<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 27, 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 [ ].
<PAGE> 2
ALBECCA INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of August 29, 1999 (audited)
and February 27, 2000 (unaudited) ........................................ 3
Consolidated Statements of Operations for the three and six months ended
February 28, 1999 (unaudited) and February 27, 2000 (unaudited) .......... 4
Consolidated Statements of Cash Flows for the six months ended
February 28, 1999 (unaudited) and February 27, 2000 (unaudited) .......... 5
Notes to the Consolidated Financial Statements ............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K ........................................... 20
Signatures ............................................................................. 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALBECCA INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
August 29, February 27,
1999 2000
---------- ------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,058 $ 27,828
Accounts receivable, less allowances for doubtful accounts of
$5,190 and $6,154 at August 29, 1999 and February 27, 2000 47,298 45,988
Inventories 67,620 55,631
Other current assets 5,057 4,430
--------- ---------
Total current assets 155,033 133,877
PROPERTY, PLANT AND EQUIPMENT, net 53,485 46,847
OTHER LONG-TERM ASSETS 58,040 44,331
--------- ---------
$ 266,558 $ 225,055
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 26,589 $ 19,488
Accounts payable 26,423 24,374
Accrued liabilities 26,331 29,386
--------- ---------
Total current liabilities 79,343 73,248
--------- ---------
LONG-TERM DEBT, less current maturities 213,211 175,386
--------- ---------
OTHER LONG-TERM LIABILITIES 7,937 7,628
--------- ---------
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) (28,954)
Cumulative foreign currency translation adjustment (8,331) (9,749)
--------- ---------
Total shareholders' deficit (33,933) (31,207)
--------- ---------
$ 266,558 $ 225,055
========= =========
</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
----------------------------- ------------------------------
February 28, February 27, February 28, February 27,
1999 2000 1999 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 97,725 $ 94,153 $ 201,299 $ 194,273
Cost of sales 55,571 52,389 114,507 109,688
-------- -------- --------- ---------
Gross profit 42,154 41,764 86,792 84,585
Operating expenses 35,613 31,522 71,838 63,619
Write-down of goodwill -- 4,997 -- 4,997
Restructuring charges 129 -- 246 --
-------- -------- --------- ---------
Operating income 6,412 5,245 14,708 15,969
Loss on sale of Mersch entities -- 1,382 -- 1,382
Interest income (462) (1,011) (1,019) (1,831)
Interest expense 6,545 5,956 13,669 12,369
-------- -------- --------- ---------
Income (loss) before provision for income taxes,
minority interest and extraordinary gain 329 (1,082) 2,058 4,049
Provision for income taxes 251 363 1,310 1,225
Minority interest 51 90 248 204
-------- -------- --------- ---------
Income (loss) before extraordinary gain 27 (1,535) 500 2,620
Extraordinary gain on retirement of debt,
net of tax -- 1,544 -- 4,524
-------- -------- --------- ---------
Net income $ 27 $ 9 $ 500 $ 7,144
======== ======== ========= =========
</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
----------------------------
February 28, February 27,
1999 2000
------------ ------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 500 $ 7,144
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 248 204
Depreciation and amortization 4,775 3,933
Loss on disposal of property, plant and equipment 227 5
Write-down of goodwill -- 4,997
Loss on sale of Mersch entities -- 1,382
Extraordinary gain on retirement of debt -- (4,524)
Changes in operating assets and liabilities:
Accounts receivable (3,594) (5,908)
Inventories 1,047 7,910
Other current assets (667) 268
Accounts payable (227) 1,600
Accrued liabilities 892 5,535
Other (1,257) (236)
-------- --------
Net cash provided by operating activities 1,944 22,310
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,159) (6,316)
Acquisitions of businesses, net (3,594) --
Proceeds from sales of property and equipment 197 1,411
Proceeds from sale of Mersch entities -- 16,278
Changes in other long-term assets (1,244) 687
-------- --------
Net cash provided by (used in) investing activities (6,800) 12,060
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for additional debt issue costs (195) --
Proceeds from revolving credit facilities 17,961 14,424
Repayments of revolving credit facilities (18,334) (20,242)
Proceeds from long-term debt 8,920 2,752
Repayments of long-term debt (12,291) (35,871)
Distributions to shareholders (4,307) (3,000)
-------- --------
Net cash used in financing activities (8,246) (41,937)
-------- --------
EFFECT OF EXCHANGE RATE ON CASH (1,109) 337
-------- --------
NET DECREASE IN CASH (14,211) (7,230)
CASH and cash equivalents at beginning of period 54,884 35,058
-------- --------
CASH and cash equivalents at end of period $ 40,673 $ 27,828
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 13,617 $ 12,491
======== ========
Income taxes paid $ 1,209 $ 1,351
======== ========
</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 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 shareholder's 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. 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.
SALE 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 decision 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 sale of the Mersch entities was approximately $1.4 million. The sales
agreement 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 completed. In the opinion of management, the sale 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.
6
<PAGE> 7
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
PREVIOUSLY REPORTED RESTRUCTURING PLANS
SWEDEN
As of February 27, 2000, the Company's closure of its duplicate
facilities in Sweden was substantially 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 February 27, 2000, the Company continued to sell existing assets
and collect existing accounts receivable related to its closed New Zealand
distribution operations through its Australian operations. None of the 9 team
members originally identified for termination remained at the facility at
February 27, 2000. The Company estimates that the remaining closure activities
will be materially complete by the end of fiscal 2000.
GREECE
As of February 27, 2000, one of the original 14 team members related to
the Company's closed distribution operations in Greece, still remained to sell
existing assets and collect existing accounts receivable. The Company estimates
that the team member will continue to provide services through August 2000.
UNITED STATES
As of February 27, 2000, the Company's management continues to assess
and monitor its plan with respect to the closure of the Company's facilities
acquired in connection with its 1998 acquisitions, and expects to complete its
restructuring plans by the end of fiscal 2000.
UNITED KINGDOM
As of February 27, 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.
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 PREVIOUSLY REPORTED RESTRUCTURING PLANS.
As of February 27, 2000, as it relates to the Company's fiscal 1998 and
1999 restructuring plans, approximately $206,000 of restructuring charges
remained in accrued liabilities representing severance and other termination
costs of approximately $44,000 and approximately $162,000 of lease termination
and other related exit costs.
A summary of the previously reported restructuring plans and activity
consist of the following estimated accrued future cash/non-cash requirements:
<TABLE>
<CAPTION>
CLOSURE OF SWEDEN DUPLICATE FACILITY: Write-down of Severance and
property and other termination Other exit
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) $ -- $ -- $ -- $ --
========= ========= ========= ===========
</TABLE>
7
<PAGE> 8
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
<TABLE>
<CAPTION>
CLOSURE OF OPERATIONS IN NEW ZEALAND: Write-down Severance
of property and other
and termination Other exit
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
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Severance
and other
CLOSURE OF OPERATIONS IN GREECE: Write-off of termination Other exit
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
======== ========= ========= =========
</TABLE>
<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
========= ========= =========
</TABLE>
8
<PAGE> 9
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
<TABLE>
<CAPTION>
Write-down Severance Lease
of property and other termination
CLOSURE OF THE 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
======== ========= ========= ===========
</TABLE>
Note 6. EXTRAORDINARY ITEM
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.
Note 7. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 29, February 27,
1999 2000
---------- ------------
<S> <C> <C>
Raw materials $12,435 $ 9,338
Work in process 2,276 2,003
Finished goods 52,909 44,290
------- -------
$67,620 $55,631
======= =======
</TABLE>
Note 8. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Note 9. COMPREHENSIVE INCOME
Comprehensive income for the Company is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ---------------------------
February 28, February 27, February 28, February 27,
1999 2000 1999 2000
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net income, as reported $ 27 $ 9 $ 500 $ 7,144
Foreign currency translation adjustments (2,534) (1,123) (405) (1,418)
------- ------- ----- -------
Total comprehensive income (loss) $(2,507) $(1,114) $ 95 $ 5,726
======= ======= ===== =======
</TABLE>
9
<PAGE> 10
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Note 10. 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 February 27, 2000, the
Company had expended approximately $3.3 million for this project. Completion of
construction is expected to occur in the fourth quarter of fiscal 2000.
LITIGATION
The Company is involved in certain 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.
Note 11. 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.
10
<PAGE> 11
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
February 27, 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 $ 20,043 $ 139 $ 7,646 $ -- $ 27,828
Accounts receivable, net -- 19,285 26,703 -- 45,988
Intercompany accounts receivable -- 50,316 1,245 (51,561) --
Inventories -- 23,371 32,260 -- 55,631
Other current assets 127 655 3,648 -- 4,430
--------- -------- --------- --------- ---------
Total current assets 20,170 93,766 71,502 (51,561) 133,877
PROPERTY, PLANT AND EQUIPMENT, net -- 10,736 36,111 -- 46,847
OTHER LONG-TERM ASSETS 5,514 13,837 24,980 -- 44,331
INVESTMENT IN SUBSIDIARIES 43,453 -- 7,886 (51,339) --
INTERCOMPANY LOANS RECEIVABLE 92,413 -- -- (92,413) --
--------- -------- --------- --------- ---------
$ 161,550 $118,339 $ 140,479 $(195,313) $ 225,055
========= ======== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 757 $ 18,731 $ -- $ 19,488
Accounts payable -- 8,144 16,230 -- 24,374
Intercompany accounts payable 42,657 733 8,171 (51,561) --
Accrued liabilities 965 18,947 9,474 -- 29,386
--------- -------- --------- --------- ---------
Total current liabilities 43,622 28,581 52,606 (51,561) 73,248
--------- -------- --------- --------- ---------
LONG-TERM DEBT, less current maturities 164,930 2,034 8,422 -- 175,386
--------- -------- --------- --------- ---------
INTERCOMPANY LOANS PAYABLE -- -- 92,413 (92,413) --
--------- -------- --------- --------- ---------
OTHER LONG-TERM LIABILITIES -- 3,967 3,661 -- 7,628
--------- -------- --------- --------- ---------
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) (56,084) 41,442 (14,312) -- (28,954)
Cumulative foreign currency translation adjustment -- 489 (10,238) -- (9,749)
--------- -------- --------- --------- ---------
Total shareholders' equity (deficit) (47,002) 83,757 (16,623) (51,339) (31,207)
--------- -------- --------- --------- ---------
$ 161,550 $118,339 $ 140,479 $(195,313) $ 225,055
========= ======== ========= ========= =========
</TABLE>
11
<PAGE> 12
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>
12
<PAGE> 13
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
February 27, 2000 (Unaudited)
----------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $56,243 $ 39,767 $(1,857) $ 94,153
Cost of sales -- 30,067 24,179 (1,857) 52,389
------- ------- -------- ------- --------
Gross profit -- 26,176 15,588 -- 41,764
Operating expenses 13 17,075 14,434 -- 31,522
Write-down of goodwill -- 4,997 -- -- 4,997
------- ------- -------- ------- --------
Operating income (13) 4,104 1,154 -- 5,245
Loss on sale of Mersch entities -- -- 1,382 -- 1,382
Interest income (1,011) -- -- -- (1,011)
Interest expense 5,315 58 583 -- 5,956
------- ------- -------- ------- --------
Income (loss) before provision for income taxes,
minority interest and extraordinary gain (4,317) 4,046 (811) -- (1,082)
Provision for income taxes -- 120 243 -- 363
Minority interest -- -- 90 -- 90
------- ------- -------- ------- --------
Income (loss) before extraordinary gain (4,317) 3,926 (1,144) -- (1,535)
Extraordinary gain on retirement of debt, net of tax 1,544 -- -- -- 1,544
------- ------- -------- ------- --------
Net income (loss) $(2,773) $ 3,926 $ (1,144) $ -- $ 9
======= ======= ======== ======= ========
</TABLE>
<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 (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,
minority interest and extraordinary gain (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>
13
<PAGE> 14
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
February 27, 2000 (Unaudited)
----------------------------------------------------------------------
Consolidated
Subsidiary Subsidiary Elimination Consolidated
Albecca Inc. Guarantors Nonguarantors Entries Total
------------ ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 111,832 $ 86,609 $(4,168) $ 194,273
Cost of sales -- 60,907 52,949 (4,168) 109,688
-------- --------- -------- ------- ---------
Gross profit -- 50,925 33,660 -- 84,585
Operating expenses 97 33,898 29,624 -- 63,619
Write-down of goodwill -- 4,997 -- -- 4,997
-------- --------- -------- ------- ---------
Operating income (97) 12,030 4,036 -- 15,969
Loss on sale of Mersch entities -- -- 1,382 -- 1,382
Interest income (1,831) -- -- -- (1,831)
Interest expense 10,840 159 1,370 -- 12,369
-------- --------- -------- ------- ---------
Income (loss) before provision for income taxes,
minority interest and extraordinary gain (9,106) 11,871 1,284 -- 4,049
Provision for income taxes -- 240 985 -- 1,225
Minority interest -- -- 204 -- 204
-------- --------- -------- ------- ---------
Income (loss) before extraordinary gain (9,106) 11,631 95 -- 2,620
Extraordinary gain on retirement of debt, net of tax 4,524 -- -- -- 4,524
-------- --------- -------- ------- ---------
Net income (loss) $ (4,582) $ 11,631 $ 95 $ -- $ 7,144
======== ========= ======== ======= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 14,194 $ 3,009 $ 5,107 $ -- $ 22,310
-------- --------- -------- ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment -- (3,537) (2,779) -- (6,316)
Proceeds from sales of property, plant
and equipment -- 61 1,350 -- 1,411
Proceeds from sale of Mersch entities -- -- 16,278 -- 16,278
Changes in other long-term assets 722 (196) 161 -- 687
-------- --------- -------- ------- ---------
Net cash provided by (used in) investing activities 722 (3,672) 14,600 -- 12,060
-------- --------- -------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities -- -- 14,424 -- 14,424
Repayments of revolving credit facilities -- -- (20,242) -- (20,242)
Proceeds from long-term debt -- -- 2,752 -- 2,752
Repayments of long-term debt (19,297) (1,518) (15,056) -- (35,871)
Distributions to shareholders (3,000) 325 (325) -- (3,000)
-------- --------- -------- ------- ---------
Net cash used in financing activities (22,297) (1,193) (18,447) -- (41,937)
-------- --------- -------- ------- ---------
EFFECT OF EXCHANGE RATE ON CASH -- 248 89 -- 337
-------- --------- -------- ------- ---------
NET INCREASE (DECREASE) IN CASH (7,381) (1,608) 1,759 -- (7,230)
Cash and cash equivalents, beginning of period 27,424 1,747 5,887 -- 35,058
-------- --------- -------- ------- ---------
Cash and cash equivalents, end of period $ 20,043 $ 139 $ 7,646 $ -- $ 27,828
======== ========= ======== ======= =========
</TABLE>
14
<PAGE> 15
ALBECCA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
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, 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 BY (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 (373) 248 (1,119) -- (1,244)
-------- --------- --------- ------- ---------
Net cash used in investing activities (373) (418) (6,009) -- (6,800)
-------- --------- --------- ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for additional debt issue costs (195) -- -- -- (195)
Proceeds from revolving credit facilities -- 437 17,524 -- 17,961
Repayments 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 by (used in) financing activities (4,502) 443 (4,187) -- (8,246)
-------- --------- --------- ------- ---------
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>
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with Albecca's unaudited consolidated financial statements and the related notes
thereto. In this "Management's Discussion and Analysis of Financial Condition
and Results of Operations," all references to the Company's international
operations ("International") include all of Albecca's operations outside of the
U.S.
The following table sets forth certain consolidated statements of
operations data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------------------- -------------------------------------
February 28, February 27, February 28, February 27,
1999 2000 1999 2000
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.9 55.6 56.9 56.5
------------- ------------- -------------- -------------
Gross profit 43.1 44.4 43.1 43.5
Operating expenses 36.4 33.5 35.7 32.7
Restructuring charges 0.1 - 0.1 -
------------- ------------- -------------- -------------
Operating income 6.6 10.9 7.3 10.8
Write-down of goodwill - 5.3 - 2.6
Loss on sale of Mersch entities - 1.5 - 0.6
Interest income (0.5) (1.1) (0.5) (0.9)
Interest expense 6.7 6.3 6.8 6.4
------------- ------------- -------------- -------------
Income (loss) before provision for income
taxes, minority interest and extraordinary gain 0.4 (1.1) 1.0 2.1
Provision for income taxes 0.3 0.4 0.7 0.6
Minority interest 0.1 0.1 0.1 0.1
------------- ------------- -------------- -------------
Income before extraordinary gain 0.0 (1.6) 0.2 1.4
Extraordinary gain on retirement
of debt, net of tax - 1.6 - 2.3
------------- ------------- -------------- -------------
Net income (loss) 0.0% 0.0% 0.2% 3.7%
============= ============= =============== =============
</TABLE>
NET SALES
For the second quarter ended February 27, 2000, net sales were $94.2
million compared to $97.7 million for the second quarter ended February 28,
1999. For the six months ended February 27, 2000, net sales were $194.3 million
compared to $201.3 million for the six months ended February 28, 1999. The
decrease in net sales for the three and six months ended February 27, 2000 were
primarily the result of the sale of the South African operations completed at
the end of fiscal 1999 and the sale 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 10.9% and 9.5% for the three and six months
ended February 27, 2000 from the comparable periods in 1999, primarily the
result of an increase in sales to independent custom framing retailers.
International net sales decreased 18.6% and 16.1% for the three and six months
ended February 27, 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
sale 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 $52.4 million and $109.7 million for the three and
the six months ended February 27, 2000, compared to $55.6 million and $114.5
million for the three and the six months ended February 28, 1999. In the U.S.,
gross profit increased to 46.6% and 45.6% for the three and the six months ended
February 27, 2000, compared to 45.5% and 45.5% for the comparable periods in
1999. The increase for the three month period was primarily the result of an
improvement in the product mix sold, partially offset by the Company's continued
review of its acquisition-related inventory. International gross profit margin
increased to 41.2% and 41.0% for the three and six months ended February 27,
2000, compared to 40.7% and 40.8% 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 and the
Mersch entities.
16
<PAGE> 17
OPERATING EXPENSES
Operating expenses were $31.5 million and $63.6 million for the three
and the six months ended February 27, 2000, compared to $35.6 million and $71.8
million for the three and the six months ended February 28, 1999. In the U.S.,
operating expenses as a percentage of net sales decreased to 29.4% and 29.5% for
the three and the six months ended February 27, 2000, compared to 34.0% and
34.5% 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. International operating
expenses as a percentage of net sales increased to 39.2% for the three months
ended February 27, 2000, compared to 39.0% for the comparable period in 1999,
and remained the same at 36.8% for the six months ended February 27, 2000 and
February 28, 1999. The increase for the three months ended February 27, 2000 is
primarily due to the decrease in net sales associated with the recently sold
South African operations and the Mersch entities.
RESTRUCTURING CHARGES
There were no restructuring charges recorded during the three and the
six months ended February 27, 2000. Restructuring charges of $.1 million and $.2
million were recorded for the three and the six months ended February 28, 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.
SALE 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 decision 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 sale of the Mersch entities was approximately $1.4 million. The sales
agreement 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 completed. In the opinion of management, the sale 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.
INTEREST EXPENSE
Interest expense was $6.0 million and $12.4 million for the three and
the six months ended February 27, 2000, compared to $6.5 million and $13.7
million for the three and the six months ended February 28, 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.
INTEREST INCOME
Interest income was $1.0 million and $1.8 million for the three and the
six months ended February 27, 2000, compared to $.5 million and $1.0 million for
the three and six months ended February 28, 1999. The increase resulted from the
interest income associated with the Company's investment in its senior
subordinated notes.
17
<PAGE> 18
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
For the three and six months ended February 27, 2000, the Company
retired $10.0 million and $23.8 million of its senior subordinated notes. The
debt retirements resulted in extraordinary gains totaling $1.5 million and $4.5
million, net of state income taxes of $.1 million and $.2 million, respectively.
NET INCOME
For the reasons set forth above, net income was $.1 million for the
three months ended February 27, 2000 and net income was $7.1 million for the six
months ended February 27, 2000, compared to net income of $.1 million and $.5
million for the three and six months ended February 28, 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. As of February 27, 2000,
the Company had cash and cash equivalents of $27.8 million compared to $35.1
million as of August 29, 1999.
Net cash provided by operating activities was $22.3 million for the six
months ended February 27, 2000, compared to $1.9 million for the six months
ended February 28, 1999. The increase is primarily attributable to the increase
in net income for the six months ended February 27, 2000 and a reduction in the
Company's inventories during the period. Net cash provided by investing
activities increased to $12.1 million for the six months ended February 27,
2000, compared to net cash used of $6.8 million for the six months ended
February 28, 1999. The increase was primarily due to the sale 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 six months
ended February 27, 2000, the Company invested $6.3 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
February 27, 2000, approximately $3.3 million had been expended on the project.
Completion is expected during the fourth quarter of fiscal 2000. Net cash used
in financing activities increased to $41.9 million compared to $8.2 million for
the six months ended February 28, 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 sale of the Mersch entities.
As of February 27, 2000, Albecca had outstanding indebtedness of
approximately $194.9 million, consisting of $164.9 million in principal amount
of the August 1998 senior subordinated debt and $30.0 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 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
18
<PAGE> 19
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 have been
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.
19
<PAGE> 20
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
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ALBECCA INC.
(registrant)
Date: April 12, 2000 /s/ Craig A. Ponzio
------------------- ------------------------------------------
Craig A. Ponzio, Chairman of the Board,
President, Chief Executive Officer
(Principal Executive Officer)
Date: April 12, 2000 /s/ Stephen M. Scheppmann
------------------- ------------------------------------------
Stephen M. Scheppmann,
Senior Vice President,
Chief Financial Officer
(Principal Financial Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED FEBRUARY 27, 2000
AND THE CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 27, 2000 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-27-2000
<PERIOD-END> FEB-27-2000
<CASH> 27,828
<SECURITIES> 0
<RECEIVABLES> 52,142
<ALLOWANCES> 6,154
<INVENTORY> 55,631
<CURRENT-ASSETS> 133,877
<PP&E> 71,211
<DEPRECIATION> 24,364
<TOTAL-ASSETS> 225,055
<CURRENT-LIABILITIES> 73,248
<BONDS> 164,930
0
0
<COMMON> 170
<OTHER-SE> (31,377)
<TOTAL-LIABILITY-AND-EQUITY> 225,055
<SALES> 194,273
<TOTAL-REVENUES> 194,273
<CGS> 109,688
<TOTAL-COSTS> 173,307
<OTHER-EXPENSES> 6,379
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,538
<INCOME-PRETAX> 3,845
<INCOME-TAX> 1,225
<INCOME-CONTINUING> 2,620
<DISCONTINUED> 0
<EXTRAORDINARY> 4,524
<CHANGES> 0
<NET-INCOME> 7,144
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
