,000 -- -- 359,000
------------- ------------- --------------- ---------
Cash -- 230,000 881,000 1,111,000
Fiscal 1998 cash activity -- (216,000) -- (216,000)
------------- ------------- --------------- ---------
Balance of accrual as of August 30, 1998 -- 14,000 881,000 895,000
First quarter 1999 cash activity (unaudited) -- (14,000) (34,000) (48,000)
------------- ------------- --------------- ---------
Balance as of November 29, 1998 (unaudited) -- -- 847,000 847,000
Second quarter 1999 cash activity (unaudited) -- -- (152,000) (152,000)
------------- ------------- --------------- ---------
Balance as of February 28, 1999 (unaudited) -- -- 695,000 695,000
Third quarter 1999 cash activity (unaudited) -- -- (70,000) (70,000)
------------- ------------- --------------- ---------
Balance as of May 30, 1999 (unaudited) $ -- $ -- $ 625,000 $ 625,000
============= ============= =============== =========
</TABLE>
7
<PAGE> 8
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CLOSURE OF OPERATIONS IN GREECE:
<TABLE>
<CAPTION>
Severance
and other
Write-off of termination
goodwill benefits Other exit costs Total
<S> <C> <C> <C> <C>
1998 Provision (fourth quarter) $ 333,000 $ 79,000 $ 104,000 $ 516,000
Non-cash 333,000 -- -- 333,000
------------- --------------- --------------- ------------
Cash -- 79,000 104,000 183,000
Fiscal 1998 cash activity -- -- -- --
------------- --------------- --------------- ------------
Balance of accrual as of August 30, 1998 -- 79,000 104,000 183,000
First quarter 1999 cash activity (unaudited) -- -- -- --
------------- --------------- --------------- ------------
Balance as of November 29, 1998 (unaudited) -- 79,000 104,000 183,000
Second quarter 1999 provision (unaudited) -- -- 129,000 129,000
Second quarter 1999 cash activity (unaudited) -- (70,000) -- (70,000)
------------- --------------- --------------- ------------
Balance as of February 28, 1999 (unaudited) -- 9,000 233,000 242,000
Third quarter 1999 cash activity (unaudited) -- -- -- --
------------- --------------- --------------- ------------
Balance as of May 30, 1999 (unaudited) $ -- $ 9,000 $ 233,000 $ 242,000
============= =============== =============== ============
</TABLE>
CLOSURE OF U.S. DUPLICATE FACILITIES:
<TABLE>
<CAPTION>
Severance
and other
termination
benefits Other exit costs Total
<S> <C> <C> <C>
1998 Provision (fourth quarter) $ 234,000 $ 42,000 $ 276,000
Non-cash -- -- --
------------ --------------- ---------
Cash 234,000 42,000 276,000
Fiscal 1998 cash activity -- (42,000) (42,000)
------------ --------------- ---------
Balance of accrual as of August 30, 1998 234,000 -- 234,000
First quarter 1999 provision (unaudited) -- 117,000 117,000
First quarter 1999 cash activity (unaudited) (86,000) (108,000) (194,000)
------------ --------------- ---------
Balance as of November 29, 1998 (unaudited) 148,000 9,000 157,000
Second quarter 1999 cash activity (unaudited) (43,000) -- (43,000)
------------ --------------- ---------
Balance as of February 28, 1999 (unaudited) 105,000 9,000 114,000
Third quarter 1999 cash activity (unaudited) (16,000) -- (16,000)
------------ --------------- ---------
Balance as of May 30, 1999 (unaudited) $ 89,000 $ 9,000 $ 98,000
============ =============== =========
</TABLE>
CLOSURE OF SWEDEN DUPLICATE FACILITIES:
<TABLE>
<CAPTION>
Severance
Write-down of and other Lease
property and termination termination and
equipment benefits exit costs Total
<S> <C> <C> <C> <C>
1999 Provision (third quarter) (unaudited) $ 700,000 $ 275,000 $ 45,000 $ 1,020,000
Non-cash 700,000 -- -- 700,000
------------- --------------- --------------- ------------
Cash -- 275,000 45,000 320,000
Third quarter 1999 cash activity (unaudited) -- -- -- --
------------- --------------- --------------- ------------
Balance as of May 30, 1999 (unaudited) $ -- $ 275,000 $ 45,000 $ 320,000
============= =============== =============== ============
</TABLE>
8
<PAGE> 9
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CLOSURE OF OPERATIONS IN NEW ZEALAND:
<TABLE>
<CAPTION>
Severance
Write-down of and other
property and termination
equipment benefits Other exit costs Total
<S> <C> <C> <C> <C>
1999 Provision (third quarter) (unaudited) $ 75,000 $ 48,000 $ 102,000 $ 225,000
Non-cash 75,000 -- -- 75,000
------------- --------------- --------------- ------------
Cash -- 48,000 102,000 150,000
Third quarter 1999 cash activity (unaudited) -- -- -- --
------------- --------------- --------------- ------------
Balance as of May 30, 1999 (unaudited) $ -- $ 48,000 $ 102,000 $ 150,000
============= =============== =============== ============
</TABLE>
Note 5. EXTRAORDINARY ITEM
In March, 1999, the Company retired a portion of its senior subordinated
notes with a face value of $9,250,000. The debt repurchase resulted in an
extraordinary gain of $1,008,000, net of state income taxes of $53,000.
Note 6. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 30, 1998 May 30, 1999
--------------- ------------
<S> <C> <C>
Raw materials $ 17,019 $ 14,199
Work in process 2,774 2,392
Finished goods 56,026 56,016
------------ ------------
$ 75,819 $ 72,607
============ ============
</TABLE>
Note 7. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Note 8. COMPREHENSIVE INCOME
Comprehensive income for the Company is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------
May 31, May 30, May 31, May 30,
1998 1999 1998 1999
------------- --------------- --------------- ------------
<S> <C> <C> <C> <C>
Net income, as reported $ 5,044 $ 3 $ 16,617 $ 503
Foreign currency translation
adjustments (383) (1,688) (2,203) (2,093)
------------- --------------- --------------- ------------
Total comprehensive income $ 4,661 $ (1,685) $ 14,414 $ (1,590)
============= =============== =============== ============
</TABLE>
9
<PAGE> 10
NOTE 9. COMMITMENTS
The company has entered into a commitment to build a new manufacturing
facility for $4.3 million. Completion of construction is expected to occur in
the fourth quarter of fiscal year 2000.
Note 10. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
These condensed consolidating financial statements reflect Albecca Inc.
and Subsidiary Guarantors, which consist of all of the Company's Wholly-Owned
Restricted Subsidiaries other than the foreign subsidiaries, as defined under
the Indenture dated August 11, 1998. These nonguarantor foreign subsidiaries are
herein referred to as "Subsidiary Nonguarantors." The subsidiary guarantee of
each Subsidiary Guarantor will be subordinated to the prior payment in full of
all senior debt of such Subsidiary Guarantor. Separate financial statements of
the Subsidiary Guarantors are not presented because the Subsidiary Guarantees
are joint and several and full and unconditional and the Company believes the
condensed consolidating financial statements presented are more meaningful in
understanding the financial position of the Subsidiary Guarantors and the
separate financial statements are deemed not material to investors.
On August 2, 1998, the operating assets of Albecca Inc. were contributed
to a wholly owned subsidiary of Albecca Inc. This subsidiary, Larson-Juhl US
LLC, became a Subsidiary Guarantor at the date of the issue of the Notes.
Therefore, the historical operations and cash flows of this entity are reflected
as a Subsidiary Guarantor for the one-month period ending August 29, 1998, and
as Albecca Inc. for the period through August 2, 1998. The operating assets of
this entity are reflected as a component of Albecca Inc. as of May 31, 1998 and
as Subsidiary Guarantor as of May 30, 1999.
10
<PAGE> 11
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
ALBECCA INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
May 30, 1999 (unaudited)
------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 36,443 $ 177 $ 3,854 $ -- $ 40,474
Accounts receivable, net -- 17,870 34,021 -- 51,891
Intercompany accounts receivable -- 21,154 1,074 (22,228) --
Inventories -- 28,230 44,377 -- 72,607
Other current assets 305 2,320 5,642 -- 8,267
------------ ---------- ------------- ------------- --------------
Total current assets 36,748 69,751 88,968 (22,228) 173,239
PROPERTY, PLANT AND
EQUIPMENT, net -- 9,253 48,953 -- 58,206
OTHER LONG-TERM ASSETS 6,617 16,989 32,226 -- 55,832
INVESTMENT IN SUBSIDIARIES 43,453 -- 3,467 (47,033) (113)
INTERCOMPANY LOANS
RECEIVABLE 89,218 -- 2,264 (91,482) --
------------ ---------- ------------- ------------- --------------
$ 176,036 $ 95,993 $ 175,878 $ (160,743) $ 287,164
============ ========== ============= ============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 2,147 $ 26,784 $ -- $ 28,931
Accounts payable -- 5,471 20,109 -- 25,580
Intercompany accounts payable 13,893 834 7,501 (22,228) --
Accrued liabilities 6,324 17,288 11,096 -- 34,708
------------ ---------- ------------- ------------- --------------
Total current liabilities 20,217 25,740 65,490 (22,228) 89,219
------------ ---------- ------------- ------------- --------------
LONG-TERM DEBT, less
current maturities 190,750 2,622 24,966 -- 218,338
------------ ---------- ------------- ------------- --------------
INTERCOMPANY LOANS PAYABLE -- 2,264 89,218 (91,482) --
------------ ---------- ------------- ------------- --------------
OTHER LONG-TERM LIABILITIES -- 3,971 7,178 -- 11,149
------------ ---------- ------------- ------------- --------------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock -- -- -- -- --
Class A common stock 4 -- -- -- 4
Class B common stock 166 -- -- -- 166
Additional paid in capital 8,912 37,520 7,927 (47,033) 7,326
Accumulated earnings (deficit) (44,013) 24,129 (7,950) -- (27,834)
Cumulative foreign currency
translation adjustment -- (253) (10,951) -- (11,204)
------------ ---------- ------------- ------------- --------------
Total shareholders' equity (deficit) (34,931) 61,396 (10,974) (47,033) (31,542)
------------ ---------- ------------- ------------- --------------
$ 176,036 $ 95,993 $ 175,878 $ (160,743) $ 287,164
============ ========== ============= ============= ==============
</TABLE>
11
<PAGE> 12
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
ALBECCA INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
August 30, 1998
-------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
----------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,188 $ 18 $ 5,678 $ -- $ 54,884
Accounts receivable, net 6 17,445 33,334 -- 50,785
Intercompany accounts receivable 373 7,024 539 (7,936) --
Inventories -- 28,322 47,497 -- 75,819
Other current assets -- 2,254 4,770 -- 7,024
----------- ----------- --------------- ------------ --------------
Total current assets 49,567 55,063 91,818 (7,936) 188,512
PROPERTY, PLANT AND
EQUIPMENT, net -- 9,487 52,271 -- 61,758
OTHER LONG-TERM ASSETS 6,703 17,315 31,634 -- 55,652
INVESTMENT IN SUBSIDIARIES 43,453 -- 3,580 (47,033) --
INTERCOMPANY LOANS RECEIVABLE 84,941 -- 1,623 (86,564) --
----------- ----------- --------------- ------------ --------------
$ 184,664 $ 81,865 $ 180,926 $ (141,533) $ 305,922
=========== =========== =============== ============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 1,519 $ 33,686 $ -- $ 35,205
Accounts payable -- 6,470 21,695 -- 28,165
Intercompany accounts payable -- 1,042 6,894 (7,936) --
Accrued liabilities 2,784 15,477 9,731 -- 27,992
----------- ----------- --------------- ------------ --------------
Total current liabilities 2,784 24,508 72,006 (7,936) 91,362
----------- ----------- --------------- ------------ --------------
LONG-TERM DEBT, less
current maturities 200,000 3,083 24,481 -- 227,564
----------- ----------- --------------- ------------ --------------
INTERCOMPANY LOANS PAYABLE -- 1,623 84,941 (86,564) --
----------- ----------- --------------- ------------ --------------
OTHER LONG-TERM LIABILITIES -- 4,443 8,197 -- 12,640
----------- ----------- --------------- ------------ --------------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock -- -- -- -- --
Class A common stock 4 -- -- -- 4
Class B common stock 166 -- -- -- 166
Additional paid in capital 8,912 37,520 7,927 (47,033) 7,326
Accumulated earnings (deficit) (27,202) 10,492 (7,319) -- (24,029)
Cumulative foreign currency
translation adjustment -- 196 (9,307) -- (9,111)
----------- ----------- --------------- ------------ --------------
Total shareholders' equity (deficit) (18,120) 48,208 (8,699) (47,033) (25,644)
----------- ----------- --------------- ------------ --------------
$ 184,664 $ 81,865 $ 180,926 $ (141,533) $ 305,922
=========== =========== =============== ============ ==============
</TABLE>
12
<PAGE> 13
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
ALBECCA INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
May 30, 1999 (unaudited)
-------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
----------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 50,985 $ 46,350 $ (1,111) $ 96,224
Cost of sales -- 28,221 28,655 (1,111) 55,765
----------- ----------- --------------- ------------ --------------
Gross profit -- 22,764 17,695 -- 40,459
Operating expenses 65 17,342 16,525 -- 33,932
Restructuring charges -- 225 1,020 -- 1,245
----------- ----------- --------------- ------------ --------------
Operating income (loss) (65) 5,197 150 -- 5,282
Interest income (604) -- -- -- (604)
Interest expense 5,185 166 894 -- 6,245
----------- ----------- --------------- ------------ --------------
Income (loss) before provision for
income taxes, minority interest
and extraordinary item (4,646) 5,031 (744) -- (359)
Provision for income taxes -- 130 409 -- 539
Minority interest -- -- 107 -- 107
----------- ----------- --------------- ------------ --------------
Income (loss) before extraordinary
item (4,646) 4,901 (1,260) -- (1,005)
----------- ----------- --------------- ------------ --------------
Extraordinary gain on retirement
of debt, net of income taxes 1,008 -- -- -- 1,008
----------- ----------- --------------- ------------ --------------
Net income (loss) $ (3,638) $ 4,901 $ (1,260) $ -- $ 3
=========== =========== =============== ============ ==============
</TABLE>
<TABLE>
<CAPTION>
Three months ended
May 31, 1998 (unaudited)
-------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
----------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 44,793 $ 1,896 $ 47,884 $ (1,518) $ 93,055
Cost of sales 23,937 1,109 29,221 (1,518) 52,749
----------- ----------- --------------- ------------ --------------
Gross profit 20,856 787 18,663 -- 40,306
Operating expenses 14,864 965 15,790 -- 31,619
----------- ----------- --------------- ------------ --------------
Operating income (loss) 5,992 (178) 2,873 -- 8,687
Interest income -- -- -- -- --
Interest expense 116 135 2,508 -- 2,759
----------- ----------- --------------- ------------ --------------
Income (loss) before provision for
income taxes and minority interest
5,876 (313) 365 -- 5,928
Provision for income taxes 322 -- 543 -- 865
Minority interest -- -- 19 -- 19
----------- ----------- --------------- ------------ --------------
Net income (loss) $ 5,554 $ (313) $ (197) $ -- $ 5,044
=========== =========== =============== ============ ==============
</TABLE>
13
<PAGE> 14
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited)
ALBECCA INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)
<TABLE>
<CAPTION>
Nine months ended
May 30, 1999 (unaudited)
--------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 154,317 $ 149,168 $ (5,962) $ 297,523
Cost of sales -- 85,440 90,794 (5,962) 170,272
----------- ----------- --------------- ------------ --------------
Gross profit -- 68,877 58,374 -- 127,251
Operating expenses 107 53,624 52,039 -- 105,770
Restructuring charges -- 342 1,149 -- 1,491
----------- ----------- --------------- ------------ --------------
Operating income (loss) (107) 14,911 5,186 -- 19,990
Interest income (1,623) -- -- -- (1,623)
Interest expense 16,675 476 2,763 -- 19,914
----------- ----------- --------------- ------------ --------------
Income (loss) before provision for
income taxes, minority interest
and extraordinary item (15,159) 14,435 2,423 -- 1,699
Provision for income taxes -- 372 1,477 -- 1,849
Minority interest -- -- 355 -- 355
----------- ----------- --------------- ------------ --------------
Income (loss) before extraordinary item (15,159) 14,063 591 -- (505)
Extraordinary gain on retirement
of debt, net of income taxes 1,008 -- -- -- 1,008
----------- ----------- --------------- ------------ --------------
Net income (loss) $ (14,151) $ 14,063 $ 591 $ -- $ 503
=========== =========== =============== ============ ==============
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED FROM (USED IN) OPERATING
ACTIVITIES $ (59) $ 947 $ 9,848 $ -- $ 10,736
----------- ----------- --------------- ------------ --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property, plant
and equipment -- (1,088) (3,432) -- (4,520)
Acquisitions of businesses -- -- (3,594) -- (3,594)
Proceeds from sales of property,
plant and equipment -- 37 1,587 -- 1,624
Changes in other long-term assets (516) 305 (611) -- (822)
----------- ----------- --------------- ------------ --------------
Net cash used in investing activities (516) (746) (6,050) -- (7,312)
----------- ----------- --------------- ------------ --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from revolving credit
facilities -- 512 26,167 -- 26,679
Repayment of revolving credit
facilities -- (58) (25,353) -- (25,411)
Proceeds from long-term debt -- 2,747 11,739 -- 14,486
Repayments of long-term debt (7,863) (3,273) (16,354) -- (27,490)
Distributions to shareholders (4,308) -- -- (4,308)
----------- ----------- --------------- ------------ --------------
Net cash provided from (used
in) financing activities (12,171) (72) (3,801) -- (16,044)
EFFECT OF EXCHANGE RATE ON
CASH -- 30 (1,820) -- (1,790)
----------- ----------- --------------- ------------ --------------
NET INCREASE (DECREASE) IN
CASH (12,746) 159 (1,823) -- (14,410)
Cash and cash equivalents,
beginning of period 49,188 18 5,678 -- 54,884
----------- ----------- --------------- ------------ --------------
Cash and cash equivalents, end of period $ 36,442 $ 177 $ 3,855 $ -- $ 40,474
=========== =========== =============== ============ ==============
</TABLE>
14
<PAGE> 15
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
ALBECCA INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
May 31, 1998 (unaudited)
-------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
----------- ----------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net sales $ 138,976 $ 5,910 $ 152,285 $ (4,302) $ 292,869
Cost of sales 75,860 3,540 92,344 (4,302) 167,442
----------- ----------- --------------- ------------ --------------
Gross profit 63,116 2,370 59,941 -- 125,427
Operating expenses 45,966 2,829 49,591 -- 98,386
----------- ----------- --------------- ------------ --------------
Operating income (loss) 17,150 (459) 10,350 -- 27,041
Interest expense 360 401 6,711 -- 7,472
----------- ----------- --------------- ------------ --------------
Income (loss) before provision for
income taxes and minority interest 16,790 (860) 3,639 -- 19,569
Provision for income taxes 638 -- 1,937 -- 2,575
Minority interest -- -- 377 -- 377
----------- ----------- --------------- ------------ --------------
Net income (loss) $ 16,152 $ (860) $ 1,325 $ -- $ 16,617
=========== =========== =============== ============ ==============
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C> <C>
NET CASH PROVIDED FROM (USED
IN) OPERATING ACTIVITIES $ (1,420) $ (658) $ 16,648 $ -- $ 14,570
----------- ----------- --------------- ------------ --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property, plant and
equipment (522) (62) (6,058) -- (6,642)
Acquisitions of businesses (20,986) -- (7,076) -- (28,062)
Proceeds from sales of property,
plant and equipment 37 -- 367 -- 404
Changes in other long-term assets -- 321 (1,260) -- (939)
----------- ----------- --------------- ------------ --------------
Net cash provided from (used in)
investing activities (21,471) 259 (14,027) -- (35,239)
----------- ----------- --------------- ------------ --------------
Cash flows from financing activities:
Proceeds from revolving credit facilities 71,444 -- 11,928 -- 83,372
Repayment of revolving credit facilities (39,973) -- (10,700) -- (50,673)
Proceeds from long-term debt 2,834 336 10,148 -- 13,318
Repayments of long-term debt (1,241) -- (11,972) -- (13,213)
Distributions to shareholders (10,300) -- -- -- (10,300)
----------- ----------- --------------- ------------ --------------
Net cash provided from (used in) financing
activities 22,764 336 (596) -- 22,504
----------- ----------- --------------- ------------ --------------
Effect of exchange rate on cash 96 (14) (523) -- (441)
----------- ----------- --------------- ------------ --------------
Net increase (decrease) in cash (31) (77) 1,502 -- 1,394
Cash and cash equivalents,
beginning of period 399 133 4,769 -- 5,301
----------- ----------- --------------- ------------ --------------
Cash and cash equivalents, end of
period $ 368 $ 56 $ 6,271 $ -- $ 6,695
=========== =========== =============== ============ ==============
</TABLE>
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
Albecca's unaudited consolidated financial statements and the related notes
thereto. In this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," all references to the Company's international
operations ("International") include all of Albecca's operations outside of the
U.S.
The following table sets forth certain consolidated statements of
operations data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
May 31, May 30, May 31, May 30,
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.7 58.0 57.2 57.2
------ ------ ------ ------
Gross profit 43.3 42.0 42.8 42.8
Operating expenses 34.0 35.2 33.6 35.5
Restructuring charges -- 1.3 -- .5
------ ------ ------ ------
Operating income 9.3 5.5 9.2 6.8
Interest income -- (.6) -- (.5)
Interest expense 3.0 6.4 2.6 6.7
------ ------ ------ ------
Income (loss) before provision for
income taxes, minority interest and
extraordinary item 6.3 (.3) 6.6 .6
Provision for income taxes .9 .6 .9 .6
Minority interest .0 .1 .1 .1
------ ------ ------ ------
Income (loss) before extraordinary item 5.4 (1.0) 5.6 (.1)
Extraordinary gain on retirement of debt, net
of income taxes -- 1.0 -- .3
------ ------ ------ ------
Net income 5.4% .0% 5.6% .2%
====== ====== ====== ======
</TABLE>
NET SALES
For the third quarter ended May 30, 1999, net sales were $96.2 million
compared to $93.1 million for the third quarter ended May 31, 1998. For the nine
months ended May 30, 1999, net sales were $297.5 million compared to $292.9
million for the nine months ended May 31, 1998. The increase in net sales for
the three and nine months ended May 30, 1999 was primarily the result of the
impact of one acquisition completed during the third quarter ended May 31, 1998
and an increase in sales to independent custom framing retailers, partially
offset by a decrease in sales to framing departments of craft chains of $2.2
million for the nine months ended May 30, 1999, and the closure of the Company's
United Kingdom manufacturing facility. U.S. net sales increased 9.7% and 7.0%
for the three and nine months ended May 30, 1999 from the comparable periods in
1998 primarily the result of the impact of one acquisition completed in the
third quarter ended May 31, 1998 and an increase in sales to independent custom
framing retailers, partially offset by a year-to-date decrease in sales to
framing departments of craft chains. International net sales decreased 2.5% and
3.3% for the three and nine months ended May 30, 1999 from the comparable
periods in 1998 primarily the result of the closure of the Company's United
Kingdom manufacturing facility.
16
<PAGE> 17
COST OF SALES
Cost of sales were $55.8 million and $170.3 million for the three and the
nine months ended May 30, 1999 compared to $52.7 million and $167.4 million for
the three and the nine months ended May 31, 1998. In the U.S., gross profit
decreased to 44.9% and 45.3% for the three and the nine months ended May 30,
1999 compared to 46.1% and 45.9% for the comparable periods in 1998. The
decrease for the quarter was primarily due to additional costs incurred in the
sampling program. The year-to-date decrease was primarily due to additional
costs associated with the sampling program, partially offset by an improvement
in the product mix sold. For the third quarter ended May 30, 1999, international
gross profit margin decreased to 39.0% compared to 40.7% for the third quarter
ended May 31, 1998. This decrease was primarily the result of an increase in the
sale of lower margin products primarily in two international locations. For the
nine months ended May 30, 1999, international gross profit margin increased to
40.3% compared to 40.1% for the comparable period in 1998.
OPERATING EXPENSES
Operating expenses were $33.9 million and $105.8 million for the three
and the nine months ended May 30, 1999 compared to $31.6 million and $98.4
million for the three and the nine months ended May 31, 1998. In the U.S.,
operating expenses as a percentage of net sales decreased to 33.4% and increased
to 34.2% for the three and the nine months ended May 30, 1999 compared to 33.9%
and 33.1% for the comparable periods in 1998. The decrease for the quarter ended
May 30, 1999 is primarily attributable to the reduction of duplicative
acquisition-related expenses. The year-to-date increase is primarily
attributable to the delay in fully integrating the U.S. acquisitions completed
during 1998. International operating expenses as a percentage of net sales
increased to 37.2% and 36.9% for the three and nine months ended May 30, 1999
compared to 34.1% and 34.1% for the comparable periods in 1998. This increase is
primarily due to the decrease in net sales associated with the closure of the
United Kingdom manufacturing facility, the integration of an acquisition and
increased operating costs primarily in two international locations.
RESTRUCTURING CHARGES
During the third quarter and the nine months ended May 30, 1999, the
Company recorded restructuring charges related to the closure of one of its
Swedish operations and its New Zealand operations, explained more fully in Note
4 of the Notes to the accompanying consolidated financial statements. The
restructuring charges for the quarter were $1.2 million. No restructuring
charges were recorded during the comparable periods in 1998.
INTEREST EXPENSE
Interest expense was $6.2 million and $19.9 million for the three and the
nine months ended May 30, 1999 compared to $2.8 million and $7.5 million for the
three and the nine months ended May 31, 1998. The increase in interest expense
is primarily due to an increase in debt and the amortization of deferred
financing costs associated with the August 1998 senior subordinated debt
placement.
INTEREST INCOME
Interest income was $.6 million and $1.6 million for the three and the
nine months ended May 30, 1999. This interest income resulted from the
investment of cash remaining from the August 1998 senior subordinated debt
placement.
NET INCOME
For the reasons set forth above, net income was $0 million and $.5
million for the three and the nine months ended May 30, 1999 compared to $5.0
million and $16.6 million for the three and the nine months ended May 31, 1998.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds have been, and are expected to
continue to be, cash flow from operations and its on-hand cash and cash
equivalents. The Company's principal need for funds historically have been to
finance its working capital (principally inventory and accounts receivables),
capital expenditures and acquisitions. As of May 30, 1999, the Company had cash
and cash equivalents of $40.5 million compared to $54.9 million as of August 30,
1998.
Net cash provided by operating activities was $10.7 million for the nine
months ended May 30, 1999 compared to $14.6 million for the nine months ended
May 31, 1998. The decrease is primarily attributable to the interest expense
associated with the August 1998 senior subordinated debt placement. Net cash
used in investing activities decreased to $7.3 million for the nine months ended
May 30, 1999 compared to $35.2 million for the nine months ended May 31, 1998
primarily due to a reduction in the Company's acquisition activities. During the
nine months ended May 30, 1999, the Company invested $3.6 million for
acquisitions and $4.5 million for capital expenditures. Albecca's historical
capital expenditures have been used to expand its distribution facilities,
enhance its management information systems and improve its manufacturing
efficiencies. Net cash used in financing activities increased to $16.0 million
compared to net cash provided from financing activities of $22.5 million for the
nine months ended May 31, 1998 due to the Company purchasing and retiring a
portion of its senior subordinated debt, with a face value of $9,250,000, and
due to the Company decreasing its credit facility borrowings related to
acquisition activities compared to the year-to-date period. The Company has
entered into a commitment to build a new manufacturing facility for $4.3
million. Completion is expected during the fourth quarter of fiscal year 2000.
As of May 30, 1999, Albecca had outstanding indebtedness of approximately
$247.3 million, consisting of $190.8 million in principal amount of the August
1998 senior subordinated debt and $56.5 million of other indebtedness compared
to $262.8 million as of August 30, 1998
The Company enters into forward exchange contracts to hedge purchases and
payables denominated in foreign currencies for periods consistent with its
identified exposures. Gains and losses related to qualifying hedges of these
exposures are deferred and recognized in operating income when the underlying
hedged transaction occurs.
Albecca's ability to make scheduled payments of the principal of, or to
pay the interest or liquidated damages, if any, on, or to refinance, its
indebtedness, including the August 1998 senior subordinated debt, or to fund
planned capital or other expenditures will depend on its future financial or
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, many of which are beyond its control.
Based upon the current levels of operations, management believes that cash flow
from operations and available cash and cash equivalents will be adequate to
meet, for the foreseeable future, Albecca's anticipated future requirements for
working capital, capital expenditures, scheduled payments of principal and
interest on its indebtedness, including the senior subordinated debt, and
acquisitions. There is no certainty that Albecca's business will generate
sufficient cash flow from operations or that future borrowings will be available
in an amount sufficient to enable Albecca to service its indebtedness, including
the senior subordinated debt, or to make anticipated capital and other
expenditures.
RECENT DEVELOPMENTS
The Company is currently evaluating various alternatives to reduce its
management involvement and financial investment in South Africa. At this time,
management does not have an estimate as to when this reduction of involvement
and investment will take place. The Company's investment in its South African
operations approximates $4,000,000, which excludes the foreign currency effect
of the devaluation of the South African Rand from the date of the Company's
investment in South Africa.
YEAR 2000 UPDATE
The efficient operation of the Company's business is dependent in part on
its computer software programs and operating systems. These programs and systems
are used in several key areas of the Company's business, including order entry,
purchasing, inventory management, pricing, sales, shipping, and financial
reporting, as well as in various administrative functions.
18
<PAGE> 19
Albecca has initiated a program to assess the impact of Year 2000
compliance on its information technology systems and its non-information
technology systems and has formulated a plan to address business disruption
associated with potential date processing problems.
Through its assessments, Albecca has identified potential Year 2000
issues in its IT systems, both hardware and software, and in its non-IT systems.
Albecca is in the process of addressing these deficiencies through upgrades,
replacements, specific enhancements and other corrective measures. Albecca
expects to complete remediation of its material IT systems no later than August
1999. In connection with its non-IT systems, which are building security,
heating, ventilation and air conditioning, and other equipment with date
sensitive operating controls, Albecca is in the process of identifying those
items that may require replacement or upgrading. Albecca expects to complete
testing and correcting the date sensitive non-IT systems by September 1999.
Albecca has initiated inquiries of third parties, such as customers,
vendors and lessors with whom Albecca has significant business relationships, to
assess their state of addressing Year 2000 issues that will materially and
adversely impact Albecca. Albecca has begun making inquiries of its significant
business relationships as to whether they will be Year 2000 compliant by the end
of 1999. Albecca plans to continue to assess its significant third party
business relationships' efforts in addressing Year 2000 issues through other
techniques as it deems appropriate. Despite Albecca's efforts, there can be no
guarantee that the systems of other companies that Albecca relies upon to
conduct its business will be Year 2000 compliant.
Albecca estimates that it will incur expenses of $1.1 million to $1.5
million in conjunction with the Year 2000 compliance project. As of May 30,
1999, Albecca has spent approximately $.8 million in connection with this
project. The majority of these expenditures has been and will be expensed as
incurred.
The estimated dates of completion and costs of Year 2000 initiatives are
based on management's best estimate. However, there can be no guarantees that
these estimates will be achieved, and actual results could differ materially
from those plans.
Albecca believes that the most reasonable likely worst case Year 2000
scenario would be a failure by a significant third party in supplying Albecca
products and services it needs to conduct its day-to-day operations. This risk
is not limited to its vendors but also includes, without limitation, utilities
or other general service providers or government entities. Albecca is focusing
its remedial efforts on those factors which it can reasonably be expected to
have influence upon. The extent of lost revenue as a result of such scenarios
cannot be estimated at this time.
Albecca has not yet completed its planning and preparation to handle the
most likely worst case scenarios described above. Albecca intends to develop
contingency plans for these scenarios by September 30, 1999.
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q and in future filings by the Company with the
Securities and Exchange Commission and in its press releases, and in other
written or oral statements made by the Company's representatives, the words and
phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimates," "projects," "believes," "plans," "anticipates,"
"intends," "may," or similar expressions, are intended to identify "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward looking statements include, without limitation,
the Company's expectations regarding sales, earnings, or other future financial
performance and liquidity, and general statements about future operations and
operating results. Although the Company believes that its expectations are based
on reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. Factors that could cause actual results to
differ from expectations include, without limitation, (i) the timing and expense
associated with, and effects of, cost-reduction and integration initiatives
being implemented by the Company; (ii) general competitive factors and the
overall financial condition of the custom framing industry, the retail industry
and the general economy; (iii) change in retailer or consumer acceptance of the
Company's products; (iv) consolidations and restructurings in the retail
industry causing a decrease in the number of stores that sell the Company's
products; (v) social, political, and economic risks to the Company's foreign
operations and
19
<PAGE> 20
customers; (vi) changes in the laws, regulations, and policies, including
changes in accounting standards, that affect, or will affect, the Company in the
United States and internationally; (vii) shipment delays, depletion of
inventory, service problems; (viii) changes in product mix to ones which are
less profitable; and (ix) the ability of the Company and third parties,
including customers or suppliers, to adequately address Year 2000 issues. The
Company assumes no responsibility to update forward-looking statements made
herein or elsewhere.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
<TABLE>
<CAPTION>
NO. DESCRIPTION
- --- -----------
<S> <C> <C>
3.1 -- Amended and Restated Articles of Incorporation of Albecca
(incorporated by reference to Exhibit 3.1 of Albecca's Registration
Statement on Form S-4 (No. 333-67975) as declared effective by the SEC
on February 12, 1999).
3.2 -- Amended and Restated Bylaws of Albecca(incorporated by reference to
Exhibit 3.2 of Albecca's Registration Statement on Form S-4 (No.
333-67975) as declared effective by the SEC on February 12, 1999).
4.1 -- Indenture dated August 11, 1998, among Albecca Inc. and State Street
Bank & Trust, as trustee, relating to the Notes (the "Indenture")
(incorporated by reference to Exhibit 4.1 of Albecca's Registration
Statement on Form S-4 (No. 333-67975) as declared effective by the SEC on
February 12, 1999).
4.2 -- Form of 10 3/4% Senior Note due 2008 of Albecca Inc. (included as
Exhibit A of the Indenture filed as Exhibit 4.1) (incorporated by
reference to Exhibit 4.2 of Albecca's Registration Statement on Form S-4
(No. 333-67975) as declared effective by the SEC on February 12, 1999).
4.3 -- Subsidiary Guaranty (incorporated by reference to Exhibit 4.3 of
Albecca's Registration Statement on Form S-4 (No. 333-67975) as declared
effective by the SEC on February 12, 1999).
4.4 -- Registration Rights Agreement, dated as of August 11, 1998, among
Albecca Inc. Donaldson Lufkin Jenrette Securities Corporation and Morgan
Stanley & Co. Incorporated (incorporated by reference to Exhibit 4.4 of
Albecca's Registration Statement on Form S-4 (No. 333-67975) as declared
effective by the SEC on February 12, 1999).
10.1 -- Amended and Restated 1998 Stock Option Plan (incorporated by reference
to Exhibit 10.1 of Albecca's Registration Statement on Form S-4 (No.
333-67975) as declared effective by the SEC on February 12, 1999).
10.2 -- Form of S Corp Note issued by Albecca in favor of its existing
shareholders (incorporated by reference to Exhibit 10.4 of Albecca's
Registration Statement on Form S-4 (No. 333-67975) as declared effective
by the SEC on February 12, 1999).
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
b. Reports on Form 8-K:
None
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ALBECCA INC.
(registrant)
Date: July 14, 1999 /s/ Craig A. Ponzio
------------------- ---------------------------------------
Craig A. Ponzio, Chairman of the Board,
President, Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 1999 /s/ Stephen M. Scheppmann
------------------- ---------------------------------------
Stephen M. Scheppmann,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED MAY 30, 1999 AND
THE CONSOLIDATED BALANCE SHEET AS OF MAY 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-END> MAY-30-1999
<CASH> 40,474
<SECURITIES> 0
<RECEIVABLES> 58,549
<ALLOWANCES> 6,658
<INVENTORY> 72,607
<CURRENT-ASSETS> 173,239
<PP&E> 84,577
<DEPRECIATION> 26,371
<TOTAL-ASSETS> 287,164
<CURRENT-LIABILITIES> 89,219
<BONDS> 190,750
0
0
<COMMON> 170
<OTHER-SE> (31,712)
<TOTAL-LIABILITY-AND-EQUITY> 287,164
<SALES> 297,523
<TOTAL-REVENUES> 297,523
<CGS> 170,272
<TOTAL-COSTS> 276,042
<OTHER-EXPENSES> 1,491
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,291
<INCOME-PRETAX> 2,054
<INCOME-TAX> 1,849
<INCOME-CONTINUING> 21,731
<DISCONTINUED> 0
<EXTRAORDINARY> 1,008
<CHANGES> 0
<NET-INCOME> 503
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
