<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 February 28, 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 (unaudited)
Consolidated Balance Sheets as of August 30, 1998
and February 28, 1999......................................................................... 3
Consolidated Statements of Operations
for the three and six months ended
March 1, 1998 and February 28, 1999.......................................................... 4
Consolidated Statements of Cash Flows
for the six months ended
March 1, 1998 and February 28, 1999.......................................................... 5
Notes to the Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K................................................................. 16
Signatures......................................................................................................... 18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALBECCA INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
August 30, February 28,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 54,884 $ 40,673
Accounts receivable, less allowances for doubtful accounts of
$5,859 and $6,643 at August 30, 1998 and February 28, 1999 50,785 54,102
Inventories 75,819 74,479
Other current assets 7,024 7,996
------------ ------------
Total current assets 188,512 177,250
PROPERTY, PLANT and EQUIPMENT, net 61,758 61,106
OTHER LONG-TERM ASSETS 55,652 57,923
------------ ------------
$ 305,922 $ 296,279
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 35,205 $ 26,207
Accounts payable 28,165 27,804
Accrued liabilities 27,992 26,829
------------ ------------
Total current liabilities 91,362 80,840
------------ ------------
LONG-TERM DEBT, less current maturities 227,564 233,692
------------ ------------
OTHER LONG-TERM LIABILITIES 12,640 11,603
------------ ------------
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) (27,836)
Cumulative foreign currency translation adjustment (9,111) (9,516)
------------ ------------
Total shareholders' deficit (25,644) (29,856)
------------ ------------
$ 305,922 $ 296,279
============ ============
</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 Six Months Ended
--------------------------- ---------------------------
March 1, February 28, March 1, February 28,
1998 1999 1998 1999
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net sales $ 96,829 $ 97,725 $ 199,814 $ 201,299
Cost of sales 55,215 55,571 114,693 114,507
---------- ---------- ---------- ----------
Gross profit 41,614 42,154 85,121 86,792
Operating expenses 34,033 35,613 66,767 71,838
Restructuring charges -- 129 -- 246
---------- ---------- ---------- ----------
Operating income 7,581 6,412 18,354 14,708
Interest income -- (462) -- (1,019)
Interest expense 2,370 6,545 4,713 13,669
---------- ---------- ---------- ----------
Income before provision for income
taxes and minority interest 5,211 329 13,641 2,058
Provision for income taxes 814 251 1,710 1,310
Minority interest 192 51 358 248
---------- ---------- ---------- ----------
Net income $ 4,205 $ 27 $ 11,573 $ 500
========== ========== ========== ==========
</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>
Six Months Ended
---------------------------------
March 1, February 28,
1998 1999
------------ -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 11,573 $ 500
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 358 248
Depreciation and amortization 3,650 4,775
Loss on disposal of property, plant and equipment 40 227
Changes in operating assets and liabilities:
Accounts receivable (4,772) (3,594)
Inventories 1,487 1,047
Other current assets (1,675) (667)
Accounts payable 1,095 (227)
Accrued liabilities (267) 892
Other 490 (1,257)
------------ ------------
Net cash provided by operating activities 11,979 1,944
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,757) (2,159)
Acquisitions of businesses, net (19,042) (3,594)
Proceeds from sales of property and equipment 175 197
Changes in other long-term assets (102) (1,439)
------------ ------------
Net cash used in investing activities (23,726) (6,995)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities 47,945 17,961
Repayments of revolving credit facilities (28,538) (18,334)
Proceeds from long-term debt 3,907 8,920
Repayments of long-term debt (3,624) (12,291)
Distributions to shareholders (7,300) (4,307)
------------ ------------
Net cash provided by (used in) financing activities 12,390 (8,051)
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH (356) (1,109)
------------ ------------
NET INCREASE (DECREASE) IN CASH 287 (14,211)
CASH and cash equivalents at beginning of period 5,301 54,884
============ ============
CASH and cash equivalents at end of period $ 5,588 $ 40,673
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 6,027 $ 13,617
============ ============
Income taxes paid $ 1,115 $ 1,209
============ ============
</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
During the six months ended February 28, 1999, the Company recorded
additional restructuring charges of $246,000 ($117,000 for the quarter ended
November 29, 1998 and $129,000 for the quarter ended February 28, 1999),
primarily for additional severance and other related closure costs, relating to
its fiscal year 1998 restructuring plans, as more fully discussed in the
Company's Registration Statement on Form S-4 as declared effective by the SEC
on February 12, 1999. The Company expects to incur an additional $200,000 in
restructuring costs related to the Company's fiscal year 1998 restructuring
plans during the third quarter of fiscal year 1999 which will be expensed as
incurred.
Note 5. SUBSEQUENT EVENT
In March, 1999, the Company purchased $9,250,000 of its 10.75% senior
subordinated notes due August 2008 for $7,862,500.
6
<PAGE> 7
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 30, 1998 February 28, 1999
--------------- -----------------
<S> <C> <C>
Raw materials $ 17,019 $ 12,364
Work in process 2,774 2,226
Finished goods 56,026 59,889
=============== =================
$ 75,819 $ 74,479
=============== =================
</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 followings (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- -----------------------------
March 1, February 28, March 1, February 28,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income, as reported $ 4,205 $ 27 $ 11,573 $ 500
Foreign currency translation
adjustments (99) (2,534) (1,820) (405)
============ ============ ============ ============
Total comprehensive income $ 4,106 $ (2,507) $ 9,753 $ 95
============ ============= ============ ============
</TABLE>
Note 9. 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 the 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 March 1, 1998 and as Subsidiary Guarantor as of February 28, 1999.
7
<PAGE> 8
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
ALBECCA INC.
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
February 28, 1999 (unaudited)
---------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ------------ ------------- ------------- -------------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 36,564 $ 134 $ 3,975 $ -- $ 40,673
Accounts receivable, net -- 18,115 35,987 -- 54,102
Intercompany accounts receivable 4 14,170 897 (15,071) --
Inventories -- 28,043 46,436 -- 74,479
Other current assets -- 2,482 5,514 -- 7,996
---------- ---------- ---------- ---------- ----------
Total current assets 36,568 62,944 92,809 (15,071) 177,250
PROPERTY, PLANT AND
EQUIPMENT, net -- 9,353 51,753 -- 61,106
OTHER LONG-TERM ASSETS 6,698 17,098 34,127 -- 57,923
INVESTMENT IN SUBSIDIARIES 43,453 -- 3,580 (47,033) --
INTERCOMPANY LOANS
RECEIVABLE 89,939 -- 2,096 (92,035) --
---------- ---------- ---------- ---------- ----------
$ 176,658 $ 89,395 $ 184,365 $ (154,139) $ 296,279
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 2,107 $ 24,100 $ -- $ 26,207
Accounts payable -- 5,368 22,436 -- 27,804
Intercompany accounts payable 6,790 1,155 7,126 (15,071) --
Accrued liabilities 1,162 15,201 10,466 -- 26,829
---------- ---------- ---------- ---------- ----------
Total current liabilities 7,952 23,831 64,128 (15,071) 80,840
---------- ---------- ---------- ---------- ----------
LONG-TERM DEBT, less
current maturities 200,000 3,175 30,517 -- 233,692
---------- ---------- ---------- ---------- ----------
INTERCOMPANY LOANS PAYABLE -- 2,096 89,939 (92,035) --
---------- ---------- ---------- ---------- ----------
OTHER LONG-TERM LIABILITIES -- 4,000 7,603 -- 11,603
---------- ---------- ---------- ---------- ----------
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) (40,376) 18,807 (6,267) 0 (27,836)
Cumulative foreign currency
translation adjustment -- (34) (9,482) -- (9,516)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity (deficit) (31,294) 56,293 (7,822) (47,033) (29,856)
---------- ---------- ---------- ---------- ----------
$ 176,658 $ 89,395 $ 184,365 $ (154,139) $ 296,279
========== ========== ========== ========== ==========
</TABLE>
8
<PAGE> 9
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
------------ ---------- ------------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
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>
9
<PAGE> 10
ALBECCA INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
February 28, 1999 (unaudited)
-----------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------- -----
<S> <C> <C> <C> <C> <C>
Net sales $ -- $51,242 $49,542 $(3,059) $97,725
Cost of sales -- 28,338 30,292 (3,059) 55,571
------- ------- ------- ------- -------
Gross profit -- 22,904 19,250 -- 42,154
Operating expenses 5 17,909 17,699 -- 35,613
Restructuring charges -- -- 129 -- 129
------- ------- ------- ------- -------
Operating income (loss) (5) 4,995 1,422 -- 6,412
Interest income (462) -- -- -- (462)
Interest expense 5,464 133 948 -- 6,545
------- ------- ------- ------- -------
Income (loss) before provision for
income taxes and minority interest (5,007) 4,862 474 -- 329
Provision for income taxes -- 120 131 -- 251
Minority interest -- -- 51 -- 51
------- ------- ------- ------- -------
Net income (loss) $(5,007) $ 4,742 $ 292 $ -- $ 27
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three months ended
March 1, 1998 (unaudited)
-----------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------- -----
<S> <C> <C> <C> <C> <C>
Net sales $46,883 $ 1,796 $ 49,517 $(1,367) $96,829
Cost of sales 25,996 1,116 29,470 (1,367) 55,215
------- ------- -------- ------- -------
Gross profit 20,887 680 20,047 -- 41,614
Operating expenses 15,946 901 17,186 -- 34,033
------- ------- -------- ------- -------
Operating income (loss) 4,941 (221) 2,861 -- 7,581
Interest income -- -- -- -- --
Interest expense 197 101 2,072 -- 2,370
------- ------- -------- ------- -------
Income (loss) before provision for
income taxes and minority interest 4,744 (322) 789 -- 5,211
Provision for income taxes 216 -- 598 -- 814
Minority interest -- -- 192 -- 192
------- ------- -------- ------- -------
Net income (loss) $ 4,528 $ (322) $ (1) $ -- $ 4,205
======= ======= ======== ======= =======
</TABLE>
10
<PAGE> 11
================================================================================
ALBECCA INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
February 28, 1999 (unaudited)
----------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 103,332 $ 102,818 $(4,851) $ 201,299
Cost of sales -- 57,219 62,139 (4,851) 114,507
-------- --------- --------- ------- ---------
Gross profit -- 46,113 40,679 -- 86,792
Operating expenses 42 36,282 35,514 -- 71,838
Restructuring charges -- 117 129 -- 246
-------- --------- --------- ------- ---------
Operating income (loss) (42) 9,714 5,036 -- 14,708
Interest income (1,019) -- -- -- (1,019)
Interest expense 11,489 311 1,869 -- 13,669
-------- --------- --------- ------- ---------
Income (loss) before provision for
income taxes and minority interest (10,512) 9,403 3,167 -- 2,058
Provision for income taxes -- 243 1,067 -- 1,310
Minority interest -- -- 248 -- 248
-------- --------- --------- ------- ---------
Net income (loss) $(10,512) $ 9,160 $ 1,852 $ -- $ 500
======== ========= ========= ======= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NET CASH PROVIDED FROM (USED IN)
OPERATING ACTIVITIES $ (7,749) $ 28 $ 9,665 $ -- $ 1,944
-------- --------- --------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
Equipment -- (701) (1,458) -- (2,159)
Acquisitions of businesses -- -- (3,594) -- (3,594)
Proceeds from sales of property, --
plant and equipment -- 35 162 -- 197
Changes in other long-term assets (568) 248 (1,119) -- (1,439)
-------- --------- --------- ------- ---------
Net cash used in investing activities (568) (418) (6,009) -- (6,995)
-------- --------- --------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities -- 437 17,524 -- 17,961
Repayment of revolving credit
facilities -- (57) (18,277) -- (18,334)
Proceeds from long-term debt -- 2,060 6,860 -- 8,920
Repayments of long-term debt -- (1,997) (10,294) -- (12,291)
Distributions to shareholders (4,307) -- -- -- (4,307)
-------- --------- --------- ------- ---------
Net cash provided from (used in)
financing activities (4,307) 443 (4,187) -- (8,051)
-------- --------- --------- ------- ---------
EFFECT OF EXCHANGE RATE ON CASH -- 63 (1,172) -- (1,109)
NET INCREASE (DECREASE) IN CASH (12,624) 116 (1,703) -- (14,211)
-------- --------- --------- ------- ---------
CASH and cash equivalents,
beginning of period 49,188 18 5,678 -- 54,884
-------- --------- --------- ------- ---------
CASH and cash equivalents, end of
period $ 36,564 $ 134 $ 3,975 $ -- $ 40,673
======== ========= ========= ======= =========
</TABLE>
11
<PAGE> 12
ALBECCA INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Six months ended
March 1, 1998 (unaudited)
--------------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 94,184 $ 4,013 $ 104,401 $(2,784) $ 199,814
Cost of sales 51,922 2,431 61,899 (2,784) 113,468
-------- ------- --------- ------- ---------
Gross profit 42,262 1,582 42,502 -- 86,346
Operating expenses 31,103 1,864 35,025 -- 67,992
-------- ------- --------- ------- ---------
Operating income (loss) 11,159 (282) 7,477 -- 18,354
Interest expense 244 265 4,204 -- 4,713
-------- ------- --------- ------- ---------
Income (loss) before provision for
income taxes and minority interest 10,915 (547) 3,273 -- 13,641
Provision for income taxes 317 -- 1,393 -- 1,710
Minority interest -- -- 358 -- 358
-------- ------- --------- ------- ---------
Net income (loss) $ 10,598 $ (547) $ 1,522 $ -- $ 11,573
======== ======= ========= ======= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NET CASH PROVIDED FROM (USED
IN) OPERATING ACTIVITIES $ 1,647 $ (195) $ 10,527 $ -- $ 11,979
-------- ------- --------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (337) (33) (4,387) -- (4,757)
Acquisitions of businesses (11,889) -- (7,153) -- (19,042)
Proceeds from sales of property,
plant and equipment 13 -- 162 -- 175
Changes in other long-term assets -- 217 (319) -- (102)
-------- ------- --------- ------- ---------
Net cash provided from (used in)
investing activities (12,213) 184 (11,697) -- (23,726)
-------- ------- --------- ------- ---------
Cash flows from financing activities:
Proceeds from revolving credit 46,622 23 1,300 -- 47,945
facilities
Repayment of revolving credit (28,184) -- (354) -- (28,538)
facilities
Proceeds from long-term debt 264 1 3,642 -- 3,907
Repayments of long-term debt (1,235) -- (2,389) -- (3,624)
Distributions to shareholders (7,300) -- -- -- (7,300)
-------- ------- --------- ------- ---------
Net cash provided from financing
activities 10,167 24 2,199 -- 12,390
-------- ------- --------- ------- ---------
Effect of exchange rate on cash -- (10) (346) -- (356)
Net increase (decrease) in cash (399) 3 683 -- 287
Cash and cash equivalents,
beginning of period 399 133 4,769 -- 5,301
-------- ------- --------- ------- ---------
Cash and cash equivalents, end of
period $ -- $ 136 $ 5,452 $ -- $ 5,588
======== ======= ========= ======= =========
</TABLE>
12
<PAGE> 13
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 Six Months Ended
------------------ ----------------
March 1, February 28, March 1, February 28,
1998 1999 1998 1999
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 57.0 56.9 57.4 56.9
-------- ------------ -------- ------------
Gross profit 43.0 43.1 42.6 43.1
Operating expenses 35.2 36.4 33.4 35.7
Restructuring charges -- .1 -- .1
-------- ------------ -------- ------------
Operating income 7.8 6.6 9.2 7.3
Interest income -- .5 -- .5
Interest expense 2.4 6.7 2.4 6.8
-------- ------------ -------- ------------
Income before provision for income
taxes and minority interest 5.4 .4 6.8 1.0
Provision for income taxes .8 .3 .8 .7
Minority interest .2 .1 .2 .1
-------- ------------ -------- ------------
Net income 4.4% .0% 5.8% .2%
======== ============ ======== ============
</TABLE>
NET SALES
For the second quarter ended February 28, 1999, net sales were $97.7
million compared to $96.8 million for the second quarter ended March 1, 1998.
For the six months ended February 28, 1999, net sales were $201.3 million
compared to $199.8 million for the six months ended March 1, 1998. The increase
in net sales for the three and six months ended February 28, 1999 were primarily
the result of the impact of one acquisition completed during the third quarter
ended May 31, 1998 and an increase in sales to independent custom framing
retailers, partially offset by a decrease in sales to framing departments of
craft chains ($.6 million and $2.2 million for the three and six months ended
February 28, 1999, respectively) and the closure of the Company's United Kingdom
manufacturing facility. U.S. net sales increased 5.6% and 5.7% for the three and
six months ended February 28, 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 decrease in sales to framing departments of craft chains.
International net sales decreased 3.5% and 3.7% for the three and six months
ended February 28, 1999 from the comparable periods in 1998 primarily the result
of the closure of the Company's United Kingdom manufacturing facility.
COST OF SALES
Cost of sales were $55.6 and $114.5 for the three and the six months
ended February 28, 1999 compared to $55.2 and $114.7 for the three and the six
months ended March 1, 1998. In the U.S., gross profit increased to 45.5% and
45.5% for the three and the six months ended February 28, 1999 compared to 44.5%
and 44.9% for the comparable periods in 1998. This increase was primarily the
result of an improvement in the product mix sold. For the second quarter ended
February 28, 1999, international gross profit margin decreased to 40.7% compared
to 41.5% for the second quarter ended March 1, 1998. This decrease was primarily
the result of an increase in the sale of lower margin products primarily in two
international locations and an increase of $250,000 in inventory reserves for
the Company's Pacific Rim
13
<PAGE> 14
operations. For the six months ended February 28, 1999, International gross
profit margin increased to 40.8% compared to 40.6% for the comparable period in
1998.
OPERATING EXPENSES
Operating expenses were $35.6 million and $71.8 million for the three and
the six months ended February 28, 1999 compared to $34.0 million and $66.8
million for the three and the six months ended March 1, 1998. In the U.S.,
operating expenses as a percentage of net sales increased to 34.0% and 34.5% for
the three and the six months ended February 28, 1999 compared to 33.3% and 32.7%
for the comparable periods in 1998. This 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 39.0%
and 36.8% for the three and the six months ended February 28, 1999 compared to
36.9% 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 second quarter and the six months ended February 28, 1999, the
Company recorded additional restructuring charges of $.1 million and $.2
million, respectively, related to its 1998 restructuring plan. No restructuring
charges were recorded during the comparable periods in 1998. Albecca expects to
incur an additional $.2 million in restructuring costs related to the 1998
restructuring plan during the third quarter of 1999 which will be expensed as
incurred.
INTEREST EXPENSE
Interest expense was $6.5 million and $13.7 million for the three and the
six months ended February 28, 1999 compared to $2.4 million and $4.7 million for
the three and the six months ended March 1, 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 $.5 million and $1.0 million for the three and the
six months ended February 28, 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 $.03 million and $.5
million for the three and the six months ended February 28, 1999 compared to
$4.2 million and $11.6 million for the three and the six months ended March 1,
1998.
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 February 28, 1999, the Company had
cash and cash equivalents of $40.7 million compared to $54.9 million as of
August 30, 1998.
Net cash provided by operating activities was $1.9 million for the six
months ended February 28, 1999 compared to $12.0 million for the six months
ended March 1, 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 $7.0 million for the six months
ended February 28, 1999 compared to $23.7 million for the six months ended March
1, 1998 primarily due to a reduction in the acquisition activities. During the
six months ended February 28, 1999, the Company invested $3.6 million for
acquisitions and $2.2 million for capital expenditures. Albecca's historical
capital expenditures have been used to expand its
14
<PAGE> 15
distribution facilities, enhance its management information systems and improve
its manufacturing efficiencies. Net cash used in financing activities increased
to $8.1 million compared to net cash provided from financing activities of $12.4
million for the six months ended March 1, 1998 due to the Company retiring its
principal U.S. credit facility in connection with the August 1998 senior
subordinated debt placement and principally financing its U.S. operating and
investing activities through cash flow from operations and its on-hand cash and
cash equivalents.
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.
As of February 28, 1999, Albecca had outstanding indebtedness of
approximately $259.9 million, consisting of $200.0 million in principal amount
of the August 1998 senior subordinated debt and $59.9 million of other
indebtedness compared to $262.8 million as of August 30, 1998.
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.
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.
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 just 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.
15
<PAGE> 16
Albecca estimates that it will incur expenses of $.9 million to $1.2
million in conjunction with the Year 2000 compliance project. As of February 28,
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 July 31, 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 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).
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C>
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 -- Lease Agreement, dated August 8, 1991, by and between L-J
Properties Inc. and Larson-Juhl Inc. (incorporated by
reference to Exhibit 10.2 of Albecca's Registration Statement
on Form S-4 (No. 333-67975) as declared effective by the SEC
on February 12, 1999).
10.3 -- Amendment No. 1 to Lease Agreement dated October 26, 1993, by
and between L-J Properties Inc. and Larson-Juhl Inc.
(incorporated by reference to Exhibit 10.3 of Albecca's
Registration Statement on Form S-4 (No. 333-67975) as declared
effective by the SEC on February 12, 1999).
10.4 -- 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
17
<PAGE> 18
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: April 14, 1999 /s/ Craig A. Ponzio
------------------- --------------------------------------------
Craig A. Ponzio, Chairman of the Board,
President, Chief Executive Officer
(Principal Executive Officer)
Date: April 14, 1999 /s/ Stephen M. Scheppmann
------------------- --------------------------------------------
Stephen M. Scheppmann,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999
AND THE CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 28, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-END> FEB-28-1999
<CASH> 40,673
<SECURITIES> 0
<RECEIVABLES> 60,745
<ALLOWANCES> 6,643
<INVENTORY> 74,479
<CURRENT-ASSETS> 177,250
<PP&E> 86,665
<DEPRECIATION> 25,559
<TOTAL-ASSETS> 296,279
<CURRENT-LIABILITIES> 80,840
<BONDS> 200,000
0
0
<COMMON> 170
<OTHER-SE> (30,026)
<TOTAL-LIABILITY-AND-EQUITY> 296,279
<SALES> 201,299
<TOTAL-REVENUES> 201,299
<CGS> 114,507
<TOTAL-COSTS> 186,345
<OTHER-EXPENSES> 246
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,650
<INCOME-PRETAX> 2,308
<INCOME-TAX> 1,310
<INCOME-CONTINUING> 15,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 500
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
