<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 28, 2000.
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 [ ]
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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 29, 1999 (audited)
and May 28, 2000 (unaudited) .......................................................................3
Consolidated Statements of Operations for the three and nine months ended
May 30, 1999 (unaudited) and May 28, 2000 (unaudited) .............................................4
Consolidated Statements of Cash Flows for the nine months ended
May 30, 1999 (unaudited) and May 28, 2000 (unaudited) .............................................5
Notes to the Consolidated Financial Statements .....................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................................................18
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K ....................................................................22
Signatures .........................................................................................................23
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALBECCA INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
August 29, 1999 May 28, 2000
--------------- ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,058 $ 24,985
Accounts receivable, less allowances for doubtful accounts of
$5,190 and $6,329 at August 29, 1999 and May 28, 2000 47,298 42,678
Inventories 67,620 52,074
Other current assets 5,057 5,957
--------- ---------
Total current assets 155,033 125,694
PROPERTY, PLANT AND EQUIPMENT, net 53,485 44,659
OTHER LONG-TERM ASSETS 58,040 43,599
--------- ---------
$ 266,558 $ 213,952
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 26,589 $ 13,312
Accounts payable 26,423 22,012
Accrued liabilities 26,331 29,389
--------- ---------
Total current liabilities 79,343 64,713
--------- ---------
LONG-TERM DEBT, less current maturities 213,211 173,774
--------- ---------
OTHER LONG-TERM LIABILITIES 7,937 8,975
--------- ---------
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 (33,098) (27,426)
Cumulative foreign currency translation adjustment (8,331) (13,580)
--------- ---------
Total shareholders' deficit (33,933) (33,510)
--------- ---------
$ 266,558 $ 213,952
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
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ALBECCA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- --------------------------------
May 30, 1999 May 28, 2000 May 30, 1999 May 28, 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 96,224 $ 87,883 $ 297,523 $ 282,156
Cost of sales 55,765 47,647 170,272 157,335
-------- -------- --------- ---------
Gross profit 40,459 40,236 127,251 124,821
Operating expenses 33,932 24,645 105,770 88,264
Restructuring charges 1,245 855 1,491 855
Write-down of goodwill -- -- -- 4,997
-------- -------- --------- ---------
Operating income 5,282 14,736 19,990 30,705
Loss on disposition of Mersch entities -- 472 -- 1,854
Interest income (604) (1,263) (1,623) (3,094)
Interest expense 6,245 6,033 19,914 18,402
-------- -------- --------- ---------
Income (loss) before provision for income taxes,
minority interest and extraordinary gain (359) 9,494 1,699 13,543
Provision for income taxes 539 358 1,849 1,583
Minority interest 107 58 355 262
-------- -------- --------- ---------
Income (loss) before extraordinary gain (1,005) 9,078 (505) 11,698
Extraordinary gain on retirement of debt,
net of tax 1,008 -- 1,008 4,524
-------- -------- --------- ---------
Net income $ 3 $ 9,078 $ 503 $ 16,222
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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ALBECCA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
May 30, 1999 May 28, 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 503 $ 16,222
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 355 262
Depreciation and amortization 6,619 6,384
Loss (gain) on disposal of property, plant and equipment 483 (78)
Write-down of goodwill -- 4,997
Loss on disposition of Mersch entities -- 1,854
Extraordinary gain on retirement of debt (1,008) (4,524)
Changes in operating assets and liabilities:
Accounts receivable (2,704) (3,686)
Inventories 1,876 9,760
Other current assets (1,001) (905)
Accounts payable (1,745) (885)
Accrued liabilities 8,990 5,430
Other (1,632) 1,167
-------- --------
Net cash provided by operating activities 10,736 35,998
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,520) (7,760)
Acquisitions of businesses, net (3,594) (2,449)
Proceeds from sales of property, plant and equipment 1,624 1,452
Proceeds from disposition of Mersch entities -- 16,278
Changes in other long-term assets (627) 1,205
-------- --------
Net cash (used in) provided by investing activities (7,117) 8,726
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for additional debt issue costs (195) --
Proceeds from revolving credit facilities 26,679 20,550
Repayments of revolving credit facilities (25,411) (29,199)
Proceeds from long-term debt 14,486 3,098
Repayments of long-term debt (27,490) (40,219)
Distributions to shareholders (4,308) (10,550)
-------- --------
Net cash used in financing activities (16,239) (56,320)
-------- --------
EFFECT OF EXCHANGE RATE ON CASH (1,790) 1,523
-------- --------
NET DECREASE IN CASH (14,410) (10,073)
CASH and cash equivalents at beginning of period 54,884 35,058
-------- --------
CASH and cash equivalents at end of period $ 40,474 $ 24,985
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 14,969 $ 13,245
======== ========
Income taxes paid $ 2,531 $ 2,382
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. INTERIM FINANCIAL STATEMENT PRESENTATION
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 Form 10-K for the fiscal year ended August 29, 1999, as filed with the
Securities and Exchange Commission.
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 3. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Albecca
Inc. ("Albecca", the "Company") and its subsidiaries. All significant
intercompany transactions have been eliminated. Minority interest represents
minority shareholders' interest in majority-owned subsidiaries.
Note 4. INCOME TAXES
Albecca is an S corporation and several of its subsidiaries are
classified as either partnerships or single member entities. 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 5. ACQUISITION
During March 2000, the Company acquired the outstanding 23% interest in
its Italian subsidiary for approximately $2.4 million in cash.
Note 6. INFREQUENT ITEMS
WRITE-DOWN OF GOODWILL
In October 1997, the Company acquired Robert F. deCastro, Inc.
("deCastro") a distributor of products in the pre-framed art and the custom
framing markets. Since the acquisition, the demand in the markets for the
deCastro product line has dramatically decreased or ceased. As a result, in the
second quarter of fiscal 2000, management determined to redirect its effort from
pre-framed art and to focus its energies and resources, both financial and
managerial, on the custom picture framing market. The Company determined that
the estimated future undiscounted cash flows of the deCastro product line were
below the carrying value of the associated long-lived assets, primarily
consisting of goodwill. Accordingly, during the second quarter of fiscal 2000,
the Company adjusted the carrying value of deCastro's unamortized goodwill to
its estimated fair value of approximately $.2 million, resulting in a non-cash
impairment charge of approximately $5.0 million. The estimated fair value of
goodwill was based on anticipated future cash flows discounted at a rate
commensurate with the risk involved.
DISPOSITION OF MERSCH ENTITIES
In the second quarter of fiscal 2000, Albecca made a decision to sell
its investment in its Mersch entities, a manufacturer and supplier of readymade
frames to large European discount stores, located in Germany and France. This
decision was based on management's continued initiative to focus its energies
and resources, both financial and managerial, on the European custom picture
framing market. In January 2000, Albecca sold its investment in its Mersch
entities for cash of $16.3 million and retained certain long-term assets of $3.0
million, for total gross consideration of $19.3 million. In addition, the
Company retained certain liabilities of $12.5 million (which were primarily paid
at closing).
6
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ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The loss on the disposition of the Mersch entities, recorded during the second
quarter of fiscal 2000, was approximately $1.4 million.
During the third quarter of fiscal 2000, the Company determined that
the realizable value of one of the Mersch buildings, a long-term asset retained
in the sale, was less than previously estimated. Therefore, the Company has
recorded an additional loss on the disposition of the Mersch entities of $.5
million, which represents the write-down of this asset to estimated realizable
value from future sale. This increases the total loss on the disposition of the
Mersch entities to $1.9 million.
The sale agreements required the Mersch entities to maintain a minimum
level of working capital through the closing date as supported by a closing
balance sheet audit, which has not yet been agreed to by the respective parties.
In the opinion of management, the disposition of the Mersch entities will not
have a material impact on the future operations or financial position of the
Company. The Mersch entities' five month sales and operating income for fiscal
2000 were approximately $10.0 million and $.1 million, respectively.
RESTRUCTURING CHARGES
UNITED KINGDOM - NORTHAMPTON
During the third quarter of fiscal 2000, the Company initiated a
restructuring plan related to the closure of one of its facilities in the United
Kingdom and recorded a charge to operations of approximately $909,000.
Management made the decision to close this operation 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. This charge included
severance costs for 37 team members approximating $222,000, a $270,000
write-down of property, plant and equipment to its estimated realizable value,
$233,000 of lease termination costs and $184,000 of other exit costs including
post-closure maintenance and administrative costs. The $233,000 of lease
termination costs represent the Company's estimated future obligations under the
existing lease commitments of the closed facility, net of estimated recoverable
costs through subleasing. Management anticipates the restructuring plan will be
completed prior to the second quarter of fiscal 2001.
PREVIOUSLY REPORTED RESTRUCTURING PLANS
SWEDEN
As of May 28, 2000, the Company's closure of its duplicate facilities
in Sweden was complete. None of the 25 team members originally identified for
termination remained at the facility. The facility was sold in August 1999 and
physical possession was transferred during the second quarter of fiscal 2000.
NEW ZEALAND
As of May 28, 2000, the Company, through its Australian operations,
continued to sell existing assets and collect existing accounts receivable
related to its closed New Zealand distribution operations. None of the 9 team
members originally identified for termination remained at the facility at May
28, 2000. The Company estimates that the remaining closure activities will be
materially complete by the end of fiscal 2000.
GREECE
As of May 28, 2000, one of the original 14 team members related to the
Company's closed distribution operations in Greece remained to sell existing
assets and collect existing accounts receivable. The Company estimates that the
team member will continue to provide services through the second quarter of
fiscal 2001.
7
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ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
UNITED STATES
As of May 28, 2000, the Company's closure of its duplicate facilities
in the United States was complete. None of the 17 team members originally
identified for termination remained at the facility. The unused balance of
$29,000 of the remaining restructuring provision was reversed and reflected as a
component of the current restructuring charges incurred during the third quarter
of fiscal 2000.
UNITED KINGDOM - PLASTIC MOULDING MANUFACTURING OPERATIONS
As of May 28, 2000, none of the original 59 team members remained with
respect to the closure of the Company's plastic moulding manufacturing
operations in the United Kingdom and all material events associated with the
restructuring plan had been completed. The unused balance of $25,000 of the
remaining restructuring provision was reversed and reflected as a component of
the current restructuring charges incurred during the third quarter of fiscal
2000.
For more descriptive information of the above mentioned restructuring
plans, please see the Company's Form 10-K for the fiscal year ended August 29,
1999, as filed with the Securities and Exchange Commission.
SUMMARY OF RESTRUCTURING PLANS.
As of May 28, 2000, as it relates to the Company's fiscal 1998, 1999
and 2000 restructuring plans, approximately $791,000 of restructuring charges
remained in accrued liabilities representing approximately $246,000 of severance
and other termination costs and approximately $545,000 of lease termination and
other related exit costs.
A summary of the previously reported restructuring plans and activity
and restructuring plans adopted during the third quarter of fiscal 2000 consist
of the following estimated accrued future cash/non-cash requirements:
<TABLE>
<CAPTION>
Write-down Severance
of property and other
and termination Other exit
CLOSURE OF UNITED KINGDOM - NORTHAMPTON: equipment benefits costs Total
----------- ----------- ---------- --------
<S> <C> <C> <C> <C>
2000 Provision $270,000 $222,000 $417,000 $909,000
Non-cash 270,000 -- -- 270,000
-------- -------- -------- --------
Cash -- 222,000 417,000 639,000
Third quarter 2000 cash activity (unaudited) -- -- -- --
-------- -------- -------- --------
Balance as of May 28, 2000 (unaudited) $ -- $222,000 $417,000 $639,000
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Write-down Severance
of property and other
and termination Other exit
CLOSURE OF SWEDEN DUPLICATE FACILITY: equipment benefits costs Total
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1999 Provision $700,000 $ 275,000 $ 45,000 $ 1,020,000
Non-cash 700,000 -- -- 700,000
-------- --------- -------- -----------
Cash -- 275,000 45,000 320,000
Fiscal 1999 cash activity -- (125,000) (30,000) (155,000)
-------- --------- -------- -----------
Balance as of August 29, 1999 -- 150,000 15,000 165,000
First quarter 2000 cash activity (unaudited) -- (150,000) (15,000) (165,000)
-------- --------- -------- -----------
Balance as of November 28, 1999 (unaudited) -- -- -- --
Second quarter 2000 cash activity (unaudited) -- -- -- --
-------- --------- -------- -----------
Balance as of February 27, 2000 (unaudited) -- -- -- --
Third quarter 2000 cash activity (unaudited) -- -- -- --
-------- --------- -------- -----------
Balance as of May 28, 2000 (unaudited) $ -- $ -- $ -- $ --
======== ========= ======== ===========
</TABLE>
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ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
<TABLE>
<CAPTION>
Write-down Severance
of property and other
and termination Other exit
CLOSURE OF OPERATIONS IN NEW ZEALAND: equipment benefits costs Total
----------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
1999 Provision $75,000 $ 48,000 $ 102,000 $ 225,000
Non-cash 75,000 -- -- 75,000
------- -------- --------- ---------
Cash -- 48,000 102,000 150,000
Fiscal 1999 cash activity -- (30,000) (75,000) (105,000)
------- -------- --------- ---------
Balance as of August 29, 1999 -- 18,000 27,000 45,000
First quarter 2000 cash activity (unaudited) -- (3,000) (3,000) (6,000)
------- -------- --------- ---------
Balance as of November 28, 1999 (unaudited) -- 15,000 24,000 39,000
Second quarter 2000 cash activity (unaudited) -- -- -- --
------- -------- --------- ---------
Balance as of February 27, 2000 (unaudited) -- 15,000 24,000 39,000
Third quarter 2000 cash activity (unaudited) -- -- -- --
------- -------- --------- ---------
Balance as of May 28, 2000 (unaudited) $ -- $ 15,000 $ 24,000 $ 39,000
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Severance
and other
Write-off of termination Other exit
CLOSURE OF OPERATIONS IN GREECE: goodwill benefits costs Total
------------ ----------- ---------- ---------
<S> <C> <C> <C> <C>
1998 Provision $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 as of August 30, 1998 -- 79,000 104,000 183,000
1999 provision -- -- 129,000 129,000
Fiscal 1999 cash activity -- (70,000) (129,000) (199,000)
------- -------- --------- ---------
Balance as of August 29, 1999 -- 9,000 104,000 113,000
First quarter 2000 cash activity (unaudited) -- -- -- --
------- -------- --------- ---------
Balance as of November 28, 1999 (unaudited) -- 9,000 104,000 113,000
Second quarter 2000 cash activity (unaudited) -- -- -- --
------- -------- --------- ---------
Balance as of February 27, 2000 (unaudited) -- 9,000 104,000 113,000
Third quarter 2000 cash activity (unaudited) -- -- -- --
------- -------- --------- ---------
Balance as of May 28, 2000 (unaudited) $ -- $ 9,000 $ 104,000 $ 113,000
======= ======== ========= =========
</TABLE>
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ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
<TABLE>
<CAPTION>
Severance
and other
termination Other exit
CLOSURE OF U.S. FACILITIES: benefits costs Total
----------- ----------- ---------
<S> <C> <C> <C>
1998 Provision $ 234,000 $ 42,000 $ 276,000
Non-cash -- -- --
--------- --------- ---------
Cash 234,000 42,000 276,000
Fiscal 1998 cash activity -- (42,000) (42,000)
--------- --------- ---------
Balance as of August 30, 1998 234,000 -- 234,000
1999 provision -- 117,000 117,000
Fiscal 1999 cash activity (145,000) (108,000) (253,000)
--------- --------- ---------
Balance as of August 29, 1999 89,000 9,000 98,000
First quarter 2000 provision (unaudited) (54,000) 54,000 --
First quarter 2000 cash activity (unaudited) (15,000) (54,000) (69,000)
--------- --------- ---------
Balance as of November 28, 1999 (unaudited) 20,000 9,000 29,000
Second quarter 2000 cash activity (unaudited) -- -- --
--------- --------- ---------
Balance as of February 27, 2000 (unaudited) 20,000 9,000 29,000
Third quarter 2000 reversal of provision (unaudited) (20,000) (9,000) (29,000)
--------- --------- ---------
Balance as of May 28, 2000 (unaudited) $ -- $ -- $ --
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Write-down Severance Lease
of property and other termination
CLOSURE OF UNITED KINGDOM PLASTIC MOULDING and termination and exit
MANUFACTURING OPERATIONS: equipment benefits costs Total
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1998 Provision $775,000 $230,000 $ 465,000 $1,470,000
Non-cash 775,000 -- -- 775,000
------- -------- --------- ----------
Cash -- 230,000 465,000 695,000
Fiscal 1998 cash activity -- (216,000) -- (216,000)
------- -------- --------- ----------
Balance as of August 30, 1998 -- 14,000 465,000 479,000
Fiscal 1999 cash activity -- (14,000) (440,000) (454,000)
------- -------- --------- ----------
Balance as of August 29, 1999 -- -- 25,000 25,000
First quarter 2000 cash activity (unaudited) -- -- -- --
------- -------- --------- ----------
Balance as of November 28, 1999 (unaudited) -- -- 25,000 25,000
Second quarter 2000 cash activity (unaudited) -- -- -- --
------- -------- --------- ----------
Balance as of February 27, 2000 (unaudited) -- -- 25,000 25,000
Third quarter 2000 reversal of provision (unaudited) -- -- (25,000) (25,000)
------- -------- --------- ----------
Balance as of May 28, 2000 (unaudited) $ -- $ -- $ -- $ --
======= ======== ========= ==========
</TABLE>
Note 7. EXTRAORDINARY GAIN
In September and November 1999, and February 2000, the Company retired
a portion of its senior subordinated notes with a combined face value of $23.8
million. The debt retirements resulted in extraordinary gains approximating $4.5
million, net of state income taxes of approximately $.2 million.
10
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ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 8. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 29, 1999 May 28, 2000
---------------- ------------
<S> <C> <C>
Raw materials $12,435 $ 9,103
Work in process 2,276 2,186
Finished goods 52,909 40,785
------- -------
$67,620 $52,074
======= =======
</TABLE>
Note 9. STOCK OPTION PLAN
In 1998, the Company adopted the Albecca Inc. 1998 Stock Option Plan.
In March 1999, the Company awarded 378,000 non-qualified options to acquire
shares of common stock at $6.46 per share to certain members of management under
the Stock Option Plan. No compensation expense was recognized relating to these
grants, as the exercise price was equal to the fair market value as determined
by management's estimation at the time of grant. The options granted vest on
November 1, 2003.
In May 2000, the Company elected to reduce the exercise price of the
options issued under the 1998 Stock Option Plan from $6.46 per share to $5.80
per share. Due to the repricing, the Company will record an aggregate
compensation charge of approximately $1.6 million, which will be amortized over
the remaining life of the options, or 41 months. The Company has recorded a
compensation charge during the third quarter of $.05 million related to this
change.
Note 10. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Note 11. COMPREHENSIVE INCOME
Comprehensive income for the Company is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
May 30, 1999 May 28, 2000 May 30, 1999 May 28, 2000
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Net income, as reported $ 3 $ 9,078 $ 503 $ 16,222
Foreign currency translation adjustment (1,688) (3,831) (2,093) (5,249)
------- ------- ------- --------
Total comprehensive income (loss) $(1,685) $ 5,247 $(1,590) $ 10,973
======= ======= ======= ========
</TABLE>
Note 12. COMMITMENTS AND CONTINGENCIES
CONSTRUCTION OF MANUFACTURING FACILITY
Albecca has entered into a commitment to build a new manufacturing
facility in Ashland, Wisconsin, consisting of land and a building, for a net
capitalizable cost of approximately $4.3 million. As of May 28, 2000, the
Company had expended approximately $4.1 million for this project. Completion of
construction is expected by the end of fiscal 2000.
LITIGATION
In the third quarter of fiscal 2000, Albecca either settled or reached
substantive agreement on certain outstanding litigation. As a result of the
settlement of this litigation during the third quarter of fiscal 2000, the
Company reversed $3.9 million of previously provided reserves recorded during
fiscal 1998 and prior periods. These amounts were reflected as a reduction of
operating expenses in the Company's third quarter.
The Company is involved in certain other litigation arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
11
<PAGE> 12
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 13. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES
DEFERRED COMPENSATION
During May 2000, the Company amended certain bonus arrangements with
its Chief Executive Officer and majority shareholder whereby payment of certain
amounts, earned in fiscal years 1999 and 1998, aggregating $1.8 million would be
deferred and paid after fiscal year 2001. As such, the liability for these
deferred amounts have been classified as long-term liabilities in the
accompanying balance sheets.
During the third quarter of fiscal 2000, the Company finalized certain
employee bonuses related to fiscal 1999. Accordingly, the Company decreased its
estimate of accrued bonuses to the amount actually paid. As a result, the
Company reversed previously provided reserves recorded during fiscal 1999 of
$.5 million. These amounts were reflected as a reduction of operating expenses
in the Company's third quarter of fiscal 2000.
EMPLOYER BENEFIT PLAN
In January 2000, the Company replaced its self-funded medical employer
benefit plan with a similar plan that was fully insured by third party
insurers. In May 2000, the Company settled open obligations under the
terminated plan in a favorable manner. As a result, during the third quarter
$.7 million was reversed relating to previously provided reserves recorded in
prior periods. These amounts were reflected as a reduction of operating
expenses in the Company's third quarter of fiscal 2000.
Note 14. SUBSEQUENT EVENTS
DISPOSITION OF BRIO
Subsequent to the end of the third quarter of fiscal 2000, the Company
sold it's Brio operations, a manufacturer and supplier of readymade frames and
framing supplies to large "Do-It-Yourself" stores in Europe. This decision was
based on management's decision to focus its energies and resources, both
financial and managerial, on the European custom picture framing market. The
transaction was concluded on May 31, 2000, for cash of $14.0 million. The gain
on the disposition of Brio was approximately $1.8 million. The sales agreement
required Brio to maintain a minimum level of working capital through the closing
date as supported by a closing balance sheet audit, which has not yet been
completed. As such, the preliminary estimated gain is subject to adjustment
pending the final results of the audit. Brio's nine-month sales and operating
income for fiscal 2000 were approximately $16.1 million and $.9 million,
respectively. In the opinion of management, the disposition of Brio will not
have a material impact on the future operations or financial position of the
Company.
INDUSTRIAL REVENUE BOND PLACEMENT
In June 2000, the Company completed an Industrial Revenue Bond
placement through an economic incentive program by the City of Ashland,
Wisconsin, relating to the development of the Company's new manufacturing plant
and purchase of associated equipment. The placement was for $4.6 million, net of
debt issuance costs of $.09 million, of variable interest rate notes with a
weekly adjusting rate, which at closing was 4.37%. Amortization of the bonds
consists of interest only payments for the first five years and a subsequent
amortization period of fifteen years with varying annual principal payments
ranging from $.2 million to $.4 million. The bonds are secured by a letter of
credit that is collateralized by the new manufacturing plant and a majority of
the related new and existing furniture, machinery and equipment.
RETIREMENT OF SENIOR SUBORDINATED NOTES
Subsequent to the end of the third quarter of fiscal 2000, the Company
retired a portion of its senior subordinated notes with a combined face value of
$5.0 million. The debt retirement will result in an extraordinary gain of
approximately $.6 million, net of state income taxes of approximately $.02
million.
Note 15. 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.
12
<PAGE> 13
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
May 28, 2000
(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 $ 18,443 $ 846 $ 5,696 $ -- $ 24,985
Accounts receivable, net -- 19,802 22,876 -- 42,678
Intercompany accounts receivable -- 60,057 278 (60,335) --
Inventories -- 21,602 30,472 -- 52,074
Other current assets 1,068 801 4,088 -- 5,957
--------- -------- --------- --------- ---------
Total current assets 19,511 103,108 63,410 (60,335) 125,694
PROPERTY, PLANT AND EQUIPMENT, net -- 11,017 33,642 -- 44,659
OTHER LONG-TERM ASSETS 5,412 13,687 24,500 -- 43,599
INVESTMENT IN SUBSIDIARIES 43,453 -- 7,886 (51,339) --
INTERCOMPANY LOANS RECEIVABLE 97,935 -- -- (97,935) --
--------- -------- --------- --------- ---------
$ 166,311 $127,812 $ 129,438 $(209,609) $ 213,952
========= ======== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 887 $ 12,425 $ -- $ 13,312
Accounts payable -- 7,860 14,152 -- 22,012
Intercompany accounts payable 53,787 202 6,346 (60,335) --
Accrued liabilities 6,359 13,304 9,726 -- 29,389
--------- -------- --------- --------- ---------
Total current liabilities 60,146 22,253 42,649 (60,335) 64,713
--------- -------- --------- --------- ---------
LONG-TERM DEBT, less current maturities 164,930 1,483 7,361 -- 173,774
--------- -------- --------- --------- ---------
INTERCOMPANY LOANS PAYABLE -- -- 97,935 (97,935) --
--------- -------- --------- --------- ---------
OTHER LONG-TERM LIABILITIES -- 5,785 3,190 -- 8,975
--------- -------- --------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock -- -- -- -- --
Class A common stock 4 -- -- -- 4
Class B common stock 166 -- -- -- 166
Additional paid-in capital 8,912 41,826 7,927 (51,339) 7,326
Accumulated earnings (deficit) (67,847) 56,051 (15,630) -- (27,426)
Cumulative foreign currency translation adjustment -- 414 (13,994) -- (13,580)
--------- -------- --------- --------- ---------
Total shareholders' equity (deficit) (58,765) 98,291 (21,697) (51,339) (33,510)
--------- -------- --------- --------- ---------
$ 166,311 $127,812 $ 129,438 $(209,609) $ 213,952
========= ======== ========= ========= =========
</TABLE>
13
<PAGE> 14
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
August 29, 1999
--------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,424 $ 1,747 $ 5,887 $ -- $ 35,058
Accounts receivable, net -- 17,526 29,772 -- 47,298
Intercompany accounts receivable -- 29,917 513 (30,430) --
Inventories -- 28,212 39,408 -- 67,620
Other current assets 49 432 4,576 -- 5,057
--------- -------- --------- --------- ---------
Total current assets 27,473 77,834 80,156 (30,430) 155,033
PROPERTY, PLANT AND EQUIPMENT, net -- 8,088 45,397 -- 53,485
OTHER LONG-TERM ASSETS 6,443 18,884 32,713 -- 58,040
INVESTMENT IN SUBSIDIARIES 43,453 -- 7,559 (51,012) --
INTERCOMPANY LOANS RECEIVABLE 94,598 -- 13 (94,611) --
--------- -------- --------- --------- ---------
$ 171,967 $104,806 $ 165,838 $(176,053) $ 266,558
========= ======== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 2,209 $ 24,380 $ -- $ 26,589
Accounts payable -- 8,611 17,812 -- 26,423
Intercompany accounts payable 21,742 155 8,533 (30,430) --
Accrued liabilities 895 16,336 9,100 -- 26,331
--------- -------- --------- --------- ---------
Total current liabilities 22,637 27,311 59,825 (30,430) 79,343
--------- -------- --------- --------- ---------
LONG-TERM DEBT, less current maturities 188,750 2,045 22,416 -- 213,211
--------- -------- --------- --------- ---------
INTERCOMPANY LOANS PAYABLE -- 13 94,598 (94,611) --
--------- -------- --------- --------- ---------
OTHER LONG-TERM LIABILITIES -- 3,975 3,962 -- 7,937
--------- -------- --------- --------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock -- -- -- -- --
Class A common stock 4 -- -- -- 4
Class B common stock 166 -- -- -- 166
Additional paid-in capital 8,912 41,500 7,926 (51,012) 7,326
Accumulated earnings (deficit) (48,502) 29,811 (14,407) -- (33,098)
Cumulative foreign currency translation adjustment -- 151 (8,482) -- (8,331)
--------- -------- --------- --------- ---------
Total stockholders' equity (deficit) (39,420) 71,462 (14,963) (51,012) (33,933)
--------- -------- --------- --------- ---------
$ 171,967 $104,806 $ 165,838 $(176,053) $ 266,558
========= ======== ========= ========= =========
</TABLE>
14
<PAGE> 15
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
May 28, 2000 (Unaudited)
--------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 55,531 $ 34,806 $ (2,454) $ 87,883
Cost of sales -- 28,669 21,432 (2,454) 47,647
--------- -------- --------- --------- ---------
Gross profit -- 26,862 13,374 -- 40,236
Operating expenses 12 12,098 12,535 -- 24,645
Restructuring charges -- (29) 884 -- 855
--------- -------- --------- --------- ---------
Operating income (loss) (12) 14,793 (45) -- 14,736
Loss on disposition of Mersch entities -- -- 472 -- 472
Interest income (1,263) -- -- -- (1,263)
Interest expense 5,464 64 505 -- 6,033
--------- -------- --------- --------- ---------
Income (loss) before provision for income
taxes and minority interest (4,213) 14,729 (1,022) -- 9,494
Provision for income taxes -- 120 238 -- 358
Minority interest -- -- 58 -- 58
--------- -------- --------- --------- ---------
Net income (loss) $ (4,213) $ 14,609 $ (1,318) $ -- $ 9,078
========= ======== ========= ========= =========
</TABLE>
<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 gain (4,646) 5,031 (744) -- (359)
Provision for income taxes -- 130 409 -- 539
Minority interest -- -- 107 -- 107
--------- -------- --------- --------- ---------
Income (loss) before extraordinary gain (4,646) 4,901 (1,260) -- (1,005)
Extraordinary gain on retirement of debt,
net of tax 1,008 -- -- -- 1,008
--------- -------- --------- --------- ---------
Net income (loss) $ (3,638) $ 4,901 $ (1,260) $ -- $ 3
========= ======== ========= ========= =========
</TABLE>
15
<PAGE> 16
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
May 28, 2000 (Unaudited)
--------------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $167,363 $ 121,415 $ (6,622) $ 282,156
Cost of sales -- 89,576 74,381 (6,622) 157,335
--------- -------- --------- --------- ---------
Gross profit -- 77,787 47,034 -- 124,821
Operating expenses 109 45,996 42,159 -- 88,264
Restructuring charges -- (29) 884 -- 855
Write-down of goodwill -- 4,997 -- -- 4,997
--------- -------- --------- --------- ---------
Operating income (loss) (109) 26,823 3,991 -- 30,705
Loss on disposition of Mersch entities -- -- 1,854 -- 1,854
Interest income (3,094) -- -- -- (3,094)
Interest expense 16,304 223 1,875 -- 18,402
--------- -------- --------- --------- ---------
Income (loss) before provision for income taxes,
minority interest and extraordinary gain (13,319) 26,600 262 -- 13,543
Provision for income taxes -- 360 1,223 -- 1,583
Minority interest -- -- 262 -- 262
--------- -------- --------- --------- ---------
Income (loss) before extraordinary gain (13,319) 26,240 (1,223) -- 11,698
Extraordinary gain on retirement of debt,
net of tax 4,524 -- -- -- 4,524
--------- -------- --------- --------- ---------
Net income (loss) $ (8,795) $ 26,240 $ (1,223) $ -- $ 16,222
========= ======== ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 20,144 $ 5,442 $ 10,412 $ -- $ 35,998
--------- -------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment -- (4,892) (2,868) -- (7,760)
Acquisitions of businesses, net -- -- (2,449) -- (2,449)
Proceeds from sales of property, plant and equipment -- 63 1,389 -- 1,452
Proceeds from disposition of Mersch entities -- -- 16,278 -- 16,278
Changes in other long-term assets 721 (186) 670 -- 1,205
--------- -------- --------- --------- ---------
Net cash provided by (used in) investing activities 721 (5,015) 13,020 -- 8,726
--------- -------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities -- -- 20,550 -- 20,550
Repayments of revolving credit facilities -- -- (29,199) -- (29,199)
Proceeds from long-term debt -- 157 2,941 -- 3,098
Repayments of long-term debt (19,296) (2,015) (18,908) -- (40,219)
Distributions to shareholders (10,550) -- -- -- (10,550)
--------- -------- --------- --------- ---------
Net cash used in financing activities (29,846) (1,858) (24,616) -- (56,320)
--------- -------- --------- --------- ---------
EFFECT OF EXCHANGE RATE ON CASH -- 530 993 -- 1,523
--------- -------- --------- --------- ---------
NET DECREASE IN CASH (8,981) (901) (191) -- (10,073)
Cash and cash equivalents at beginning of period 27,424 1,747 5,887 -- 35,058
--------- -------- --------- --------- ---------
Cash and cash equivalents at end of period $ 18,443 $ 846 $ 5,696 $ -- $ 24,985
========= ======== ========= ========= =========
</TABLE>
16
<PAGE> 17
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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 gain (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 gain (15,159) 14,063 591 -- (505)
Extraordinary gain on retirement of debt,
net of tax 1,008 -- -- -- 1,008
--------- -------- --------- --------- ---------
Net income (loss) $ (14,151) $ 14,063 $ 591 $ -- $ 503
========= ======== ========= ========= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NET CASH (USED IN) PROVIDED BY
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, net -- -- (3,594) -- (3,594)
Proceeds from sales of property, plant and equipment -- 37 1,587 -- 1,624
Changes in other long-term assets (321) 305 (611) -- (627)
--------- -------- --------- --------- ---------
Net cash used in investing activities (321) (746) (6,050) -- (7,117)
--------- -------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for additional debt issue costs (195) -- -- -- (195)
Proceeds from revolving credit facilities -- 512 26,167 -- 26,679
Repayments 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 used in financing activities (12,366) (72) (3,801) -- (16,239)
--------- -------- --------- --------- ---------
EFFECT OF EXCHANGE RATE ON CASH -- 30 (1,820) -- (1,790)
--------- -------- --------- --------- ---------
NET (DECREASE) INCREASE IN CASH (12,746) 159 (1,823) -- (14,410)
Cash and cash equivalents at beginning of period 49,188 18 5,678 -- 54,884
--------- -------- --------- --------- ---------
Cash and cash equivalents at end of period $ 36,442 $ 177 $ 3,855 $ -- $ 40,474
========= ======== ========= ========= =========
</TABLE>
17
<PAGE> 18
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 30, 1999 May 28, 2000 May 30, 1999 May 28, 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.0 54.2 57.2 55.8
--------- --------- --------- ---------
Gross profit 42.0 45.8 42.8 44.2
Operating expenses 35.2 28.0 35.5 31.2
Restructuring charges 1.3 1.0 0.5 0.3
Write-down of goodwill -- -- -- 1.8
--------- --------- --------- ---------
Operating income 5.5 16.8 6.8 10.9
Loss on disposition of Mersch entities -- 0.5 -- 0.7
Interest income (0.6) (1.4) (0.5) (1.1)
Interest expense 6.4 6.9 6.7 6.5
--------- --------- --------- ---------
Income (loss) before provision for income
taxes, minority interest and extraordinary gain (0.3) 10.8 0.6 4.8
Provision for income taxes 0.6 0.4 0.6 0.6
Minority interest 0.1 0.1 0.1 0.1
--------- --------- --------- ---------
Income (loss) before extraordinary gain (1.0) 10.3 (0.1) 4.1
Extraordinary gain on retirement
of debt, net of tax 1.0 -- 0.3 1.6
--------- --------- --------- ---------
Net income 0.0% 10.3% 0.2% 5.7%
========= ========= ========= =========
</TABLE>
NET SALES
For the third quarter ended May 28, 2000, net sales were $87.9 million
compared to $96.2 million for the third quarter ended May 30, 1999. For the nine
months ended May 28, 2000, net sales were $282.2 million compared to $297.5
million for the nine months ended May 30, 1999. The decrease in net sales for
the three and nine months ended May 28, 2000 were primarily the result of the
sale of the South African operations completed at the end of fiscal 1999 and the
disposition of the Mersch entities completed during January of fiscal 2000,
along with unfavorable changes in foreign currency rates, partially offset by an
increase in sales to independent custom framing retailers. U.S. net sales
increased 10.5% and 9.8% for the three and nine months ended May 28, 2000 from
the comparable periods in 1999, primarily the result of an increase in sales to
independent custom framing retailers. International net sales decreased 28.7%
and 20.1% for the three and nine months ended May 28, 2000 from the comparable
periods in 1999 primarily due to the sale of the South African operations
completed at the end of fiscal 1999 and the disposition of the Mersch entities
completed during January of fiscal 2000 and the unfavorable changes in the
foreign currency exchange rates for the French franc, the Deutsche mark and the
Dutch guilder.
COST OF SALES
Cost of sales were $47.6 million and $157.3 million for the three and
nine months ended May 28, 2000, compared to $55.8 million and $170.3 million for
the three and nine months ended May 30, 1999. In the U.S., gross profit
increased to 48.4% and 46.5% for the three and nine months ended May 28, 2000,
compared to 44.9% and 45.3% for the comparable periods in 1999. The increase was
primarily the result of an improvement in the product mix sold and steps taken
last year by management to address its non-performing U.S. acquisition-related
inventory. International gross profit margin increased to 41.5% and 41.1% for
the three and nine months ended May 28, 2000, compared to 39.0% and 40.3% for
the comparable periods in 1999. This increase was primarily the result of a
decrease in net sales of lower-margin products associated with the recently sold
South African operations, as well as an increase of value added sales in Japan.
18
<PAGE> 19
OPERATING EXPENSES
Operating expenses were $24.6 million and $88.3 million for the three
and nine months ended May 28, 2000, compared to $33.9 million and $105.8 million
for the three and nine months ended May 30, 1999. In the U.S., operating
expenses as a percentage of net sales decreased to 21.2% and 26.8% for the three
and nine months ended May 28, 2000, compared to 33.4% and 34.2% for the
comparable periods in 1999. The decrease was primarily attributable to the
reduction of duplicative acquisition-related expenses and gains in efficiencies
at the acquisition locations, along with the reversals of previously provided
reserves as more fully described in Notes 12 and 13 to the consolidated
financial statements. International operating expenses as a percentage of net
sales increased to 38.9% and 37.4% for the three and nine months ended May 28,
2000, compared to 37.2% and 36.9% for the comparable periods in 1999. This
increase was primarily due to the decrease in net sales associated with the
recently sold South African operations and the Mersch entities, along with the
recording of charges associated with the closure of the United Kingdom -
Northampton location. Had the reversals of the previously provided reserves
referred to above and more fully described in Notes 12 and 13 to the
consolidated financial statements not taken place, operating expenses as a
percentage of net sales would have been 30.6% and 29.9% in the U.S. and 33.7%
and 33.0% for the total Company for the three and nine months ended May 28,
2000, respectively.
RESTRUCTURING CHARGES
During the third quarter and the nine months ended May 28, 2000, the
Company recorded a restructuring charge related to the closure of one of its
United Kingdom operations, explained more fully in Note 6 of the notes to the
accompanying consolidated financial statements. In addition, the Company off-set
the remaining $.03 million unused balance associated with the closure of its
duplicate facilities in the United States and the $.02 million unused balance
associated with the closure of the UK plastic moulding manufacturing operations
with the current restructuring charges incurred in the quarter. The
restructuring charges for the quarter were $.9 million. Restructuring charges of
$1.2 million and $1.5 million were recorded for the three and nine months ended
May 30, 1999.
WRITE-DOWN OF GOODWILL
In October 1997, the Company acquired Robert F. deCastro, Inc.
("deCastro") a distributor of products in the pre-framed art and the custom
framing markets. Since the acquisition, the demand in the markets for the
deCastro product line has dramatically decreased or ceased. As a result, in the
second quarter of fiscal 2000, management determined to redirect its effort from
pre-framed art and to focus its energies and resources, both financial and
managerial, on the custom picture framing market. The Company determined that
the estimated future undiscounted cash flows of the deCastro product line were
below the carrying value of the associated long-lived assets, primarily
consisting of goodwill. Accordingly, during the second quarter of fiscal 2000,
the Company adjusted the carrying value of deCastro's unamortized goodwill to
its estimated fair value of approximately $.2 million, resulting in a non-cash
impairment charge of approximately $5.0 million. The estimated fair value of
goodwill was based on anticipated future cash flows discounted at a rate
commensurate with the risk involved.
DISPOSITION OF MERSCH ENTITIES
In the second quarter of fiscal 2000, Albecca made a decision to sell
its investment in its Mersch entities, a manufacturer and supplier of readymade
frames to large European discount stores, located in Germany and France. This
decision was based on management's continued initiative to focus its energies
and resources, both financial and managerial, on the European custom picture
framing market. In January 2000, Albecca sold its investment in its Mersch
entities for cash of $16.3 million and retained certain long-term assets of $3.0
million, for total gross consideration of $19.3 million. In addition, the
Company retained certain liabilities of $12.5 million (which were primarily paid
at closing). The loss on the disposition of the Mersch entities, recorded during
the second quarter of fiscal 2000, was approximately $1.4 million.
During the third quarter of fiscal 2000, the Company determined that
the realizable value of one of the Mersch buildings, a long-term asset retained
in the sale, was less than previously estimated. Therefore, the Company has
recorded an additional loss on the disposition of the Mersch entities of $.5
million, which represents the write-down of this asset to estimated realizable
value from future sale. This increases the total loss on the disposition of the
Mersch entities to $1.9 million.
The sale agreements required the Mersch entities to maintain a minimum
level of working capital through the closing date as supported by a closing
balance sheet audit, which has not yet been agreed to by the respective parties.
In the opinion of management, the disposition of the Mersch entities will not
have a material impact on the future operations or financial position of the
Company. The Mersch entities' five month sales and operating income for fiscal
2000 were approximately $10.0 million and $.1 million, respectively.
19
<PAGE> 20
INTEREST INCOME
Interest income was $1.3 million and $3.1 million for the three and
nine months ended May 28, 2000, compared to $.6 million and $1.6 million for the
three and nine months ended May 30, 1999. The increase resulted primarily from
the interest income associated with the Company's investment in its senior
subordinated notes.
INTEREST EXPENSE
Interest expense was $6.0 million and $18.4 million for the three and
nine months ended May 28, 2000, compared to $6.2 million and $19.9 million for
the three and nine months ended May 30, 1999. The decrease in interest expense
is primarily due to a decrease in long-term debt associated with the sale of the
South African operations and the Mersch entities and the Company's continued
focus to reduce its debt.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
Consistent with its stated objective of using a portion of its cash to
lower its debt, including its senior subordinated debt, for the nine months
ended May 28, 2000, the Company retired $23.8 million of its senior subordinated
notes. The debt retirements resulted in extraordinary gains totaling $4.5
million, net of state income taxes of $.2 million.
NET INCOME
For the reasons set forth above, net income was $9.2 and $16.4 million
for the three and nine months ended May 28, 2000, compared to $.0 million and
$.5 million for the three and nine months ended May 30, 1999.
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 has been to
finance its working capital (principally inventory and accounts receivable),
capital expenditures, acquisitions and debt reduction. Consistent with its
stated objective, the Company will continue to use its cash, whether generated
from operations, third-party financing, or otherwise, to lower its debt,
including its senior subordinated debt. As of May 28, 2000, the Company had cash
and cash equivalents of $25.0 million compared to $35.1 million as of August 29,
1999.
Net cash provided by operating activities was $36.0 million for the
nine months ended May 28, 2000, compared to $10.7 million for the nine months
ended May 30, 1999. The increase is primarily attributable to the increase in
net income for the nine months ended May 28, 2000 and a reduction in the
Company's inventories during the period. Net cash provided by investing
activities increased to $8.7 million for the nine months ended May 28, 2000,
compared to net cash used of $7.1 million for the nine months ended May 30,
1999. The increase was primarily due to the disposition of the Company's Mersch
entities and a reduction in the Company's acquisition activities, partially
offset by an increase in capital expenditures. During the nine months ended May
28, 2000, the Company invested $7.8 million for capital expenditures, primarily
associated with the construction of the Company's new manufacturing plant
located in Ashland, Wisconsin. The land and building cost of the manufacturing
facility is expected to be approximately $4.3 million. As of May 28, 2000,
approximately $4.1 million had been expended on the project. Completion is
expected by the end of fiscal 2000. The Company also purchased the outstanding
23% interest in its Italian subsidiary for approximately $2.4 million. During
the nine months ended May 28, 2000, cash used in financing activities increased
to $56.3 million compared to $16.2 million for the nine months ended May 30,
1999, primarily due to the Company retiring a portion of its senior subordinated
debt with a face value of $23.8 million and debt reduction of $11.9 million
associated with the disposition of the Mersch entities.
As of May 28, 2000, Albecca had outstanding indebtedness of
approximately $187.1 million, consisting of $164.9 million in principal amount
of the August 1998 senior subordinated debt and $22.2 million of other
indebtedness. As of August 29, 1999, Albecca had outstanding indebtedness of
approximately $239.8 million, consisting of $188.8 million in principal amount
of the notes and $51.0 million of other indebtedness.
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 provide adequate
funds for the Company's foreseeable working capital needs, capital expenditures,
scheduled
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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 an ongoing program to assess the impact of Year 2000
compliance on its information technology systems and its non-information
technology systems and has formulated plans 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 continues to address
these deficiencies through upgrades, replacements, specific enhancements and
other corrective measures. 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 has completed its
testing.
Albecca has incurred expenses of $1.1 million in conjunction with the
Year 2000 compliance project. The majority of these expenditures were expensed
during fiscal 1999.
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.
As of the filing date of this Form 10-Q, the Company has not
experienced any significant Year 2000 issues arising from its systems or those
of its material vendors and suppliers. To the extent that there might be any
ongoing Year 2000 issues that might arise at a later date, the Company has
contingency plans in place to address such issues. The Company continues to
maintain close contact with third parties with whom it has material
relationships, such as vendors, suppliers and financial institutions, with
respect to such third parties' Year 2000 compliance and any ongoing Year 2000
issues that might arise at a later date. In light of the Company's efforts, the
Year 2000 issue has had no material adverse effect to date on the operations or
results of operations of the Company, and is not expected to have a material
impact on the Company's financial statements. However, there can be no assurance
that the Company or any third parties will not have ongoing Year 2000 issues
that may have a material adverse effect on the Company's business, operating
results and financial condition in the future.
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<S> <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).
27.1 -- Financial Data Schedule
</TABLE>
b. Reports on Form 8-K: None
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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 12, 2000 /s/ Craig A. Ponzio
------------- ---------------------------------------
Craig A. Ponzio, Chairman of the Board,
President, Chief Executive Officer
(Principal Executive Officer)
Date: July 12, 2000 /s/ R. Bradley Goodson
------------- ---------------------------------------
R. Bradley Goodson,
Vice President Finance,
Chief Financial Officer
(Principal Financial Officer)
23
