10-Q 1 g68404e10-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 February 25, 2001. 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

Page No. Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of August 27, 2000 (audited) and ~~November~~February 2625, ~~2000~~2001 (unaudited) .......................................~~...~~ 3 Consolidated Statements of Operations for the three and six months ended ~~November~~February 2827, ~~1999~~2000 (unaudited) and ~~November~~February 2625, ~~2000~~2001 (unaudited) .....~~...~~ 4 Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~November~~February 2827, ~~1999~~2000 (unaudited) and ~~November~~February 2625, ~~2000~~2001 (unaudited) .....~~...~~ 5 Notes to the Consolidated Financial Statements .........................~~...~~ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...........................................~~...~~ 1415 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..............~~....~~ 1617 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K ........................................~~...~~ 1718 Signatures ...........................................................................~~....~~ 1819

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

August 27, ~~November~~February 2625, 2000 ~~2000~~2001 ----------- ------------ ASSETS (unaudited) ~~ASSETS~~ CURRENT ASSETS: Cash and cash equivalents $ 23,321 $ 2524,~~715~~555 Accounts receivable, less allowances for doubtful accounts of $5,283 and $5,~~382~~380 at August 27, 2000 and ~~November~~February 2625, ~~2000~~2001 36,384 3936,~~973~~097 Inventories 48,413 4749,~~067~~381 Other current assets 4,754 65,~~734~~301 ---------- ---------- Total current assets 112,872 ~~119~~115,~~489~~334 PROPERTY, PLANT AND EQUIPMENT, net 36,692 3435,~~519~~484 OTHER LONG-TERM ASSETS 41,531 40,~~038~~603 ---------- ---------- $ 191,095 $ ~~194~~191,~~046~~421 ========== ========== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Current maturities of long-term debt $ 7,686 $ 5,~~760~~796 Accounts payable 17,247 2018,~~415~~443 Accrued liabilities 24,664 2720,~~197~~322 ---------- ---------- Total current liabilities 49,597 5344,~~372~~561 ---------- ---------- LONG-TERM DEBT, less current maturities 162,496 ~~158~~154,~~186~~239 ---------- ---------- OTHER LONG-TERM LIABILITIES 8,879 9,~~457~~726 ---------- ---------- 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 (23,578) (1710,~~762~~357) Accumulated other comprehensive loss (13,795) (1614,~~703~~244) ---------- ---------- Total shareholders' deficit (29,877) (2617,~~969~~105) ---------- ---------- $ 191,095 $ ~~194~~191,~~046~~421 ========== ==========

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

Three months ended Six months ended ----------------------------- ~~November~~------------------------------- 28February 27, ~~November~~February 2625, ~~1999~~February 27, February 25, 2000 2001 2000 2001 ------------ ------------ ------------ ------------ Net sales $ ~~100~~94,~~120~~153 $ 8381,~~373~~561 $ 194,273 $ 164,934 Cost of sales 5752,~~299~~389 4442,~~474~~444 109,688 86,918 -------- -------- --------- --------- Gross profit 4241,~~821~~764 3839,~~899~~117 84,585 78,016 Operating expenses 3231,~~097~~522 25,~~445~~609 63,619 51,054 Impairment of goodwill 4,997 -- 4,997 -- -------- -------- --------- --------- Operating income 105,~~724~~245 13,~~454~~508 15,969 26,962 Loss on disposition of businesses 1,382 -- 1,382 -- Interest income (~~820~~1,011) (1,~~576~~905) (1,831) (3,481) Interest expense 65,~~413~~956 5,~~890~~778 12,369 11,668 Other ~~loss~~income -- ~~549~~(430) -- (69) -------- -------- --------- ~~Income~~--------- (Loss) income before provision for income taxes, minority interest, and extraordinary gain ~~and~~(1,082) ~~cumulative~~10,065 ~~effect of a change in accounting principle 5~~4,~~131~~049 818,~~591~~844 Provision for income taxes ~~862~~363 ~~879~~388 1,225 1,267 Minority interest ~~114~~90 3123 204 54 -------- -------- --------- --------- ~~Income~~(Loss) income before extraordinary gain ~~and~~(1,535) ~~cumulative~~9,654 ~~effect of a change in accounting principle 4~~2,~~155~~620 717,~~681~~523 Extraordinary gain on repurchase of debt, net of tax 21,~~980~~544 ~~247~~251 4,524 498 ---------- ---------- ~~Income before cumulative effect of a change in accounting principle 7,135 7,928 Cumulative effect of adoption of SFAS 133, net of tax~~ -- ~~188~~ -------~~---~~ ---------- Net income $ 9 $ 9,905 $ 7,~~135~~144 $ 818,~~116~~021 ======== ======== ========= =========

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

~~Three~~Six months ended ----------------------------- ~~November~~February 2827, ~~November~~February 2625, ~~1999~~ 2000 2001 ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 7,~~135~~144 $ 818,~~116~~021 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest ~~114~~204 3154 Depreciation and amortization 23,~~067~~933 12,~~434~~727 Loss ~~(gain)~~ on disposal of property, plant and equipment 835 ~~(65)~~114 Impairment of goodwill 4,997 -- Loss on disposition of businesses 1,382 -- Extraordinary gain on repurchase of debt (24,~~980~~524) (~~247~~498) Changes in operating assets and liabilities: Accounts receivable (105,~~344~~908) (~~4,704~~279) Inventories 47,~~519~~910 (~~322~~1,551) Other current assets ~~(548)~~268 (~~2,294~~523) Accounts payable 31,~~523~~600 41,~~279~~579 Accrued liabilities 85,~~692~~535 2(4,~~684~~282) Other (49236) ~~751~~854 ---------- ---------- Net cash provided by operating activities 1222,~~212~~310 916,~~663~~216 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (36,~~574~~316) (1,~~001~~447) Proceeds from sales of property, plant and equipment ~~508~~1,411 ~~486~~668 Proceeds from disposition of businesses 16,278 -- Changes in other long-term assets 63687 (~~224~~57) ---------- ---------- Net cash provided by (used in) investing activities (312,~~003)~~060 (~~739~~836) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities 714,~~855~~424 411,~~791~~009 Repayments of revolving credit facilities (720,~~914~~242) (510,~~587~~941) Proceeds from long-term debt 2,~~153~~752 ~~608~~703 Repayments of long-term debt (1435,~~848~~871) (410,~~845~~323) Distributions to shareholders --(3,000) (24,~~300~~800) ---------- ---------- Net cash used in financing activities (1241,~~754~~937) (714,~~333~~352) ---------- ---------- EFFECT OF EXCHANGE RATE ON CASH 52337 ~~803~~206 ---------- ---------- NET (DECREASE) INCREASE IN CASH (37,~~493~~230) 21,~~394~~234 CASH and cash equivalents, beginning of period 35,058 23,321 ---------- ---------- CASH and cash equivalents, end of period $ 3127,~~565~~828 $ 2524,~~715~~555 ========== ========== SUPPLEMENTAL INFORMATION: Interest paid $ 112,~~020~~491 $ ~~549~~11,782 ========== ========== Income taxes paid $ 1,~~113~~351 $ ~~774~~2,258 ========== ==========

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 February 25, 2001, the following restructuring plans had remaining financial and/or legal obligations: UNITED KINGDOM - NORTHAMPTON As of February 25, 2001, 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 continues 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 February 25, 2001, 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 prior to the end of fiscal 2001. GREECE As of February 25, 2001, 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 February 25, 2001, as it relates to the Company's fiscal 1998, 1999 and 2000 restructuring plans, $489,000 of restructuring charges remained in accrued liabilities representing $85,000 of severance and other termination costs and $404,000 of lease termination and other exit costs. During the second quarter of fiscal 2001, $128,000 was paid relating to lease termination costs on a building not yet subleased, relating to the closure of the Company's United Kingdom - Northampton operation. 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:

Severance and ~~Lease~~ Write-down of other ~~termination~~Lease property and termination termination and ~~other exit~~ CLOSURE OF UNITED KINGDOM - NORTHAMPTON: equipment benefits other exit costs Total ------------- ------------- -------------- -- ----------- 2000 Provision $ 499,000 $ 298,000 $ 618,000 $ 1,415,000 Non-cash 499,000 -- -- 499,000 ---------- ---------- ---------- ------------ Cash -- 298,000 618,000 916,000 Fiscal 2000 cash activity -- (116,000) (84,000) (200,000) ---------- ---------- ---------- ------------ Balance as of August 27, 2000 -- 182,000 534,000 716,000 First quarter 2001 cash activity (unaudited) -- (121,000) (126,000) (247,000) ---------- ---------- ---------- ------------ Balance as of November 26, 2000 (unaudited) $ -- $ 61,000 $ 408,000 $ 469,000 ~~==========~~Second ========== ========== ============ Severance and Write-down of other property and termination Other exit CLOSURE OF OPERATIONS IN NEW ZEALAND: equipment benefits costs Total ------------- ------------- ---------- ---------- 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 Fiscal 2000 cash activity -- (3,000) (3,000) (6,000) ---------- ---------- ---------- ---------- Balance as of August 27, 2000 -- 15,000 24,000 39,000 First quarter 2001 cash activity (unaudited) -- -- ~~-- -- ---------- ---------- ---------- ---------- Balance as of November 26, 2000~~ (~~unaudited) $ -- $ 15~~128,000 $ 24,000 $ 39,000 ========== ========== ========== ========== Severance and other Write-off of termination Other exit CLOSURE OF OPERATIONS IN GREECE: goodwill benefits costs Total ------------ ------------- ---------- ---------- 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~~128,000) ~~(199,000)~~ ---------- ---------- ---------- ---------- ~~Balance as of August 29, 1999~~ -- ~~9,000 104,000 113,000 Fiscal 2000 cash activity -- -- (4,000) (4,000) ---------- ---------- ---------- ----------~~ Balance as of ~~August~~February 2725, ~~2000 -- 9,000 100,000 109,000 First quarter~~ 2001 ~~cash activity~~ (unaudited) ~~-- -- -- -- ---------- ---------- ---------- ---------- Balance as of November 26, 2000 (unaudited)~~ $ -- $ 961,000 $ ~~100~~280,000 $ ~~109~~341,000 ========== ========== ========== ===========

~~August~~Severance ~~27,~~and ~~November~~Write-down ~~26,~~of ~~2000~~other ~~2000~~property and termination Other exit CLOSURE OF OPERATIONS IN NEW ZEALAND: equipment benefits costs Total ------------- ------------- ~~Raw~~---------- ~~materials~~----------- 1999 Provision $ 675,~~290~~000 $ 548,~~878~~000 ~~Work~~$ in102,000 ~~process~~$ 2225,~~127~~000 2Non-cash 75,~~175~~000 ~~Finished~~-- ~~goods~~-- 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 Fiscal 2000 cash activity -- (3,000) (3,000) (6,000) -------- --------- --------- ----------- Balance as of August 27, 2000 -- 15,000 24,000 39,~~996~~000 First quarter 2001 cash activity (unaudited) -- -- -- -- -------- --------- --------- ----------- Balance as of November 26, 2000 (unaudited) -- 15,000 24,000 39,~~014~~000 Second quarter 2001 cash activity (unaudited) -- -- -- -- -------- --------- --------- ----------- Balance as of February 25, 2001 (unaudited) $ 48-- $ 15,~~413~~000 $ 4724,~~067~~000 $ 39,000 ======== ========= ========= ===========

~~Three~~Severance ~~months~~and ~~ended~~other Write-off of termination Other exit CLOSURE OF OPERATIONS IN GREECE: goodwill benefits costs Total ------------- ------------- ~~November~~---------- 28----------- 1998 Provision $333,000 ~~November~~$ 2679,000 $ 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 ~~2000~~provision -- -- 129,000 129,000 Fiscal 1999 cash activity -- (70,000) (129,000) (199,000) -------- --------- --------- ~~Net~~----------- ~~income~~Balance as of August 29, 1999 -- 9,000 104,000 113,000 Fiscal 2000 cash activity -- -- (4,000) (4,000) -------- --------- --------- ----------- Balance as ~~reported~~of $August 727,~~135~~ $2000 8-- 9,~~116~~000 ~~Foreign~~100,000 ~~currency~~109,000 ~~translation~~First ~~adjustments~~quarter 2001 cash activity (~~295~~unaudited) -- -- -- -- -------- --------- --------- ----------- Balance as of November 26, 2000 (2unaudited) -- 9,~~908~~000 100,000 109,000 Second quarter 2001 cash activity (unaudited) -- -- -- -- -------- ~~Total~~--------- ~~comprehensive~~--------- ~~income~~----------- Balance as of February 25, 2001 (unaudited) $ 6-- $ 9,~~840~~000 $ 5100,~~208~~000 $ 109,000 ======== ========= ========= ===========

7 8 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) Note 6. OTHER INCOME Other income primarily represents realized and unrealized foreign currency exchange gains and losses on intercompany account balances and certain other foreign-denominated assets, as well as gains and losses on derivative instruments as discussed in Note 10. Note 7. EXTRAORDINARY GAIN In September and December 2000 and February 2001, the Company repurchased a portion of its senior subordinated notes with a face value of $8,000,000. The debt repurchases resulted in extraordinary gains of $498,000, net of state income taxes of $12,000. In September and November 1999 and February 2000, the Company repurchased a portion of its senior subordinated notes with a face value of $23,820,000. The debt repurchases resulted in extraordinary gains of $4,524,000, net of state income taxes of $189,000. Note 8. INVENTORIES Inventories consist of the following (in thousands):

~~November~~August 2627, ~~2000~~February (Unaudited) ------------------------------------------------------------------------ Consolidated Subsidiary Subsidiary Elimination Consolidated Albecca Inc. Guarantors Nonguarantors Entries Total ------------ ---------- ------------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,141 $ 1,233 $ 8,341 $ -- $ 25,~~715~~ ~~Accounts~~2000 ~~receivable,~~2001 ~~net~~ -- ~~22,892 17,081~~ -- ~~39,973 Intercompany accounts receivable~~ -- ~~81,678 314 (81,992)~~ -- ~~Inventories~~ -- ~~24,811 22,256~~ -- ~~47,067 Other current assets 1,676 1,196 3,862~~ -- ~~6,734~~ ---------- ~~----------~~Raw ~~----------~~materials ---------- ---------- Total current assets 17,817 131,810 51,854 (81,992) 119,489 PROPERTY, PLANT AND EQUIPMENT, net -- 10,596 23,923 -- 34,519 OTHER LONG-TERM ASSETS 4,698 13,831 21,509 -- 40,038 INVESTMENT IN SUBSIDIARIES 117,222 -- 7,884 (125,106) -- INTERCOMPANY LOANS RECEIVABLE 92,492 -- -- (92,492) -- ---------- ---------- ---------- ---------- ---------- $ ~~232~~6,~~229~~290 $ 156,237 $ 105,170 $ (299,590) $ 194,046 ========== ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ 722 $ 5,038 $ -- $ 5,760 Accounts payable -- 11,183 9,232 -- 20,415 Intercompany accounts payable 75,976 441 5,575 (81,992) -- Accrued liabilities 6,~~171~~425 ~~10,242~~Work 10,784 -- 27,197 ---------- ---------- ---------- ---------- ---------- Total current liabilities 82,147 22,588 30,629 (81,992) 53,372 ---------- ---------- ---------- ---------- ---------- LONG-TERM DEBT, less current maturities 144,930 6,622 6,634 -- 158,186 ---------- ---------- ---------- ---------- ---------- INTERCOMPANY LOANS PAYABLE -- 172 92,320 (92,492) -- ---------- ---------- ---------- ---------- ---------- OTHER LONG-TERM LIABILITIES 898 5,544 3,015 -- 9,457 ---------- ---------- ---------- ---------- ---------- SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock -- -- -- -- -- Class A common stock 4 -- -- -- 4 Class B common stock 166 -- -- -- 166 Additional paid-in ~~capital~~process 72,~~326 41,825 7,926 (49,751) 7,326 Accumulated (deficit) earnings (3,242) 79,~~127 ~~(18~~2,~~292)~~495 ~~(75,355)~~Finished ~~(17,762)~~goods ~~Accumulated other comprehensive gain (loss) -- 359 (17~~39,~~062)~~996 ~~-- (16~~40,~~703)~~461 -------~~---~~ -------~~---~~ ~~---------- ---------- ---------- Total shareholders' equity (deficit) 4,254 121,311 (27,428) (125,106) (26,969) ---------- ---------- ---------- ---------- ----------~~ $ ~~232~~48,~~229~~413 $ ~~156~~49,~~237~~381 ~~$ 105,170 $ (299,590) $ 194,046~~ =======~~===~~ =======~~=== ========== ========== ==========~~

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

~~August~~Three ~~27,~~months ~~2000~~ended ~~---------------------------------------------------------------------------~~Six ~~Consolidated~~months ~~Subsidiary~~ended ~~Subsidiary Elimination Consolidated Albecca Inc. Guarantors Nonguarantors Entries Total~~ ------------ ---------- -------~~--------~~ ------------ ------------ ~~ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13,745 $ 1,855 $ 7,721 $~~ -- ~~$ 23,321 Accounts receivable, net~~ -- ~~20,291 16,093~~ -- ~~36,384~~February ~~Intercompany accounts receivable -- 73~~27,~~310~~ ~~1,336~~February ~~(74~~25,~~646)~~ --February ~~Inventories -- 23~~27,~~617~~ ~~24,796~~February ~~-- 48~~25,~~413~~ ~~Other~~2000 ~~current~~2001 ~~assets~~2000 ~~180~~2001 ~~987 3,587~~ -- ~~4,754~~ ---------- ---------- --~~--------~~ ---------- --~~--------~~ ~~Total current assets 13,925 120,060 53,533 (74,646) 112,872 PROPERTY, PLANT AND EQUIPMENT, net~~ -- ~~11,095 25,597~~ -- ~~36,692 OTHER LONG~~-~~TERM ASSETS 4,894 13,745 22,892~~ -- ~~41,531 INVESTMENT IN SUBSIDIARIES 105,452~~ -- ~~7,884 (113,336)~~ -- ~~INTERCOMPANY LOANS RECEIVABLE 91,985~~ -- ~~532~~Net ~~(92~~income,~~517)~~ --as ~~----------~~reported ~~---------- ---------- ---------- ----------~~ $ ~~216,256~~9 $ ~~144~~9,~~900~~905 $ 110,438 $ (280,499) $ 191,095 ========== ========== ========== ========== ========== LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ 563 $ 7,~~123~~144 $ ~~-- $ 7~~18,~~686~~021 ~~Accounts~~Foreign ~~payable~~currency --translation ~~9,484~~adjustments ~~7,763 -- 17,247 Intercompany accounts payable 67,854 114 6,678~~ (741,~~646~~123) ~~-- Accrued liabilities 814 11~~2,~~856~~459 ~~11,994 -- 24,664 ---------- ---------- ---------- ---------- ---------- Total current liabilities 68,668 22,017 33,558~~ (741,~~646~~418) 49,597 ---------- ---------- ---------- ---------- ---------- LONG-TERM DEBT, less current maturities 148,930 6,085 7,481 -- 162,496 ---------- ---------- ---------- ---------- ---------- INTERCOMPANY LOANS PAYABLE -- 388 92,129 (~~92,517~~449) -- -----~~-----~~ -------~~---~~ -------~~---~~ ---------- ~~----------~~Total OTHER LONG-TERM LIABILITIES 220 5,961 2,698 -- 8,879 ---------- ---------- ---------- ---------- ---------- SHAREHOLDERS' (DEFICIT) EQUITY: Preferred stock -- -- -- -- -- Class A common stock 4 -- -- -- 4 Class B common stock 166 -- -- -- 166 Additional paid-in capital 7,326 41,825 7,926 (49,751) 7,326 Accumulated (deficit) earnings (9,058) 68,199 (19,134) (63,585) (23,578) Accumulated other comprehensive ~~gain~~ (loss) --income ~~425~~ $(~~14,220) -- (13,795) ---------- ---------- ---------- ---------- ---------- Total shareholders' (deficit) equity (~~1,~~562~~114) ~~110,449 (25,428) (113,336) (29,877) ---------- ---------- ---------- ---------- ----------~~ $ ~~216~~12,~~256~~364 $ ~~144~~5,~~900~~726 $ ~~110~~17,~~438~~572 ~~$ (280,499) $ 191,095~~ =======~~===~~ =======~~===~~ =======~~===~~ ========~~== ==========~~

Accumulated other comprehensive loss represents foreign currency translation adjustments of $13,795,000 and $14,244,000 at August 27, 2000 and February 25, 2001, 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 years beginning after June 15, 2000. 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 transition adjustments to earnings and other comprehensive income (equity). In accordance with the transition provisions of SFAS 133, the Company recorded a cumulative adjustment, net of tax, of $188,000 to recognize the fair value of the derivatives during the first quarter of fiscal 2001, to other income on the Company's Consolidated Statement of Operations. 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. Its U.S. operations purchase primarily the Italian Lira, Spanish Peseta, and French Franc, and its United Kingdom subsidiary primarily enters into U.S. dollar forward exchange contracts. The carrying amount of derivatives at fair value as of February 25, 2001 was $130,000. During the three months ended February 25, 2001, a loss of $133,000 was recorded, net of tax, representing the change in fair value of the derivatives. As of February 25, 2001 the maximum period of time the Company was hedging its exposure to the variability in future cash flows for forecasted transactions was approximately six months. 8 9 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) 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 second quarter of fiscal 2001, the Company repurchased $2,000,000 of its senior subordinated notes. The Company estimates that an extraordinary loss of approximately $35,000 will be recorded. 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)

~~Three~~February ~~Months Ended November 26~~25, ~~2000~~2001 (Unaudited) ------------------------------------------------------------------------------ Consolidated Subsidiary Subsidiary Elimination Consolidated Albecca Inc. Guarantors Nonguarantors Entries Total ------------ ---------- ------------- ------------- ------------ ~~Net~~ASSETS ~~sales~~CURRENT $ASSETS: --Cash and cash equivalents $ 5715,~~134~~720 $ 281,~~476~~193 $ (27,~~237)~~642 $ 83-- $ 24,~~373~~555 ~~Cost~~Accounts ofreceivable, ~~sales~~net -- 2920,~~698~~137 1715,~~013~~960 ~~(2,237)~~-- 4436,~~474~~097 ~~----------~~Intercompany ~~----------~~accounts ~~----------~~receivable --~~--------~~ 93,331 516 (93,847) --~~--------~~ ~~Gross~~Inventories ~~profit~~ -- 2725,~~436~~887 1123,~~463~~494 -- 3849,~~899~~381 ~~Operating~~Other ~~expenses~~current 18assets 16183 1,~~139~~348 93,~~288~~770 -- 255,~~445~~301 ---------- ---------- ---------- ---------- ---------- ~~Operating~~Total ~~(loss)~~current ~~income~~assets ~~(18)~~15,903 11141,~~297~~896 251,~~175~~382 --(93,847) 13115,~~454~~334 ~~Interest~~PROPERTY, ~~income~~PLANT (1AND EQUIPMENT,~~576)~~ --net -- 10,335 25,149 -- (135,~~576)~~484 ~~Interest~~OTHER ~~expense~~LONG-TERM 5ASSETS 4,~~459~~506 ~~234~~13,712 ~~197~~22,385 -- 540,~~890~~603 ~~Other~~INVESTMENT ~~loss~~IN SUBSIDIARIES 130,515 -- 7,885 (138,400) -- ~~549~~INTERCOMPANY LOANS RECEIVABLE 91,274 -- ~~549~~176 (91,450) -- -------- ---------- ---------- ---------- ---------- ~~(Loss)~~$242,198 ~~income~~$165,943 ~~before~~$ ~~provision~~106,977 ~~for income taxes~~$(323,697) ~~minority~~$ ~~interest~~191,421 ~~extraordinary~~======== ~~gain~~======== ~~and~~========= ~~cumulative~~========= ~~effect~~========= ofLIABILITIES aAND ~~change~~SHAREHOLDERS' inEQUITY ~~accounting principle~~ (~~3,901~~DEFICIT) ~~11,063~~CURRENT ~~1,429~~LIABILITIES: --Current ~~8,591~~maturities ~~Provision~~of ~~for~~long-term ~~income~~debt ~~taxes~~$ -- ~~135~~$ ~~744~~721 --$ ~~879~~5,075 ~~Minority~~$ ~~interest~~ -- --$ 315,796 --Accounts 31payable --~~--------~~ ~~----------~~9,445 ~~----------~~8,998 --~~--------~~ ~~----------~~18,443 ~~(Loss)~~Intercompany ~~income~~accounts ~~before~~payable ~~extraordinary~~88,033 ~~gain~~578 ~~and~~5,236 ~~cumulative effect of a change in accounting principle~~ (393,~~901~~847) ~~10,928 654~~ -- ~~7,681~~Accrued ~~Extraordinary~~liabilities ~~gain~~645 on9,416 ~~repurchase of debt~~10,261 ~~net of tax 247~~ -- --20,322 -- ~~247~~ ------~~----~~ ---------- ---------- ---------- ---------- ~~(Loss)~~Total ~~income~~current ~~before~~liabilities ~~cumulative effect of a change in accounting principle (3~~88,~~654)~~678 1020,~~928~~160 ~~654 -- 7~~29,~~928~~570 ~~Cumulative effect of adoption of SFAS 133, net of tax -- -- 188 -- 188 Equity in earnings of subsidiaries 11,770 -- --~~ (1193,~~770~~847) --44,561 ---------- ---------- ---------- ---------- --------- LONG-TERM ~~Net income $ 8~~DEBT,~~116~~ $less ~~10,928~~current $maturities ~~842 $ (11~~140,~~770)~~930 ~~$ 8~~6,~~116~~601 ~~========== ========== ========== ========== ========== CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 8~~6,~~352~~708 ~~$ (1,210) $ 2,521 $~~ -- ~~$ 9~~154,~~663~~239 ---------- ---------- ---------- ---------- ---------- ~~CASH~~INTERCOMPANY ~~FLOWS~~LOANS ~~FROM~~PAYABLE ~~INVESTING ACTIVITIES: Purchases of property, plant and equipment~~ -- ~~(281)~~176 ~~(720)~~91,274 -- (191,~~001~~450) ~~Proceeds from sales of property, plant and equipment~~ -- ~~399 87~~ -- ~~486 Changes in other long~~-~~term assets 97 (208) (113)~~ -- ~~(224)~~ ---~~-------~~ ---------- ---------- ---------- ---------- ~~Net~~OTHER ~~cash~~LONG-TERM ~~provided~~LIABILITIES by931 ~~(used~~5,634 ~~in)~~3,161 ~~investing activities 97 (90) (746)~~ -- ~~(739)~~9,726 ---------- ---------- ---------- ---------- ---------- ~~CASH~~SHAREHOLDERS' ~~FLOWS~~EQUITY ~~FROM FINANCING ACTIVITIES~~(DEFICIT): ~~Proceeds~~Preferred ~~from~~stock ~~revolving credit facilities~~ -- ~~102 4,689~~ -- ~~4,791 Repayments of revolving credit facilities~~ -- -- ~~(5,587)~~ -- ~~(5,587)~~Class ~~Proceeds~~A ~~from~~common ~~long-term~~stock ~~debt~~4 -- ~~600 8~~ -- ~~608 Repayments of long~~-~~term debt (3,753) (3) (1,089)~~ -- (4~~,845)~~ ~~Distributions~~Class toB ~~shareholders~~common ~~(2,300)~~stock --166 -- -- ~~(2,300)~~ --~~--------~~ ~~----------~~166 ~~----------~~Additional paid-~~---------~~in ~~----------~~capital ~~Net~~7,326 ~~cash~~41,826 ~~(used~~7,926 in(49,752) ~~provided~~7,326 byAccumulated ~~financing~~earnings ~~activities~~(deficit) 4,163 91,183 (617,~~053~~055) ~~699~~ (188,~~979~~648) -- (710,~~333~~357) ~~----------~~Accumulated ~~----------~~other ~~----------~~comprehensive ~~----------~~gain (loss) --~~--------~~ ~~EFFECT~~363 OF(14,607) ~~EXCHANGE RATE ON CASH~~ -- (2114,244) ~~824~~ -- ~~803~~ ------~~----~~ ---------- ---------- ---------- ---------- ~~NET~~Total ~~INCREASE~~shareholders' ~~(DECREASE)~~equity ~~IN CASH 2,396~~ (~~622~~deficit) ~~620 -- 2~~11,~~394~~659 ~~Cash and cash equivalents~~133,372 ~~beginning of period 13~~(23,~~745~~736) 1(138,~~855~~400) 7(17,~~721~~105) -- ~~23,321~~ ------~~----~~ ---------- ---------- ---------- ---------- ~~Cash and cash equivalents~~$242,198 ~~end of period~~ $ 16165,~~141~~943 $ 1106,~~233~~977 $ 8(323,~~341~~697) $ ~~-- $ 25~~191,~~715~~421 ========== ========== ========== ========== ==========

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

~~Three~~August ~~Months Ended November 28~~27, ~~1999~~2000 ~~(Unaudited)~~ ------------------------------------------------------------------------------ Consolidated Subsidiary Subsidiary Elimination Consolidated Albecca Inc. Guarantors Nonguarantors Entries Total ------------ ---------- ------------- ------------- ------------ ~~Net~~ASSETS ~~sales~~CURRENT $ASSETS: --Cash $and ~~55,589~~cash equivalents $ 4613,~~842~~745 $ (21,~~311)~~855 $ ~~100~~7,~~120~~721 ~~Cost~~$ ~~of sales~~ -- ~~30,840~~$ 2823,~~770~~321 ~~(2,311)~~Accounts 57receivable,~~299~~ ~~---------~~net --~~-------~~ ~~--------- --------- --------- Gross profit -- 24~~20,~~749~~291 1816,~~072~~093 -- 4236,~~821~~384 ~~Operating~~Intercompany ~~expenses~~accounts 84receivable ~~16,823 15,190~~ -- 3273,~~097~~310 ~~---------~~1,336 ~~---------~~(74,646) --~~-------~~ ~~---------~~Inventories --~~-------~~ ~~Operating (loss) income (84) 7~~23,~~926~~617 224,~~882~~796 -- 1048,~~724~~413 ~~Interest~~Other ~~income~~current ~~(820)~~assets --180 --987 ~~-- (820) Interest expense 5~~3,~~525~~587 ~~101 787~~ -- 64,~~413~~754 --------- --------- --------- --------- --------- ~~(Loss)~~Total ~~income~~current ~~before~~assets ~~provision~~13,925 ~~for~~120,060 ~~income taxes~~53,533 ~~minority interest and extraordinary gain~~ (474,~~789~~646) 7112,~~825~~872 2PROPERTY,~~095~~ --PLANT 5AND EQUIPMENT,~~131~~ ~~Provision~~net ~~for income taxes~~ -- ~~120~~11,095 ~~742~~25,597 -- ~~862~~36,692 ~~Minority~~OTHER ~~interest~~ LONG--TERM --ASSETS ~~114 -- 114 --------- --------- --------- --------- --------- (Loss) income before extraordinary gain (~~4,~~789)~~894 713,~~705~~745 122,~~239~~892 -- 441,~~155~~531 ~~Extraordinary~~INVESTMENT ~~gain~~IN onSUBSIDIARIES ~~repurchase~~105,452 of-- ~~debt~~7,884 ~~net of tax 2~~(113,~~980~~336) -- --INTERCOMPANY --LOANS ~~2,980~~RECEIVABLE ~~Equity in earnings of subsidiaries 8~~91,~~944~~985 -- --532 (892,~~944~~517) -- --------- --------- --------- --------- --------- ~~Net income~~ $ 7216,~~135~~256 $ 7144,~~705~~900 $ 1110,~~239~~438 $ (8280,~~944~~499) $ 7191,~~135~~095 ========= ========= ========= ========= ========= ~~CONDENSED~~LIABILITIES ~~CONSOLIDATING~~AND ~~STATEMENT~~SHAREHOLDERS' OF(DEFICIT) ~~CASH~~EQUITY ~~FLOWS~~CURRENT ~~NET~~LIABILITIES: ~~CASH~~Current ~~PROVIDED~~maturities BYof ~~OPERATING~~long-term ~~ACTIVITIES~~debt $ ~~8,900~~-- $ ~~1,495~~563 $ 17,~~817~~123 $ -- $ 127,~~212~~686 Accounts payable -- 9,484 7,763 -- 17,247 Intercompany accounts payable 67,854 114 6,678 (74,646) -- Accrued liabilities 814 11,856 11,994 --- 24,664 --------- --------- --------- --------- ~~CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment~~ -- ~~(1,886) (1,688)~~ -- ~~(3,574) Proceeds from sales of property, plant and equipment~~ -- ~~11 497~~ --- ~~508~~Total ~~Changes~~current inliabilities ~~other~~68,668 ~~long-term~~22,017 ~~assets~~33,558 ~~430~~ (~~203~~74,646) ~~(164)~~49,597 -- 63 --------- --------- --------- --------- --------- ~~Net~~LONG-TERM ~~cash~~DEBT, ~~provided~~less bycurrent ~~(used~~maturities ~~in)~~148,930 ~~investing activities 430 (2~~6,~~078)~~085 (17,~~355)~~481 -- (3162,~~003)~~496 --------- --------- --------- --------- --------- ~~CASH~~INTERCOMPANY ~~FLOWS~~LOANS ~~FROM~~PAYABLE ~~FINANCING ACTIVITIES: Changes in intercompany loan balances~~ -- 388 92,129 (492,517) 4 -- -- ~~Proceeds from revolving credit facilities~~ -- -- ~~7,855~~ --- ~~7,855 Repayments of revolving credit facilities~~ -- -- ~~(7,914)~~ -- ~~(7,914) Proceeds from long~~-~~term~~- ~~debt~~ --------- --------- ~~2,153~~ --------- ~~2,153~~OTHER ~~Repayments of long~~LONG-~~term~~TERM ~~debt~~LIABILITIES ~~(10,840)~~220 (15,~~301)~~961 (2,~~707)~~698 -- ~~(14~~8,~~848)~~879 ~~Distributions to shareholders~~ -- ~~326 (326)~~ -- -- ---~~------~~ --------- --------- --------- --------- ~~Net~~SHAREHOLDERS' ~~cash used in financing activities~~ (~~10,840~~DEFICIT) ~~(979)~~EQUITY: ~~(935)~~Preferred stock -- ~~(12,754)~~ -- -- -- --- Class A common stock 4 -- -- -- 4 Class B common stock 166 --- --~~-------~~ --~~-------~~ 166 Additional paid-~~--------~~in ~~EFFECT~~capital OF7,326 ~~EXCHANGE~~41,825 ~~RATE~~7,926 ON(49,751) ~~CASH~~7,326 Accumulated (deficit) earnings (9,058) 68,199 (19,134) (63,585) (23,578) Accumulated other comprehensive gain (loss) -- ~~128~~425 (7614,220) -- 52(13,795) --------- --------- --------- --------- --------- ~~NET~~Total ~~DECREASE~~shareholders' IN(deficit) ~~CASH~~equity (1,~~510~~562) 110,449 (125,~~434~~428) (~~549~~113,336) -- (329,~~493~~877) ~~Cash and cash equivalents, beginning of period 27,424 1,748 5,886~~ -- ~~35,058~~ --------- --------- --------- --------- --------- ~~Cash~~$ ~~and cash equivalents~~216,256 ~~end of period~~ $ 25144,~~914~~900 $ ~~314~~110,438 $ 5(280,~~337~~499) $ ~~-- $ 31~~191,~~565~~095 ========= ========= ========= ========= =========

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

Three months ended February 25, 2001 (Unaudited) -------------------------------------------------------------------------- ~~November~~Consolidated ~~28,~~Subsidiary ~~November~~Subsidiary ~~26,~~Elimination ~~1999~~Consolidated ~~2000~~Albecca Inc. Guarantors Nonguarantors Entries Total ------------ ---------- ------------- ------------ ------------ Net sales ~~100.0%~~$ ~~100.0%~~-- $55,672 $ 28,552 $ (2,663) $ 81,561 Cost of sales ~~57.~~-- 27,386 17,721 (2,663) ~~53.3~~42,444 -------- ------- -------- -------- -------- Gross profit ~~42.8~~-- ~~46.7~~28,286 10,831 -- 39,117 Operating expenses ~~32.0~~172 ~~30.5~~15,923 9,514 -- 25,609 -------- ------- -------- -------- -------- Operating (loss) income ~~10.8~~(172) ~~16.2~~12,363 1,317 -- 13,508 Interest income (~~0.8~~1,905) -- -- -- (1.9,905) Interest expense ~~6.4~~5,372 ~~7.1~~182 224 -- 5,778 Other ~~loss~~income -- ~~0.7~~-- (430) -- (430) -------- ------- ~~Income~~-------- -------- -------- (Loss) income before provision for income taxes, minority interest, and extraordinary gain ~~and~~(3,639) ~~cumulative~~12,181 ~~effect~~1,523 of-- ~~a change in accounting principle 5.2~~ 10.3,065 Provision for income taxes ~~0.9~~-- ~~1.1~~125 263 -- 388 Minority interest ~~0.1~~-- -- 23 -- 23 -------- ------- ~~Income~~-------- ~~before~~-------- ~~extraordinary~~-------- ~~gain~~(Loss) ~~and~~income ~~cumulative~~before ~~effect~~extraordinary ofgain a(3,639) ~~change~~12,056 in1,237 ~~accounting~~-- ~~principle 4.2~~ 9.2,654 Extraordinary gain on repurchase of debt, net of tax ~~3.0~~251 ~~0.3~~ -- ---- --~~----~~ ~~Income~~251 ~~before~~Equity ~~cumulative effect of a change~~ in ~~accounting~~earnings ~~principle 7.2 9.5 Cumulative effect~~ of ~~adoption~~subsidiaries of13,293 ~~SFAS~~-- ~~133~~-- (13,293) ~~net~~-- of-------- ~~tax~~------- -------- .2 -------- -------- Net income ~~7.2%~~(loss) $ 9~~.7%~~,905 $12,056 $ 1,237 $(13,293) $ 9,905 ======== ======= ======== ======== ========

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

13 14 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (unaudited) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (in thousands)

14 15 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 second quarter ended February 25, 2001, net sales were $81.6 million compared to $94.2 million for the second quarter ended February 27, 2000. For the six months ended February 25, 2001, net sales were $164.9 million compared to $194.3 million for the six months ended February 27, 2000. The decrease in net sales for the three and six months ended February 25, 2001 was primarily the result of the sale of two international operations completed during the second and fourth quarters of fiscal 2000, the closure of an international operation completed during the third quarter of fiscal 2000, the impact of unfavorable changes in foreign exchange rates, as well as a general softening in the global economy. Currency fluctuations decreased net sales by $4.0 million and $3.2 million for the first and second quarters of fiscal 2001, respectively, primarily due to continued strengthening of the U.S. dollar against major European currencies. U.S. net sales decreased .7% and increased 1.3%, respectively, for the three and six months ended February 25, 2001 from the comparable periods in fiscal 2000, primarily the result of an increase in sales of branded moulding, partially offset by a continued loss of sales from prior acquisitions. Management believes sales were also affected by a decline in overall consumer purchases during the last three months. International net sales decreased 31.1% and 36.0% for the three and six months ended February 25, 2001 from the comparable periods in fiscal 2000, primarily due to the sale of the Mersch operations completed during the second quarter of fiscal 2000, the sale of the Brio operation completed during the fourth quarter of fiscal 2000, the closure of the United Kingdom - Northampton operation completed during the third quarter of fiscal 2000, a decrease in sales in The Netherlands, Korea and Sweden, and the negative impact of the continued strengthening of the U.S. dollar. COST OF SALES Cost of sales was $42.4 million and $86.9 million for the three and six months ended February 25, 2001 compared to $52.4 million and $109.7 million for the three and six months ended February 27, 2000. In the U.S., gross profit increased to 51.0% and 49.6% for the three and six months ended February 25, 2001 compared to 46.6% and 45.6% for the comparable periods in fiscal 2000. The increase for the quarter was primarily the result of continued growth in sales of branded products and favorable currency exchange rate movements in certain supplier markets. For the three and six months ended February 25, 2001, International gross profit margin increased to 41.7% and 42.6% compared to 41.2% and 41.0% for the comparable periods in fiscal 2000. This increase was primarily the result of the decrease in net sales of lower margin products associated with the Mersch and Brio operations sold in the second and fourth quarters of fiscal 2000 and a focus on sales of branded products. 15 16 OPERATING EXPENSES Operating expenses were $25.6 million and $51.1 million for the three and six months ended February 25, 2001 compared to $31.5 million and $63.6 million for the three and six months ended February 27, 2000. In the U.S., operating expenses as a percentage of net sales decreased to 28.6% and 28.4% for the three and six months ended February 25, 2001 compared to 29.4% and 29.5% for the comparable periods in fiscal 2000. The decrease is primarily the result of the continued integration of prior acquisitions and a focused internal effort to control costs. For the three and six months ended February 25, 2001, International operating expenses as a percentage of net sales decreased to 37.0% and 36.2% compared to 39.2% and 36.8% for the comparable periods in fiscal 2000. The decrease in operating expenses as a percentage of net sales is primarily attributable to ongoing cost reduction activities and stabilization of sales revenues, partially offset by increased costs experienced in certain of the Company's operations. INTEREST INCOME Interest income was $1.9 million and $3.5 million for the three and six months ended February 25, 2001 compared to $1.0 million and $1.8 million for the three and six months ended February 27, 2000. 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 $5.8 million and $11.7 million for the three and six months ended February 25, 2001 compared to $6.0 million and $12.4 million for the three and six months ended February 27, 2000. 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 company's continued focus to reduce its total debt. OTHER INCOME Other income primarily represents realized and unrealized foreign currency exchange gains and losses on intercompany account balances and certain other foreign-denominated assets, as well as gains and losses on derivative instruments as discussed in Note 10 of the Notes to Consolidated Financial Statements. 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, the Company repurchased a portion of its senior subordinated notes with a face value of $4.0 million during each of the first two quarters of fiscal 2001, for a total repurchase of $8.0 million. The debt repurchases resulted in extraordinary gains totaling $.5 million, net of state income taxes of $.12 million. NET INCOME For the reasons set forth above, net income was $9.9 million and $18.0 million for the three and six months ended February 25, 2001 compared to $.1 million and $7.1 million for the three and six months ended February 27, 2000. 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 February 25, 2001, the Company had cash and cash equivalents of $24.6 million compared to $23.3 million as of August 27, 2000. Net cash provided by operating activities was $16.2 million for the six months ended February 25, 2001 compared to $22.3 million for the six months ended February 27, 2000. Net income for the first six months of fiscal 2001 was significantly higher than in the same period in the preceding year ($18.0 million vs. $7.1 million). However, the first and second quarters of fiscal 2000 included a number of significant items positively impacting cash flow that did not recur in the first six months of fiscal 2001. This included a reduction of inventory both as a result of the disposition of the Mersch businesses as well as continued sell-down of acquisition inventories and an increase in accrued liabilities. These items were partially offset by an increase in accounts receivable. Items negatively impacting cash flow during the first six months of fiscal 2001 included an increase in inventories and a reduction in accrued liabilities, partially offset by the positive cash flow effect of an increase in accounts payable. Net cash used in investing activities was $.8 million for the six months ended February 25, 2001 compared to net cash provided by investing activities of $12.1 million for the six months ended February 27, 2000, primarily due to the proceeds from the disposition of the Mersch entities received during the second quarter of fiscal 2000, partially offset by a decrease in capital expenditures in the current year as a result of the completion of the Company's new manufacturing plant in Ashland, Wisconsin during fiscal 2000. Net cash used in financing activities decreased to $14.4 million for the six months ended February 25, 2001 compared to $41.9 million for the six months ended February 27, 2000, primarily due to the reduction of debt associated with the disposition of the Mersch and Brio businesses during fiscal 2000 and 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 $8.0 million for the six months ended February 25, 2001 compared to $23.8 million during the prior comparable period. 16 17 As of February 25, 2001, the Company had outstanding indebtedness of approximately $160.0 million, consisting of $140.9 million in principal amount of the August 1998 senior subordinated debt and $19.1 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. 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. Historically, significant portions of the Company's revenue have been 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. 17 18 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits:

b. Reports on Form 8-K: None 18 19 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: April 11, 2001 By: /s/ Craig A. Ponzio -------------- ----------------------------------------- Craig A. Ponzio, Chairman of the Board, President, Chief Executive Officer (Principal Executive Officer) Date: April 11, 2001 By: /s/ R. Bradley Goodson -------------- ----------------------------------------- R. Bradley Goodson, Vice President Finance, Chief Financial Officer (Principal Financial Officer) 19

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