10-Q 1 g66329e10-q.txt ALBECCA INC. 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 November 26, 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 . 1 2 ALBECCA INC. INDEX TO FORM 10-Q

2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALBECCA INC. CONSOLIDATED BALANCE SHEETS (in thousands)

The accompanying notes are an integral part of these consolidated balance sheets. 3 4 ALBECCA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 4 5 ALBECCA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 5 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 27, 2000, 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. RESTRUCTURING PLANS Restructuring plans address the status of the Company's ongoing restructuring activities which were initiated in prior fiscal years. As of November 26, 2000, the following restructuring plans had remaining financial and/or legal obligations. UNITED KINGDOM - NORTHAMPTON As of November 26, 2000, with respect to the Company's closure of its United Kingdom - Northampton operation, none of the original 37 team members remained at the facility. The Company continued to sell existing assets and collect existing accounts receivable through its United Kingdom - Arqadia Ltd. operations. Management estimates that the restructuring plan will be completed prior to the end of fiscal 2001. NEW ZEALAND As of November 26, 2000, with respect to the closure of the Company's distribution operations in New Zealand, none of the 9 original team members remained at the facility. The Company, through its Australian operations, is finalizing the legal requirements of the liquidation, and estimates the restructuring plan will be completed by the second quarter of fiscal 2001. GREECE As of November 26, 2000, with respect to the closure of the Company's distribution operations in Greece, none of the original 14 team members remained at the facility. The Company, through its local counsel, will continue to collect existing accounts receivable and finalize the legal liquidation of its Greek entities. The Company estimates that the restructuring plan will be completed prior to the end of fiscal 2001. For more descriptive information on the above mentioned restructuring plans, please see the Company's Form 10-K for the fiscal year ended August 27, 2000, as filed with the Securities and Exchange Commission. SUMMARY OF PREVIOUSLY REPORTED RESTRUCTURING PLANS At November 26, 2000, as it relates to the Company's fiscal 1998, 1999 and 2000 restructuring plans, $617,000 of restructuring charges remained in accrued liabilities representing severance and other termination costs of $85,000 and $532,000 of lease termination and other exit costs. 6 7 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) A summary of the previously reported restructuring plans and activity consist of the following estimated accrued future cash/non-cash requirements:

7 8 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) Note 6. OTHER LOSS Other loss primarily represents realized and unrealized foreign currency exchange gains and losses on intercompany account balances. Note 7. EXTRAORDINARY GAIN In September 2000, the Company repurchased a portion of its senior subordinated notes with a face value of $4,000,000. The debt repurchase resulted in an extraordinary gain of $247,000, net of state income taxes of $6,000. In September and November 1999, the Company repurchased a portion of its senior subordinated notes with a face value of $13,820,000. The debt repurchases resulted in extraordinary gains of $2,980,000, net of state income taxes of $124,000. Note 8. INVENTORIES Inventories consist of the following (in thousands):

Note 9. COMPREHENSIVE INCOME Comprehensive income for the Company is as follows (in thousands):

Accumulated other comprehensive loss represents foreign currency translation adjustments of $13,795,000 and $16,703,000 at August 27, 2000 and November 26, 2000, respectively. Note 10. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Effective August 28, 2000, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended by SFAS No. 137, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement became effective for all fiscal quarters beginning after June 15, 2000. 8 9 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) The statement requires the Company to recognize all derivatives on the balance sheet at fair value. If the derivative is a hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in comprehensive income (equity) until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings. In transition, the statement required all hedging relationships to be evaluated and designated anew, resulting in cumulative-effect-type transition adjustments to earnings and other comprehensive income (equity). In accordance with the transition provisions of SFAS 133, the Company recorded a cumulative- effect-type adjustment, net of tax, of $188,000 to recognize the fair value of the derivatives. The Company has historically entered into forward exchange contracts to reduce the foreign currency exchange risks associated with its committed and anticipated foreign currency denominated purchases; with its U.S. operations purchasing primarily the Italian Lira, Spanish Peseta, and French Franc, and with its United Kingdom subsidiary entering into U.S. dollar forward exchange contracts. The carrying amount of derivatives at fair value as of November 26, 2000 was $312,000. As of November 26, 2000 the maximum period of time the Company was hedging its exposure to the variability in future cash flows for forecasted transactions was nine months. Note 11. COMMITMENTS AND CONTINGENCIES 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 12. SUBSEQUENT EVENTS REPURCHASE OF SENIOR SUBORDINATED NOTES Subsequent to the end of the first quarter of fiscal 2001, the Company repurchased $2,000,000 of its senior subordinated notes. The Company estimates that an extraordinary gain of approximately $198,000 will be recorded net of state income taxes of $5,000. Note 13. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. Note 14. 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. 9 10 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) CONDENSED CONSOLIDATING BALANCE SHEETS (in thousands)

10 11 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) CONDENSED CONSOLIDATING BALANCE SHEETS (in thousands)

11 12 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)

12 13 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)

13 14 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:

NET SALES For the first quarter ended November 26, 2000, net sales were $83.4 million compared to $100.1 million for the first quarter ended November 28, 1999. The decrease in net sales for the three months ended November 26, 2000 was primarily the result of the sale of two international operations completed during the second and fourth quarters of fiscal year 2000, the closure of an international operation completed during the third quarter of fiscal year 2000, and the impact of unfavorable changes in foreign exchange rates. Currency fluctuations in the first quarter decreased net sales by $4.0 million, primarily due to a strengthening of the U.S. dollar against major European currencies. U.S. net sales increased 3.2% for the three months ended November 26, 2000 compared to November 28, 1999, primarily the result of an increase in sales of branded wood moulding. International net sales decreased 40.1%, primarily due to the sale of the Mersch operations completed during the second quarter of fiscal year 2000, the sale of the Brio operations completed during the fourth quarter of fiscal year 2000, the closure of the United Kingdom - Northampton operation completed during the third quarter of fiscal year 2000, a decrease in sales in Canada, The Netherlands, and Sweden, as well as the negative impact of the strengthening of the U.S. dollar. COST OF SALES Cost of sales were $44.5 million for the three months ended November 26, 2000 compared to $57.3 million for the three months ended November 28, 1999. In the U.S., gross profit increased to 48.2% for the three months ended November 26, 2000 compared to 44.2% for the comparable period in fiscal year 2000. The increase for the quarter was primarily the result of continued growth in sales of branded products, a continued decrease in sales of lower margin products associated with the Company's prior years' acquisitions, and favorable currency exchange rate movements in certain supplier markets. For the first quarter ended November 26, 2000, international gross profit margin increased to 43.5% compared to 41.1% for the first quarter ended November 28, 1999. This increase was primarily the result of the decrease in net sales of lower margin products associated with the recently sold Mersch and Brio operations, and a continued decrease in sales of lower margin products related to the Canadian operation's prior year acquisitions. OPERATING EXPENSES Operating expenses were $25.4 million for the three months ended November 26, 2000 compared to $32.1 million for the three months ended November 28, 1999. In the U.S., operating expenses as a percentage of net sales decreased to 28.1% for the three months ended November 26, 2000 compared to 29.7% for the comparable period in fiscal year 2000. The decrease is primarily the result of the completion of acquisition related integrations versus ongoing integration costs in the previous year. For the first quarter ended November 26, 2000, international operating expenses as a percentage of net sales increased to 35.5% compared to 34.8% for the comparable period in fiscal year 2000. The increase in operating expenses as a percentage of net sales is primarily attributable to the decrease in net sales in Canada, The Netherlands, and Sweden. 14 15 INTEREST INCOME Interest income was $1.6 million for the three months ended November 26, 2000 compared to $.8 million for the three months ended November 28, 1999. The increase resulted primarily from the interest income associated with the Company's continued acquisition of its senior subordinated notes. INTEREST EXPENSE Interest expense was $5.9 million for the three months ended November 26, 2000 compared to $6.4 million for the three months ended November 28, 1999. The decrease in interest expense is primarily due to the reduction of debt associated with the sale of the Mersch and Brio businesses, as well as the repurchase of $30.0 million of the Company's senior subordinated notes during the preceding twelve months. OTHER LOSS Other loss primarily represents realized and unrealized foreign currency exchange gains and losses on intercompany account balances. EXTRAORDINARY GAIN ON REPURCHASE OF DEBT Consistent with its stated objective of using a portion of its cash to lower its debt, including its senior subordinated notes, in September 2000, the Company repurchased a portion of its senior subordinated notes with a face value of $4.0 million. The debt repurchase resulted in an extraordinary gain totaling $.25 million, net of state income taxes of $.06 million. NET INCOME For the reasons set forth above, net income was $8.1 million for the three months ended November 26, 2000 compared to $7.1 million for the three months ended November 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 distributions to the Company's shareholders to pay income taxes as a result of its status as an S corporation. As of November 26, 2000, the Company had cash and cash equivalents of $25.7 million compared to $23.3 million as of August 27, 2000. Net cash provided by operating activities was $9.7 million for the three months ended November 26, 2000 compared to $12.2 million for the three months ended November 28, 1999. The decrease is primarily attributable to the positive cash flow generated by the reduction of acquisition related inventories and the increase in accrued liabilities for the three months ended November 28, 1999 compared to the three months ended November 26, 2000. This impact is partially offset by the negative cash flow generated from the increase in accounts receivables for the three months ended November 28, 1999 compared to the three months ended November 26, 2000. Net cash used in investing activities decreased to $.7 million for the three months ended November 26, 2000 compared to $3.0 million for the three months ended November 28, 1999, primarily due to a decrease in capital expenditures as a result of the completion of the Company's new manufacturing plant in Ashland, Wisconsin. Net cash used in financing activities decreased to $7.3 million for the three months ended November 26, 2000 compared to $12.8 million for the three months ended November 28, 1999, primarily due to a decrease in the amount of its senior subordinated debt repurchased by the Company. The Company repurchased senior subordinated debt with a face value of $4.0 million for the three months ended November 26, 2000 compared to $13.8 million during the prior comparable period. As of November 26, 2000, the Company had outstanding indebtedness of approximately $164.0 million, consisting of $145.0 million in principal amount of the August 1998 senior subordinated debt and $19.0 million of other indebtedness. At August 27, 2000, the Company had outstanding indebtedness of approximately $170.2 million, consisting of $148.9 million in principal amount of the notes and $21.3 million of other indebtedness. 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. 15 16 RECENT ACCOUNTING PRONOUNCEMENTS In July and September 2000, the Emerging Issues Task Force (EITF) reached a consensus on Issue 00-10 "Accounting for Shipping and Handling Fees and Costs." EITF Issue 00-10 requires that all amounts billed to a customer in a sale transaction for shipping and handling be classified as sales, and recommends that shipping and handling expenses be classified as cost of sales. The Company currently classifies most shipping and handling revenues and costs, on a net basis, in selling and administrative expense. Accordingly, the Company has determined that EITF Issue 00-10 will require reclassification of shipping and handling revenues and costs, but does not believe EITF Issue 00-10 will impact its financial condition or net income. The effective date of this standard is the fourth quarter of the Company's fiscal year 2001. EUROPEAN UNION CURRENCY CONVERSION On January 1, 1999, eleven member nations of the European Economic and Monetary Union began using a common currency, the Euro. For a three-year transition period ending June 30, 2002, both the Euro and each of the currencies for such member countries will remain in circulation. After June 30, 2002, the Euro will be the sole legal tender for those countries. The adoption of the Euro will affect many financial systems and business applications as the commerce of those countries may be transacted both in the Euro and the existing national currency during the transition period. Significant portions of the Company's revenue have been historically generated in Europe. Of the eleven countries currently using the Euro, the Company has subsidiary operations in Austria, Finland, France, Germany, Italy, and the Netherlands. The Company has assessed the potential impact of the Euro conversion in a number of areas, particularly on pricing and other marketing strategies. Although the Company does not currently expect that the conversion, either during or after the transition period, will have an adverse effect on its operations or financial condition, there can be no assurance that it will not have some unexpected adverse impact. 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; and (viii) changes in product mix to ones which are less profitable. The Company assumes no responsibility to update forward-looking statements made herein or elsewhere. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company's disclosures related to certain market risks as reported under Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," in the Company's Form 10-K for the fiscal year ended August 27, 2000, as filed with the Securities and Exchange Commission. 16 17 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: NO. DESCRIPTION 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 filed with the SEC on November 25, 1998 and 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 filed with the SEC on November 25, 1998 and declared effective by the SEC on February 12, 1999). 4.1 Indenture dated August 11, 1998, among Albecca Inc. and State Street Bank & Trust, as trustee, relating to the Notes (the "Indenture")(incorporated by reference to Exhibit 4.1 of Albecca's Registration Statement on Form S-4 (No. 333-67975) as filed with the SEC on November 25, 1998 and declared effective by the SEC on February 12, 1999). 4.2 Form of 10 3/4% Senior Note due 2008 of Albecca Inc. (the "New Notes")(included as Exhibit A of the Indenture filed as Exhibit 4.1).

b. Reports on Form 8-K: None 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALBECCA INC. (registrant) Date: January 10, 2001 By: /s/ Craig A. Ponzio ----------------------------------- Craig A. Ponzio, Chairman of the Board, President, Chief Executive Officer (Principal Executive Officer) Date: January 10, 2001 By: /s/ R. Bradley Goodson ----------------------------------- R. Bradley Goodson, Vice President Finance, Chief Financial Officer (Principal Financial Officer) 18

ALBECCA INC 10-Q