10-K 1 g72929e10-k.txt ALBECCA INC UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 26, 2001 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Number) 3900 STEVE REYNOLDS BOULEVARD, NORCROSS, GEORGIA 30093 (Address of Principal Executive Offices) (770) 279-5210 Securities registered pursuant Section 12(b) of the Act: None Securities registered pursuant Section 12(g) of the Act: None Indicate by check mark 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 has required to file such report(s), and (2) has been subject to such filing requirements during the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] TABLE OF CONTENTS

PAGE ---- PART I Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Selected Consolidated Financial Data 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 1716 Item 8. ~~Consolidated~~ Financial Statements and Supplementary Data F-1 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 18 PART III Item 10. Directors and Executive Officers of the Registrant 18 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 2120 Item 13. Certain Relationships and Related Transactions 21 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 22 Signatures 25

2 PART I Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 This document contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, forward-looking statements may be made orally or in press releases, conferences, reports or otherwise, in the future by or on behalf of the Company. When used in this document, the words, "anticipates," "intends," "plans," "believes," "estimates," "expects" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause actual results, performance or achievement of Albecca Inc. and its subsidiaries ("Albecca" or the "Company") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Particular risks and uncertainties facing the Company at the present include political and economic uncertainty throughout the world; whether profit improvement efforts can be successfully implemented; increased competition in the Company's businesses; the cost of closing certain plants and selling certain business units; the success of new marketing programs; continued softness in the global economy; the strong dollar which increases the cost of the Company's products in certain foreign markets resulting in limiting the Company's ability to increase prices in such markets; competitive implications and price transparencies related to the Euro conversion; changing buying patterns affecting the Company's consumer business; the Company's ability to develop and manufacture new and existing products profitably; market acceptance of existing and new products; changes in retail distribution channels and purchasing practices; the Company's ability to rationalize its product lines; the Company's ability to maintain good relations with its team members; and the ability to retain and hire quality team members. In addition, the Company is subject to risks and uncertainties facing its industry in general, including changes in business and political conditions and the economy in general in both foreign and domestic markets; slower growth in the Company's markets; financial market changes including changes in interest rates and fluctuations in foreign exchange rates; unanticipated problems or costs associated with the transition of European currencies to the common Euro currency; a slowing in housing starts; inability to raise prices of products due to market conditions in certain markets; changes in market demographics; actions of competitors; seasonal factors in the Company's industry; unforeseen litigation; and governmental actions. The Company wishes to caution readers not to place undue reliance on any forward-looking statements and to recognize that the statements are not predictions of actual future results. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The foregoing statements are not exclusive and further information concerning the Company and its businesses, including factors that could potentially materially affect the Company's financial results, may emerge from time to time. It is not possible for management to predict all risk factors or to assess the impact of such risk factors on the Company's business. ITEM 1. BUSINESS GENERAL Albecca primarily does business under the Larson-Juhl name. Albecca designs, manufactures and distributes a complete line of high quality, branded custom framing products, including wood and metal moulding, matboard, foamboard, glass, equipment and other framing supplies. Albecca's principal brands include the "Craig Ponzio Custom Frame Collection" and the "Larson-Juhl Classic Collection." For over 100 years, Albecca has been designing, manufacturing and distributing custom framing products that enhance the aesthetic qualities of prints, paintings, drawings and other art and memorabilia. The Company is incorporated under the laws of the State of Georgia. Its principal executive offices are located at 3900 Steve Reynolds Boulevard, Norcross, Georgia 30093, and its telephone number is (770) 279-5210. HISTORY Craig Ponzio, Albecca's Chairman and sole shareholder, joined Larson Picture Frame, Inc. in 1973 and purchased that company in 1981. In 1988, Larson Picture Frame, Inc. acquired Juhl-Pacific Corporation creating Larson-Juhl. MARKETS Today the industry in North America includes approximately 18,000 retail custom frame storefronts and over 350 manufacturers and distributors of custom framing products. Independent and franchise custom framers currently account for over 90% of custom framing sales in North America. The remaining sales are principally generated by custom framing departments of craft chains. 3 Outside of North America, Albecca estimates there are over 20,000 retail custom frame storefronts and over 500 manufacturers and distributors of custom framing products. Albecca estimates that sales to retail custom framers in 2000 were approximately $1.3 billion in North America. The Company's fiscal year 2001 sales to customers in North America were $232.7 million and $81.4 million for all other international customers. PRODUCTS Albecca designs, manufactures and distributes a complete line of quality branded custom framing products, including wood and metal moulding, matboard, foamboard, glass, equipment and other framing supplies. This product offering allows Albecca to be a complete source supplier to retail custom framers. Albecca offers over 8,000 branded products in North America and over 10,000 additional branded products in the rest of the world. Of Albecca's worldwide products, over 6,000 are branded custom wood moulding products. MARKETING Albecca markets its products to retail custom frame shops principally through Albecca-employed sales representatives, catalogs, advertisements in trade magazines and attendance at industry trade shows. Albecca also markets to consumers by advertising in widely distributed magazines that Albecca considers influential among consumers and decorators, as well as through the use of direct mail materials and in-store promotional displays. These advertisements generally focus on Albecca's image and the introduction of new premium, branded products. Through educational seminars and consultations by Albecca's sales team, Albecca also provides technical, marketing and other business advice both to established retail custom framers and to prospective customers establishing new retail custom framing businesses. COMPETITION Albecca competes with over 350 North American and over 500 international manufacturers and distributors of custom framing products. Albecca is one of the largest manufacturers and distributors of wood moulding in North America. The principal manufacturers of metal moulding are Nielsen & Bainbridge and Cardinal Aluminum Company, which primarily supply their products to custom framers through distributors. Albecca believes it is one of the largest metal moulding customers of Nielsen & Bainbridge. The principal manufacturers of matboard are Crescent Cardboard Company and Nielsen & Bainbridge, which primarily supply their products to custom framers through distributors. Albecca believes it is the largest single matboard customer of both companies. Albecca competes primarily on the basis of product design and quality, on-time delivery, inventory availability and service. Albecca believes its principal competitive strengths are: leadership in design of premium branded products for the custom framing industry; a wide variety of custom framing products; a direct sales force regularly visiting retail custom framers to introduce new products and assist with in-store merchandising; and strategically-located manufacturing/distribution centers for rapid, efficient response to customers. Albecca experiences competition from smaller, regionally-focused distributors of framing products. In the broader sense, Albecca competes in the larger home decorating market, where consumers may forego custom framing and choose ready-made picture frames or framed art works, and in the larger wholesale contract framing market, where wholesale picture framers produce framed art works in volume for large accounts such as hotels or office complexes. Albecca believes that other home furnishing items such as furniture, floor and wall coverings and window treatments compete with custom framing for consumer dollars. DISTRIBUTION DISTRIBUTION IN NORTH AMERICA The Company sells its products through direct sales personnel of approximately 100 sales representatives and associates. Albecca's sales representatives update customers on Albecca's product lines, advise customers on framing design and provide information on more effective merchandising, design and selling techniques. Sales representatives are employed by Albecca and are compensated principally by salary, with commission and bonus components available based on sales and other performance criteria. Albecca distributes its products in North America through 27 distribution centers. The number and location of these distribution centers make Albecca the only manufacturer with a broad-based North American distribution network. Albecca's Chicago and Los 4 Angeles distribution centers also serve as distribution hubs that receive and process container-size deliveries of Albecca's products and ship smaller quantities of products, generally weekly, to the other distribution centers based on customer demand. INTERNATIONAL DISTRIBUTION Outside of North America, Albecca has relied to date on the distribution systems in place for the companies it has acquired, and is continuing the process of integrating and rationalizing these systems. Albecca's goal for its international operations is to develop a fast, user-friendly order-fulfillment system that operates through a logistical network similar to the one existing in North America. In order to realize this goal, Albecca has developed a central distribution center (relocated to The Netherlands during fiscal 2000) to improve response to European framers as well as to better control distribution costs. TRADEMARKS Albecca uses a number of trademarks to distinguish its brands, principally, Larson-Juhl, Clark and Artique. Albecca has registered or applied for registration of these trademarks in the U.S. and Canada and in numerous countries in Europe, Asia and elsewhere. Mr. Ponzio has granted Albecca a perpetual right to use the name "Craig Ponzio" to identify and brand Albecca's premium custom framing products. Albecca regards its trademarks and other proprietary rights as valuable assets in the marketing of its products and on a worldwide basis seeks to protect them against infringement. There can be no assurance that the actions taken by Albecca to establish and protect its trademarks and other proprietary rights will be adequate to prevent imitation of its products by others or to prevent others from seeking to block sales of Albecca's products as violative of the trademarks and other proprietary rights of others. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. Albecca also regards its moulding designs as critical to the success of its marketing efforts, and seeks to protect those designs before their introduction to the marketplace. However, after such introduction, there are no practical means to prevent others from copying or imitating such designs or specific design elements. RAW MATERIALS AND SUPPLIERS Albecca's manufacturing and sourcing staff oversees manufacturing and production, negotiates purchases of raw materials and researches and identifies new suppliers and third-party manufacturers. Albecca separately negotiates with suppliers for the purchase of required raw materials in accordance with Albecca's specifications and limits its exposure to holding excess raw material inventory by purchasing quantities based on demand. Albecca believes that its policy of limiting commitments for purchases reduces its exposure to excess inventory and obsolescence. Albecca is not responsible for procuring raw materials used by its third-party manufacturers. Wood, the principal raw material used in Albecca's manufacturing processes, is purchased from a variety of suppliers in the U.S., Canada, Asia and Africa as kiln-dried blanks or as raw lumber that is then dried by Albecca. The primary types of wood used by Albecca are North American oak and ash, as well as European pine. Albecca has long-standing relationships with many of its suppliers and has experienced only limited difficulty in satisfying its raw materials requirements. Although the loss of any supplier may have an adverse effect on Albecca's short-term operating results, Albecca believes it could replace suppliers without having a material adverse effect on Albecca. Albecca produces approximately 50% of its wood moulding in Albecca-owned manufacturing plants, with the balance of the wood moulding sold by Albecca produced by third-party manufacturers. Albecca does not have supply contracts with any of these suppliers. However, as an industry leader in design and as one of the largest distributors of wood moulding to retail custom framers, Albecca has developed close working relationships with many of these third-party manufacturers who produce Albecca's proprietary products to its designs and specifications. Many of these manufacturers have devoted a significant amount of their capacity to the production of Albecca's products. Besides wood moulding, Albecca does not manufacture any other products. Instead, it purchases them from numerous other manufacturers and distributors. Albecca works with one manufacturer to produce its proprietary line of Clark metal moulding. Albecca is the only purchaser of metal picture frame moulding from this manufacturer. Albecca also works with one manufacturer to produce its Artique brand of matboard. Albecca generally does not have supply contracts with these suppliers, but relationships with these suppliers to date have been satisfactory. MANUFACTURING Albecca's products are manufactured according to plans prepared each year which reflect prior years' experience, current industry trends, economic conditions and Albecca's estimates of a particular line's performance. The Company estimates that it manufactures approximately 50% of its wood moulding in its facilities worldwide. Each plant manufactures its own unique lines specific to the decorative tastes and designs of that region. In addition to moulding manufacturing plants, Albecca has plants manufacturing pre-assembled frames in Europe and in the U.S. 5 The following lists Albecca's manufacturing facilities:

~~FISCAL~~Number ~~YEAR ----------------------------------------------------------------------- 1996 1997 1998 1999 2000 ------------ ------------ ------------- ------------ ------------ Statement~~ of ~~Operations~~Country ~~Data:~~Products ~~(Dollars~~facilities ~~in thousands) Net sales $ 300,788 $ 354,058 $ 381,137 $ 384,183 $ 358,187 Cost of sales 173,964 200,750 217,094 220,565 199,874~~ -------~~-----~~ --------~~----~~ ----------~~---~~ ~~------------~~Austria ~~------------~~............................................ ~~Gross~~Mouldings ~~profit 126,824 153,308 164,043 163,618 158,313 Operating expenses 96,595 117,707 129,820 137,652 113,057 Restructuring charges - - 2,262~~ 1~~,491~~ ~~1,361~~Canada ~~Impairment~~............................................. ofMouldings goodwill - - - - 4,997 ------------ ------------ ------------- ------------ ------------ Operating income 30,229 35,601 31,961 24,475 38,898 Net loss (gain) on dispositions of businesses - - - 4,136 (969) Cost of cancelled initial public equity offering - - 1~~,273~~ -Czech -Republic ~~Interest~~..................................... ~~income~~Mouldings -and -Frames ~~(116) (~~2~~,254)~~ ~~(4,587)~~France ~~Interest~~............................................. ~~expense~~Mouldings ~~6,846 9,722 11,949 26,163 24,265 Provision for income taxes 3,679 3,243 4,021 2,204 3,654 Minority interest 300 146 471 318 298 Extraordinary gain on repurchase of debt, net of tax - - - (~~1~~,331)~~ ~~(5,833)~~Italy ~~------------~~.............................................. ~~------------~~Mouldings ------------- ------------ ------------ Net income (loss) $ 19,404 $ 22,490 $ 14,363 $ (4,761) $ 22,070 ============ ============ ============= ============ ============ OTHER DATA: Net cash provided by operating activities $ 30,640 $ 22,150 $ 17,452 $ 13,645 $ 39,180 Net cash (used in) provided by investing activities (38,099) (22,514) (35,633) (10,116) 21,506 Net cash provided by (used in) financing activities 8,282 1~~,504~~ ~~67,658~~Sweden ~~(22,857)~~............................................. ~~(73,754)~~Mouldings ~~Adjusted EBITDA (~~1) ~~35,531~~United ~~42,486~~States ~~46,404 35,165 47,925 Adjusted EBITDA margin 11~~.~~8% 12~~.~~0% 12~~.~~2% 9~~.~~2% 13~~.4%................................. ~~Depreciation~~Mouldings and ~~amortization~~Frames $1 ~~5,302~~--- ~~$ 6,885 $ 8,213 $ 9,153 $ 8,010 Capital expenditures 5,461 7,746 8,378 5,948 8,810 CREDIT DATA:~~ Total ~~interest expense less amortization of bond costs $ 23,852 Ratio of Adjusted EBITDA to net cash interest expense~~ (31) 2.~~5x Ratio of total debt less cash and cash equivalents to Adjusted EBITDA 3~~.~~1 Ratio of earnings to fixed charges (2) (3) 4~~.~~5 3~~.~~7 2~~.~~6 1~~.~~0 2~~.~~0 Pro forma ratio of earnings to fixed charges (4) 1~~.2................................... BALANCE SHEET DATA: Cash and cash equivalents $ 4,363 $ 5,301 $ 54,884 $ 35,058 $ 23,321 Working capital 39,456 43,302 95,632 75,690 63,275 Total assets 190,168 208,689 305,922 266,558 191,095 Total debt 93,062 108,726 262,769 239,800 170,182 Shareholders' equity (deficit) 35,343 37,313 (25,644) (33,933) (29,877)8

(1) During fiscal 2001, the Company sold its moulding manufacturing operations in Finland and closed its Dutch frame manufacturing facility, resulting in a decrease of two manufacturing facilities between fiscal 2000 and fiscal 2001. CUSTOMERS In North America, Albecca's target customers are the approximately 18,000 custom framing retail storefronts that serve middle to upper income consumers. To date, Albecca has served approximately 90% of these retail storefronts. Outside North America, Albecca targets the over 20,000 retail custom frame storefronts and home decorating centers. Albecca manages its credit and collection functions regionally in the U.S. Outside of the U.S., credit and collection functions are managed separately in each country in which Albecca operates. Albecca extends credit based on an evaluation of the customer's financial condition and history with Albecca. Albecca monitors credit levels on an ongoing basis to minimize credit risk. Albecca does not factor its accounts receivable. No single customer or affiliated group of customers represented over 10% of the net sales of the Company in fiscal year 1999, 2000 or 2001. ALBECCA TEAM MEMBERS -- OUR EMPLOYEES At August 26, 2001, Albecca had approximately 2,070 full-time team members, or employees, of which approximately 1,560 were in operations, 260 were in sales and marketing and 250 were in corporate and general administrative positions. In certain European countries in which Albecca operates, Albecca's relationships with its team members are mandated by such countries' laws or covered by social legislation governing employment practices. Management believes that Albecca's labor relationships are satisfactory and no material labor cost increases are anticipated. ENVIRONMENTAL MATTERS Albecca is subject to various federal, state, local and foreign environmental laws and regulations relating to the handling and management of certain chemicals used and generated in manufacturing its products. Albecca believes that its operations currently comply in all material respects with these laws and regulations. Based on the annual costs incurred by Albecca over the past several years, management does not believe that compliance with these laws and regulations will have a material adverse effect upon Albecca's business, financial condition and results of operations. Albecca believes, however, that it is reasonably likely that the trend in environmental litigation and regulation will continue to be toward stricter standards. Such changes in the law and regulations may require Albecca to make additional capital expenditures which, while not presently estimable with certainty, are not currently expected to have a material adverse effect on Albecca's business, financial condition and results of operations. 6 ITEM 2. PROPERTIES Albecca's principal executive offices are located in a 65,000 square foot office building in Norcross, Georgia. The headquarters building houses administrative offices as well as a light manufacturing and distribution center. This building is owned by L-J Properties Inc., a company owned by Messrs. Ponzio, Trimarco and McKenzie, each of whom is an executive officer of Albecca. Mr. Ponzio is also a director of Albecca. Albecca's lease for this facility terminates in August 2009 and the annual rent for fiscal 2002 will be $.8 million. In August 2001, the Company purchased the Evergreen, Colorado design center building (5,000 square feet) from Mr. Ponzio. See "Certain Relationships and Related Transactions." In fiscal 2000, Albecca constructed a new manufacturing facility in Ashland, Wisconsin containing approximately 125,000 square feet of space. This facility is used in the manufacture of moulding, ready-made frames and corner samples and consolidates and replaces two older facilities which had a combined 112,000 square feet of space. Those manufacturing facilities were disposed of during fiscal 2001. There are 23 other light manufacturing and distribution centers located throughout the U.S., providing approximately 640,000 square feet of space. These facilities vary in size from approximately 5,100 to 83,900 square feet. Of these, all are leased except the Denver, Colorado location with 18,500 square feet of space and the Waldorf, Maryland location with 45,000 square feet of space, which are owned. In Canada, the Company leases five locations, four of which are distribution centers; the fifth holds administrative offices, a manufacturing facility and a distribution center. The Canadian facilities total approximately 160,000 square feet. Outside of North America, there are 33 locations in Europe, Asia and Australia. These facilities house administrative offices, distribution and light manufacturing centers, and manufacturing facilities and provide approximately 923,000 square feet of space. Of these facilities, 12 are owned and the remainder are leased. They vary in size from less than 1,000 square feet to over 107,000 square feet. Albecca believes that its properties and facilities are adequate for its current needs. Albecca does not anticipate any material difficulty in replacing such facilities or securing new facilities. ITEM 3. LEGAL PROCEEDINGS Albecca is a party from time to time in actions incidental to its business. Albecca believes that any currently pending proceedings are of a routine nature and will not, individually or in the aggregate, have a material adverse effect upon Albecca. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not applicable. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, the consolidated financial statements and the related notes thereto and other financial information included elsewhere in this report, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations." Albecca ends its fiscal year on the last Sunday in August. The information as of and for the fiscal years ended August 31, 1997, August 30, 1998, August 29, 1999, August 27, 2000 and August 26, 2001 is derived from audited consolidated financial statements. Fiscal year 1997 was a 53-week year. All other fiscal periods presented were 52-week years. Historical results are not necessarily indicative of the results to be expected in the future. 7

FISCAL YEAR ----------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- -- ------- --------- --------- --------- STATEMENT OF OPERATIONS DATA: (DOLLARS IN THOUSANDS) Net sales ~~100.0~~$ %356,689 ~~100.0~~$ %383,857 ~~100.0~~$ %386,898 $ 361,333 $ 314,124 Cost of sales ~~57.0~~213,736 ~~57.4~~230,187 ~~55.8~~233,782 211,399 175,791 --------- -- ------- --------- --------- --------- Gross profit ~~43.0~~142,953 ~~42.6~~153,670 ~~44.2~~153,116 149,934 138,333 Operating expenses ~~34.1~~107,352 ~~35.8~~119,447 ~~31.6~~127,150 104,678 90,049 Restructuring charges ~~0.6~~-- ~~0.4~~2,262 ~~0.4~~1,491 1,361 (52) Impairment of goodwill -- -- 1.-- 4,997 -- --------- --------- --------- --------- --------- Operating income ~~8.3~~35,601 ~~6.4~~31,961 ~~10.8~~24,475 38,898 48,336 Net loss (gain) on dispositions of businesses -- ~~1.1~~-- 4,136 (~~0.3~~969) -- Cost of cancelled initial public equity offering ~~0.3~~-- 1,273 -- -- -- Interest income -- (~~0.6~~116) (~~1.3~~2,254) (4,587) (7,400) Interest expense ~~3.1~~9,722 ~~6.8~~11,949 ~~6.8~~26,163 24,265 23,566 Other loss -- --~~-------~~ --~~---------~~ --~~----------~~ ~~Income~~46 ~~(loss)~~Provision ~~before provision~~ for income taxes 3,243 ~~minority~~4,021 ~~interest~~2,204 ~~and~~3,654 ~~extraordinary~~781 ~~gain~~Minority ~~4.9~~interest ~~(0.9)~~146 ~~5.6~~471 ~~Provision~~318 ~~for~~298 ~~income~~104 ~~taxes~~Extraordinary ~~1.1~~gain ~~0.6~~on ~~1.0~~repurchase ~~Minority~~of ~~interest~~debt, ~~0.1~~net ~~0.1~~of ~~0.1~~tax -- --~~-------~~ (1,331) (5,833) (341) ----------- ---------~~---~~ ~~Income (loss) before extraordinary gain 3.7 (1.6) 4.5 Extraordinary gain on repurchase of debt, net of tax~~ - ~~0.3 1.6~~ --------~~---~~ ----------- ---------~~---~~ Net income (loss) ~~3.7~~$ %22,490 $ 14,363 $ (~~1.3~~4,761) %$ ~~6.1~~22,070 %$ 31,580 ========= == ======= ========= ========= ========= OTHER DATA: Net cash provided by operating activities $ 22,150 $ 17,452 $ 13,645 $ 39,180 $ 30,814 Net cash (used in) provided by investing activities (22,514) (35,633) (10,116) 21,506 (2,394) Net cash provided by (used in) financing activities 1,504 67,658 (22,857) (73,754) (32,553) Adjusted EBITDA (1) 42,486 46,404 35,165 47,925 53,559 Adjusted EBITDA margin 11.9% 12.21% 9.1% 13.3% 17.1% Depreciation and amortization $ 6,885 $ 8,213 $ 9,153 $ 8,010 $ 5,239 Capital expenditures 7,746 8,378 5,948 8,810 3,885 CREDIT DATA: Total interest expense less amortization of bond costs $ 23,168 Ratio of Adjusted EBITDA to net cash interest expense(2) 3.4x Ratio of total debt less cash and cash equivalents to Adjusted EBITDA 2.5 %Ratio 13of earnings to fixed charges (2) (3) 3.7 2.6 1.0 2.0 3.0 Pro forma ratio of earnings to fixed charges(4) %1.2 ~~===========~~BALANCE ~~===========~~SHEET ~~============~~DATA: Cash and cash equivalents $ 5,301 $ 54,884 $ 35,058 $ 23,321 $ 19,146 Working capital 43,302 95,632 75,690 63,275 66,595 Total assets 208,689 305,922 266,558 191,095 183,133 Total debt 108,726 262,769 239,800 170,182 151,157 Shareholder's equity (deficit) 37,313 (25,644) (33,933) (29,877) (13,227)

--------------- (1) Adjusted EBITDA is defined as operating income plus depreciation, amortization (excluding amortization of bond issue costs), restructuring charges and adjusted for certain infrequent or nonrecurring items. Adjusted EBITDA is used by the Company as an indicator of operating performance and not as an alternative to measures defined and required by accounting principles generally accepted in the United States. Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. For purposes of the table above, Adjusted EBITDA presented for the year ended August 26, 2001 excludes net restructuring charges of $.4 million. Of these items, $.01 million are net non-cash items. Amortization of debt issuance costs was $.4 million. (2) Net cash interest expense and fixed charges are net of $7.4 million of interest income earned during the year. (3) Earnings for this computation does not include the gain or loss on the disposition of businesses. (4) Fixed charges for purposes of this calculation are adjusted to give effect to the proceeds and related uses of the notes as if the notes had been issued at the beginning of the period presented. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the "Selected Consolidated Financial Data" and Albecca's consolidated financial statements and the related notes thereto which are included elsewhere in this report. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, all references to Albecca's international operations include all of Albecca's operations outside of the U.S. Albecca uses a 52-53 week fiscal year ending on the last Sunday in August. Accordingly, fiscal years 1999, 2000 and 2001 ended on August 29, 1999, August 27, 2000 and August 26, 2001, respectively. When reading Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the notes to consolidated financial statements, please refer to Cautionary Statement For Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 located in Part I. OVERVIEW Albecca's net sales consist primarily of sales of branded custom framing products to independent retail custom framers and franchise operations. With operations in 15 countries, Albecca's net sales are geographically diversified. U.S. customers accounted for 51.6%, 60.1% and 67.1% of net sales in 1999, 2000 and 2001, respectively. Albecca has grown internally as well through the acquisition of 39 manufacturers and distributors of custom framing products since 1988. Of these acquisitions, Albecca acquired a Canadian distributor in 1999 and has increased its interest in its Italian subsidiary during 1999 and 2000. Albecca closed its operations in Greece and New Zealand in 1999; sold its South African operations in 1999; disposed of its Mersch and Brio entities in 2000 (which served the hyper-market and "Do-It-Yourself" segments of the framing industry in France and Germany); sold its Belgian operations in 2000; as well as restructured its operations in the U.K., Sweden, The Netherlands and Canada in 1999 through 2001. Albecca's focus from fiscal 1999 to the present has been on the generation of cash flow, repayment of debt, integration of prior year acquisitions and closure or restructuring of underperforming operations. Albecca's cost of sales for manufactured goods mainly consists of the cost of raw materials, which is primarily lumber, direct labor and the overhead associated with the manufacturing processes. Albecca's cost of sales for products purchased for resale primarily consists of the cost of the product and the related freight costs. The cost of Albecca's sampling program, through which it provides moulding samples at no charge to retail custom framers, is also included in cost of sales. Costs associated with its sampling program are comprised of the direct materials, labor, overhead and freight associated with the production of samples or the actual cost for the purchase of samples. The costs of samples are expensed upon shipment of the samples to the customer. Albecca's operating expenses include the costs associated with Albecca's customer service, marketing, selling, distribution processes and general and administrative support. Albecca is an S corporation and several of its subsidiaries are classified as either partnerships or single member entities, and as such are treated as pass-through entities under the Internal Revenue Code and 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 its shareholder to pay his income tax obligations due to 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. In April 2001, the sole minority shareholder of the Company sold his shares of Albecca's common stock to Mr. Craig Ponzio, the majority shareholder. No compensation expense was recognized for this transaction since, in the opinion of management, the purchase price did not exceed the fair market value of the shares at the time of purchase. In August 2001, Mr. Ponzio stepped down from his position as President and Chief Executive Officer of Albecca. Mr. Stephen McKenzie, formerly Senior Vice President of Marketing, was promoted to the positions of President and Chief Executive Officer. Mr. Ponzio will continue in his role as Chairman of Albecca and as a member of the design team. In November 2001, Mr. Randall Fretz resigned his position as President, U.S., which he had held since January 1999. The executive managers previously reporting to Mr. Fretz now report to Mr. McKenzie. During May 2000, Albecca acquired the remaining interest in its Italian subsidiary for approximately $1.9 million. Goodwill of approximately $1.9 million was recorded in connection with the acquisition. During October 1998, the Company acquired all of the outstanding stock of a distributor of custom framing products in Canada and increased its interest in its Italian subsidiary, for aggregate consideration of approximately $3.6 million in cash. Goodwill and other intangible assets of approximately $3.3 million were recorded in connection with the acquisitions. 9 RESULTS OF OPERATIONS 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. As required, the Company implemented EITF Issue 00-10 during the fourth quarter of fiscal 2001. Prior to implementation, the Company classified most shipping and handling revenues and costs, on a net basis, in selling and administrative expense. Accordingly, these costs have been reclassified to sales and cost of sales for the current period and all prior periods presented as well as for the purposes of the Management's Discussion and Analysis of Financial Position and Results of Operations that follows. Costs reclassified to cost of sales for the purpose of EITF Issue 00-10 included all third party shipping expenses as well as variable handling costs such as shipping supplies. The following table sets forth certain consolidated statements of operations data as a percentage of net sales for the periods indicated:

~~AUGUST 29, AUGUST 27,~~ 1999 2000 2001 ---- ----- ----~~-----~~ ~~ASSETS~~Net ~~CURRENT~~sales ~~ASSETS:~~100.0% ~~Cash~~100.0% ~~and~~100.0% ~~cash~~Cost ~~equivalents $ 35,058 $ 23,321 Accounts receivable, less allowances for doubtful accounts~~ of ~~$5,190~~sales ~~and~~60.4 $58.5~~,283~~ at56.0 ~~August 29, 1999 and August 27, 2000 47,298 36,384 Inventories 67,620 48,413 Other current assets 5,057 4,754~~ -----~~----~~ ----- ----- ~~Total~~Gross ~~current~~profit ~~assets~~39.6 ~~155,033~~41.5 ~~112,872~~44.0 ~~PROPERTY,~~Operating ~~PLANT~~expenses ~~AND~~32.8 ~~EQUIPMENT,~~28.9 ~~net~~28.6 ~~53,485~~Restructuring ~~36,692~~charges ~~OTHER~~0.4 ~~LONG-TERM~~0.4 ~~ASSETS~~(0.1) ~~58,040~~Impairment ~~41,531~~of goodwill -- 1.4 -- ----- ----- ----- $Operating ~~266,558~~income $6.4 ~~191,095~~10.8 ~~=========~~15.5 ~~=========~~Net ~~LIABILITIES~~loss ~~AND~~(gain) ~~SHAREHOLDERS'~~on ~~DEFICIT~~dispositions ~~CURRENT~~of ~~LIABILITIES:~~businesses ~~Current~~1.1 ~~maturities~~(0.3) ~~of long~~-~~term~~- ~~debt~~Interest $income ~~26,589~~(0.6) $(1.3) ~~7,686~~(2.4) ~~Accounts~~Interest ~~payable~~expense ~~26,423~~6.8 ~~17,247~~6.8 ~~Accrued~~7.5 ~~liabilities~~Other ~~26,331~~loss ~~24,664~~ -- -- 0.1 ----- ----- ----- ~~Total~~(Loss) ~~current~~income ~~liabilities~~before ~~79,343~~provision ~~49,597~~for ~~---------~~income ~~---------~~taxes, ~~LONG-TERM~~minority ~~DEBT~~interest, ~~less~~and ~~current~~extraordinary ~~maturities~~gain (~~Note 4~~0.9) ~~213,211~~5.6 ~~162,496~~10.3 ~~---------~~Provision ~~---------~~for ~~OTHER~~income ~~LONG-TERM~~taxes ~~LIABILITIES~~0.6 ~~7,937~~1.0 ~~8,879~~0.2 Minority interest 0.1 0.1 0.1 -----~~----~~ ----- ----- ~~SHAREHOLDERS'~~(Loss) ~~DEFICIT~~income ~~(Notes~~before 1extraordinary ~~and~~gain (1.6) ~~Preferred~~4.5 ~~stock, $~~10.010 ~~par~~Extraordinary ~~value;~~gain ~~50,000,000~~on ~~shares~~repurchase ~~authorized~~of ~~and no shares issued and outstanding at August 29~~debt, ~~1999~~net ~~and~~of ~~August~~tax ~~27, 2000 -- -- Class A common stock, $~~0.013 ~~par~~1.6 ~~value; 250,000,000 shares authorized, 374,000 shares issued and outstanding at August 29, 1999 and August 27, 2000 4 4 Class B common stock, $~~0.011 ~~par value; 100,000,000 shares authorized, 16,626,000 shares issued and outstanding at August 29, 1999 and August 27, 2000 166 166 Additional paid~~-~~in capital 7,326 7,326 Accumulated deficit (33,098) (23,578) Cumulative foreign currency translation adjustment (8,331) (13,795)~~ ---- ----- -----~~----~~ ~~Total~~Net ~~shareholders' deficit~~ (~~33,933~~loss) income (~~29,877~~1.3)% ~~---------~~6.1% ~~---------~~10.1% $===== ~~266,558~~===== ~~$ 191,095~~ ===== Adjusted EBITDA 9.1% 13.3% 17.1% ===== ===== =====

2001 Compared to 2000 Net Sales. Net sales were $314.1 million in 2001 compared to $361.3 million in 2000. This decrease is primarily the result of the sale of two international operations during the second and fourth quarters of fiscal 2000, the closure of an international operation during the third quarter of fiscal 2000, the negative impact of the strong U.S. Dollar, as well as weakness in both the U.S. and international markets. The sales decline was partially offset by growth in sales of Albecca's lines of premium branded products in the U.S. Currency fluctuations in 2001 decreased net sales by $11.1 million, primarily due to a strengthening of the U.S. Dollar against the Euro, British Pound, Japanese Yen and Canadian and Australian Dollars. U.S. net sales decreased 2.9% in 2001 from 2000 and International net sales decreased 28.4% in the same period. The decrease in U.S. net sales was primarily the result of a decrease in sales of non-core products as a result of product discontinuation decisions and the loss of sales from prior acquisitions, as the Company continued to focus on the sale of its core branded products. Management also believes that sales were affected by a decline in overall consumer purchases in the U.S. during the year. The decrease in International net sales resulted primarily from the sale of the Mersch operations completed during the second quarter of fiscal 2000, the sale of the Brio operation completed early in the fourth quarter of fiscal 2000 and the closure of the United Kingdom - Northampton facility completed during the third quarter of fiscal 2000. Sales were also impacted by a decrease in sales in Sweden, The Netherlands and Italy, partially offset by sales increases in Australia and Korea. Cost of Sales. Cost of sales were $175.8 million in 2001 compared to $211.4 million in 2000. This decrease is primarily a result of decreased net sales as described above. In the U.S., gross profit margin increased to 47.2% in 2001 from 45.6% in 2000. This increase was primarily the result of continued strength in sales of branded products and favorable currency exchange rate movements in certain supplier markets. International gross profit margin increased to 37.6% in 2001 from 35.4% in 2000, primarily due to a decrease in sales of lower margin products associated with the Mersch and Brio operations sold in the second and fourth quarters of fiscal 2000, as well as a continuing emphasis on sales of branded products. 10 Operating Expenses. Operating expenses were $90.0 million in 2001 compared to $104.7 million in 2000. The decrease in expenses is primarily the result of a focused worldwide effort to control costs, continued integration of prior acquisitions, and efficiencies gained following restructuring activities and sales and closures of operations abroad. In the U.S., operating expenses as a percentage of sales increased to 26.5% in 2001 from 25.1% in 2000. This increase was primarily due to a reversal of previously-provided reserves during the third quarter of fiscal 2000, as more fully discussed in Notes 8 and 12 of the notes to consolidated financial statements, which did not recur in fiscal 2001. Had these reversals not taken place, U.S. operating expenses as a percentage of net sales would have been 27.4% in 2000, indicating a decrease in recurring operating expenses as a percentage of net sales for the comparable period in fiscal 2001. The decrease in recurring costs is primarily the result of the continued integration of prior acquisitions and a focused internal effort to control costs. International operating expenses as a percentage of net sales decreased to 32.9% in 2001 from 34.8% in 2000. This decrease in operating expenses as a percentage of sales is primarily due to ongoing cost reduction activities as well as improved efficiency in the international locations that have completed restructuring activities, closures or sales of operations, partially offset by the costs of closing facilities in Canada and The Netherlands and an increase in costs in Italy. Restructuring Charges. During fiscal 2001, excess restructuring provisions related to the Company's closure of its New Zealand distribution center of $.05 million were reversed. During fiscal 2001, cash payments relating to the Company's closure of its United Kingdom - Northampton facility totalled approximately $.5 million, primarily related to severance, lease termination and other exit costs. Also during fiscal 2001, the Company made cash payments of approximately $.01 million for severance and other termination benefits as well as other exit costs related to the closure of its operations in Greece. Albecca expects any remaining components of its fiscal 1999, 2000 and 2001 restructuring plans to be completed by the end of fiscal year 2002. Management believes that the 1999, 2000 and 2001 restructuring plans will not have a material impact on future operations, financial condition or liquidity of the Company. Interest Income. Interest income was $7.4 million in 2001 compared to $4.6 million in 2000. The increase resulted primarily from the interest income associated with the Company's continued repurchase of its senior subordinated notes. Interest Expense. Interest expense was $23.6 million in 2001 compared to $24.3 million in 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 Loss. Other loss primarily represents net 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 1 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, during the year Albecca repurchased $14.0 million of its senior subordinated notes. The debt repurchases resulted in a net extraordinary gain of $0.3 million, net of applicable state taxes of $.01 million. Adjusted EBITDA. Adjusted EBITDA is defined as operating income plus depreciation, amortization (excluding amortization of bond issuance costs), restructuring charges and adjusted for certain infrequent or non-recurring items. For the reasons set forth above, adjusted EBITDA was $53.6 million in 2001 compared to $47.9 million in 2000. Adjusted EBITDA for the year ended August 26, 2001 excludes restructuring charges of $.4 million. Adjusted EBITDA for the year ended August 27, 2000 excludes restructuring charges of $1.4 million and an impairment charge to goodwill of $5.0 million, offset by reversals of previously provided reserves of $4.9 million. 2000 Compared to 1999 Net Sales. Net sales were $361.3 million in 2000 compared to $386.9 million in 1999. This decrease is primarily the result of the sale and disposition of two international businesses during 2000, the sale of the South African operations at the end of 1999, a decline in sales in certain foreign locations, and unfavorable changes in foreign currency exchange rates. The sales decline was partially offset by the growth in sales of Albecca's lines of premium branded products in the U.S. and the expansion of Albecca's operations in Japan. Currency fluctuations in 2000 decreased net sales by $7.8 million, primarily due to a strengthening of the U.S. Dollar against major European currencies. U.S. net sales increased 8.7% in 2000 from 1999 and, on a constant currency basis, international net sales decreased 18.8% in the same period. The increase in U.S. net sales primarily resulted from increased sales to independent custom framing retailers. The decrease in international net sales resulted primarily from the sale of the Mersch and Brio businesses, the closure of the United Kingdom - Northampton facility in 2000, the sale of the South African operations at the end of 1999, and a decrease in sales in Canada, Australia, and The Netherlands, partially offset by an increase in sales in Japan. 11 Cost of Sales. Cost of sales were $211.4 million in 2000 compared to $233.8 million in 1999. This decrease is primarily a result of decreased net sales. In the U.S., gross profit margin increased to 45.6% in 2000 from 43.6% in 1999. This increase was primarily the result of an increase in sales of branded products, a decrease in the sales of products of previously acquired businesses with lower gross profit margins, favorable currency exchange rate movements in certain supplier markets, and steps taken in the previous year by management to address its non-performing U.S. acquisition-related inventory. International gross profit margin remained stable at 35.4% in 2000 and 35.3% in 1999. Operating Expenses. Operating expenses were $104.7 million in 2000 compared to $127.2 million in 1999. The decrease in operating expenses is primarily a result of the sale and disposition of two international businesses during 2000 and sale of the South African operations at the end of fiscal 1999, a decrease in operating expenses in Canada, Australia, and Sweden due to relocation or consolidation of locations, a decrease in duplicative acquisition related expenses and gains in efficiencies at the U.S. acquisition locations, and the reversals of previously provided reserves as more fully described in Notes 8 and 12 of the notes to consolidated financial statements, partially offset by an increase in operating expenses associated with the expansion of the Company's operations in Japan. In the U.S., operating expenses as a percentage of sales decreased to 25.1% in 2000 from 31.6% in 1999. This decrease was primarily due to the decrease in operating expenses associated with the 1998 acquisitions and the reversals of previously provided reserves as more fully described in Notes 8 and 12 of the notes to consolidated financial statements. International operating expenses as a percentage of net sales increased to 34.8% in 2000 from 34.2% in 1999. This increase in operating expenses as a percentage of sales is primarily due to the decrease in net sales in The Netherlands and Finland, partially offset by improved operating expenses in Canada, Australia and Sweden. Restructuring Charges. In May 2000, the Company initiated a restructuring plan related to the closure of its United Kingdom - Northampton operation and recorded a charge to operations of approximately $.9 million. Management made the decision to close this operation following a series of under-performing quarters, at which time management determined that the Company's resources, both financial and managerial, could be more effectively invested in operations with a greater potential return. This charge included severance costs for 37 team members approximating $.2 million, a $.3 million write-down of property, plant and equipment to its estimated net realizable value, $.2 million of lease termination costs and $.2 million of other exit costs. The $.2 million of lease termination costs represented the Company's estimated future obligations under the existing lease commitments of the closed facility, net of estimated recoverable costs through subleasing. During August 2000, additional costs of approximately $.5 million relating to the closure of the United Kingdom - Northampton operation were identified. This charge included additional severance costs of $.1 million related to an employment contract not previously identified, an additional $.2 million write-down of property, plant and equipment due to a redetermination of the estimated net realizable value, and $.2 million of additional lease termination costs and other exit costs related to a reevaluation of the period required to find a sub-tenant for the building. As of August 26, 2001, no team members remained at the facility and the restructuring plan was substantially complete, except for lease termination costs representing the Company's continued obligation under the existing lease commitments for the closed facility. During fiscal 2000, the Company reversed the remaining restructuring reserves of approximately $.1 million related to its U.S. duplicate facility and United Kingdom - plastic moulding manufacturing operations restructuring plans. During fiscal 2000, cash payments relating to the Company's closure of its duplicate facility in Sweden totaled approximately $.2 million, primarily for severance payments. Also during fiscal 2000, the Company made cash payments of approximately $.1 million for severance and other exit costs associated with closure of its operations in New Zealand, Greece and its U.S. duplicate facility. Albecca believes that the 1998, 1999 and 2000 restructuring plans will not have a material impact on future operations, financial condition or liquidity of the Company. Impairment 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. Subsequent to the acquisition, the demand in the markets for the deCastro product line has dramatically decreased or ceased. As a result, during 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 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 12 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 and Disposition of Entities. In June 2000, the Company sold its Brio operations, located in France, which is a manufacturer and supplier of readymade frames and framing supplies to large "Do-It-Yourself" stores in Europe. This decision was based on management's decision to focus its energies and resources, both financial and managerial, on the European custom picture framing market. The transaction was concluded on May 31, 2000, resulting in cash proceeds of approximately $14.0 million. The Company recorded a gain on the sale of the Brio operations of approximately $3.9 million. The sales agreement required Brio to maintain a minimum level of working capital through the closing date as supported by a closing balance sheet audit. As such, the preliminary estimated gain is subject to adjustment pending the final results of the audit. In addition, the sale agreement requires the Company to repurchase any receivables and inventory on hand at the date of sale which remain uncollected or unsold six and twelve months, respectively, after the closing date of the transaction. As of August 26, 2001, the net working capital, inventory and receivable issues related to the disposition of Brio have not been resolved. Management expects a final agreement to be reached by the end of the second quarter of fiscal 2002. The Company believes it has adequately reserved for this contingency. Brio's nine-month sales and operating income for fiscal 2000 were approximately $16.1 million and $.9 million, respectively. In the opinion of management, the disposition of Brio will not have a material impact on the future operations or financial position of the Company. In January 2000, Albecca made a decision to dispose of its investment in its Mersch entities, a manufacturer and supplier of readymade frames to large European discount stores, located in Germany and France. This decision was based on management's continued initiative to focus its energies and resources, both financial and managerial, on the European custom picture framing market. On January 31, 2000, Albecca finalized the sale of its Mersch entities for cash proceeds of approximately $16.3 million. Approximately $12.5 million of the proceeds was used to repay long-term liabilities retained by the Company. The loss on the disposition of the Mersch entities, recorded during fiscal 2000, was approximately $3.0 million. In addition, the sale agreements required the Mersch entities to maintain a minimum level of working capital through the closing date as supported by a closing balance sheet audit, which has not yet been agreed to by the respective parties. The Company recorded its best estimate of the net working capital shortfall, based upon preliminary results of the closing balance sheet audit as part of the total $3.0 million loss on the sale. Management expects a final agreement on the net working capital issue to be reached by the end of the second quarter of fiscal 2002. The Mersch entities' five month sales and operating income for fiscal 2000 were approximately $10.0 million and $.04 million, respectively. In the opinion of management, the disposition of the Mersch entities will not have a material impact on the future operations or financial position of the Company. In August 2000, the Company sold its Erijko Belgium operations for cash proceeds of less than $.1 million. This decision was based on management's decision to focus its energies and resources, both financial and managerial, on operations with a greater potential return. In the opinion of management, the disposition of Erijko Belgium will not have a material impact on the future operations or financial position of the Company. No material gain or loss was recorded as a result of this sale. Interest Income. Interest income was $4.6 million in 2000 compared to $2.3 million in 1999. The increase resulted primarily from the interest income associated with the Company's repurchase of its senior subordinated notes. Interest Expense. Interest expense was $24.3 million in 2000 compared to $26.2 million in 1999. The decrease in interest expense is primarily due to the reduction of debt associated with the sales of the Mersch and Brio businesses, and the Company's continued focus on reducing its outstanding debt. 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, during the year Albecca repurchased $39.8 million of its senior subordinated notes. The debt repurchases resulted in an extraordinary gain of $5.8 million, net of applicable state taxes of $.2 million. Adjusted EBITDA. Adjusted EBITDA is defined as operating income plus depreciation, amortization (excluding amortization of bond issuance costs), restructuring charges and adjusted for certain infrequent or non-recurring items. For the reasons set forth above, adjusted EBITDA was $47.9 million in 2000 compared to $35.2 million in 1999. Adjusted EBITDA for the year ended August 27, 2000 excludes restructuring charges of $1.4 million and an impairment charge to goodwill of $5.0 million, offset by reversals of previously 13 provided reserves of $4.9 million. Adjusted EBITDA for the year ended August 29, 1999 excludes restructuring charges of $1.5 million and net infrequent and non-recurring items of $.4 million. 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 shareholder to pay income taxes as a result of its status as an S corporation. As of August 26, 2001, the Company had cash and cash equivalents of $19.1 million compared to $23.3 million as of August 26, 2000. Net cash provided by operating activities was $13.6 million, $39.2 million and $30.8 million in 1999, 2000 and 2001, respectively. In fiscal 2000, a significant increase in adjusted EBITDA and a large decrease in inventories were the primary reasons for the increase in net cash provided by operating activities compared to fiscal 1999. In fiscal year 2001, adjusted EBITDA again increased, however, this increase was offset by an increase in inventories and a decrease in accrued liabilities, resulting in a decrease in net cash provided by operating activities between fiscal years 2000 and 2001. Net cash used in investing activities was $10.1 million in 1999 and $2.4 million in 2001. Net cash provided by investing activities was $21.5 million in 2000. Cash flows from investing activities have been used primarily for the acquisition of manufacturers and distributors of custom framing products as well as for capital expenditures. Albecca invested $3.6 million for acquisitions in 1999 and $1.9 million for acquisitions in 2000. There were no acquisitions during 2001. Net cash provided by investing activities has primarily been from the disposition of businesses. Albecca received proceeds of $30.3 million from dispositions in fiscal 2000. Capital expenditures, excluding acquisition costs, were $5.9 million, $8.8 million and $3.9 million in 1999, 2000 and 2001, respectively. Albecca's historical capital expenditures have primarily been used to expand its distribution network, enhance management information systems and improve manufacturing efficiencies. During 2000, Albecca invested approximately $5.6 million in the construction of the Company's new manufacturing plant and related purchases of equipment in Ashland, Wisconsin. During fiscal 2001, Albecca invested approximately $.8 million for the purchase of the design center building in Evergreen, Colorado, as discussed more fully in Note 7 of the notes to consolidated financial statements. Net cash used in financing activities increased from $22.9 million in 1999 to $73.8 million in 2000 and decreased to $32.6 million in 2001. The increase from 1999 to 2000 is primarily due to the Company's repurchase of $39.8 million of its senior subordinated notes and debt reduction of $17.4 million associated with the disposition of the Mersch and Brio entities during fiscal 2000. In fiscal 2001, the Company continued its focus on reducing its debt by repurchasing $14.0 million of its senior subordinated notes and also reducing other bank debt worldwide by approximately $5.0 million. At August 26, 2001, Albecca had outstanding indebtedness of approximately $151.2 million, consisting of $134.9 million in principal amount of the senior subordinated notes and $16.3 million of other indebtedness. Albecca's primary sources of liquidity will be cash flow internally generated from operations and its available cash and cash equivalents of $19.1 million. In June 2000, the Company completed an Industrial Revenue Bond placement through an economic incentive program by the City of Ashland, Wisconsin, relating to the development of the Company's new manufacturing plant and purchase of associated equipment. The placement was for $4.6 million, net of debt issuance costs of $.09 million, of variable interest rate notes with a weekly adjusting rate, which at closing was 4.37%. Scheduled payments consist of interest-only payments for the first five years and, subsequently, principal payments for a period of fifteen years ranging from $.2 million to $.4 million. The bonds are secured by a letter of credit that is collateralized by the new manufacturing plant and a majority of the related new and existing furniture, machinery and equipment. Albecca's foreign subsidiaries have outstanding indebtedness under various foreign credit facilities, term notes and purchase money financing obligations, which had an aggregate outstanding balance of $9.6 million as of August 26, 2001. Indebtedness of the foreign subsidiaries is effectively senior to the senior subordinated notes and the guarantees thereof given by the US subsidiaries. The largest of Albecca's foreign credit facilities is the $6.2 million credit facility entered into by Larson-Juhl Canada Ltd. to fund its Canadian operations. Borrowings under the Canadian facility bear interest at LIBOR plus .75%. The Canadian facility is secured by all of the assets of Larson-Juhl Canada. The Canadian facility is subject to certain customary financial and other covenants, including without limitation: 14 (1) financial reporting; (2) funded indebtedness to total capitalization ratio; (3) leverage ratio; (4) tangible net worth; and (5) limitations on indebtedness, contingent obligations, liens, loans, repayments of intercompany indebtedness, dividends, advances, investments, acquisitions, mergers and sale of assets. As of August 29, 1999 and August 27, 2000, approximately $1.7 million and $1.0 million was outstanding under the Canadian credit facility, respectively. Borrowings under the Canadian facility were repaid during fiscal 2001 and there was no balance outstanding at August 26, 2001. Albecca's other debt includes a series of revolving credit facilities and term notes used to finance working capital needs and acquisitions in the respective countries in which Albecca operates. These facilities and notes range in size from less than $1.0 million to $1.2 million. The indebtedness under these facilities and notes generally bears interest at rates ranging from 4.8% to 11.5% per annum, as of August 26, 2001, and matures on various dates ranging through December 2017. Certain of these facilities and notes are secured by assets of the respective borrowers, including accounts receivable, inventory, property or capital stock, and are generally subject to certain customary financial and other covenants, including limitations on repayment of intercompany indebtedness and payment of dividends. Total foreign revolving facilities provide Albecca with additional borrowings of up to $8.7 million as of August 26, 2001. As of August 26, 2001, Albecca did not have a bank credit facility in place to fund its U.S. operations, nor had it entered into any agreements, commitments, discussions or understandings with respect to such a credit facility. The indenture, under which the senior subordinated notes were issued, permits Albecca and the subsidiary guarantors to incur additional indebtedness, including senior debt, subject to certain limitations. The notes contain certain covenants that limit, among other things, the ability of Albecca and its subsidiaries to pay dividends and/or distributions to its shareholders. Albecca from time to time reviews and will continue to review acquisition opportunities as well as changes in the capital markets. If Albecca were to consummate a significant acquisition or elect to take advantage of favorable opportunities in the capital markets, Albecca may supplement availability or revise the terms under its credit facilities or undertake public or private offerings of equity or debt securities. At present, Albecca has not entered into any agreements, commitments or understandings with respect to such a credit facility. Moreover, there can be no assurances that Albecca will be able to obtain such financing in the amounts or at the times such financing may be required, or that, if obtained, any such financing would be on acceptable terms. 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 senior subordinated notes, 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 level of operations, management believes that cash flow from operations and available cash and cash equivalents will be adequate to meet Albecca's anticipated future requirements for working capital, scheduled payments of principal and interest on its indebtedness, including the senior subordinated notes, capital expenditures, and acquisitions, through the next twelve months. There can be no assurance 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 notes, 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. As required, the Company implemented EITF Issue 00-10 during the fourth quarter of fiscal 2001. Prior to implementation, the Company classified most shipping and handling revenues and costs, on a net basis, in selling and administrative expense. Accordingly, these costs were reclassified to sales and cost of sales for the current period and all prior periods presented. Costs reclassified to cost of sales for the purpose of EITF Issue 00-10 included all third party shipping expenses as well as variable handling costs such as shipping supplies. 15 In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, eliminating the pooling-of-interests method. SFAS No. 141 also establishes criteria to be used in identifying intangible assets to be recognized separately from goodwill in an acquisition. SFAS No. 142 outlines the methods to be used to account for goodwill and other intangible assets after their acquisition. Specifically, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead be tested for impairment annually. Intangible assets with definite useful lives will be amortized over their estimated useful life, which will no longer be limited to forty years. The Company intends to implement SFAS No. 142, as required, on the first day of fiscal 2003. Management is currently evaluating the effect of this Statement on the Company's financial position and results of operations. (See Note 1 of the notes to consolidated financial statements, Other Long-Term Assets, for details of the Company's current goodwill, intangible assets and amortization expense.) In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for asset retirement costs of long-lived assets resulting from legal obligations associated with acquisition, construction or development transactions. The Company plans to adopt SFAS No. 143 on the first day of fiscal 2003. The adoption of this Statement is not expected to have a material impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." This Statement clarifies accounting and reporting for assets held for sale, scheduled for abandonment or other disposal, and recognition of impairment loss related to the carrying value of long-lived assets. This Statement is effective for fiscal years beginning after December 15, 2001. The adoption of this Statement is not expected to have a material impact on the Company's financial position or results of operations. 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, a significant portion of the Company's revenue has 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK EXCHANGE RATES Albecca is affected by fluctuations in the values of currencies in the 15 countries in which it operates. Albecca's results of operations and financial condition may be adversely affected by fluctuations in foreign currencies and by translations of the financial statements of Albecca's international operations from local currencies into U.S. Dollars. Albecca addresses this exposure by financing most funding needs in the applicable foreign currencies. In addition, the exposure is further mitigated by each of the international operations transacting business primarily in its local currency. The Company does hold some forward foreign currency contracts. These contracts are primarily in place at the Company's United Kingdom and United States operations and are used as a hedge against currency risks associated with inventory purchases and not for trading or speculative purposes. The fair value of the forward foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates. As of August 26, 2001, a 10% adverse change in foreign currency exchange rates from market rates would decrease the fair value of the contracts by approximately $.3 million. Gains and losses on the foreign currency exchanges are defined as the difference between the above contract rate at its inception date and the current exchange rate. However, any such gains and losses would generally be offset by corresponding losses and gains, respectively on the related hedged asset or liability. 16 INTEREST RATES The Company is exposed to market risk from changes in interest rates. The Company's primary interest rate risk relates to its long-term debt obligations. At August 26, 2001, the Company had total long-term debt obligations (including the current portion of those obligations) of $151.2 million. Of that amount, $144.1 million was in fixed rate obligations and $7.1 million was in variable rate obligations. Based on the Company's market risk sensitive instruments (i.e. its variable rate debt) outstanding at August 26, 2001, the Company has determined that there was no material market risk exposure to the Company's financial position, results of operations, or cash flows as of such date. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALBECCA INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements: Report of Independent Public Accountants - Arthur Andersen LLP F-2 Auditors' Report - BDO Walgemoed CampsObers F-3 Consolidated Balance Sheets as of August 27, 2000 and August 26, 2001 F-4 Consolidated Statements of Operations for each of the three years ended August 29, 1999, F-5 August 27, 2000 and August 26, 2001 Consolidated Statements of Shareholder's Deficit for each of the three years ended F-6 August 29, 1999, August 27, 2000 and August 26, 2001 Consolidated Statements of Cash Flows for each of the three years ended August 29, 1999, F-7 August 27, 2000 and August 26, 2001 Notes to Consolidated Financial Statements F-8

F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Albecca Inc.: We have audited the accompanying consolidated balance sheets of Albecca Inc. (a Georgia corporation) and subsidiaries as of August 26, 2001 and August 27, 2000, and the related consolidated statements of operations, shareholder's deficit, and cash flows for each of the three years in the period ended August 26, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Larson-Juhl Netherlands B.V. and subsidiaries, which statements reflect total assets of 7% and 6% at August 26, 2001 and August 27, 2000, and total revenues of 4%, 4% and 5% for each of the three years in the period ended August 26, 2001. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audits also included examining, on a test basis, evidence supporting the translation of Larson-Juhl Netherlands B.V.'s financial statements from Dutch guilders to U.S. Dollars and from Part 9, Book 2 of the Dutch Civil Code to accounting principles generally accepted in the United States. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Albecca Inc. and subsidiaries as of August 26, 2001 and August 27, 2000, and the results of their operations and their cash flows for each of the three years in the period ended August 26, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia October 19, 2001 F-2 LARSON-JUHL NETHERLANDS B.V. AUDITORS' REPORT To the shareholders of Larson-Juhl Netherlands B.V.: We have audited the financial statements of Larson-Juhl Netherlands B.V. at Barneveld, The Netherlands for the three year period ended August 26, 2001. The Company's management is responsible for the preparation of these financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. We conducted our audit in accordance with the auditing standards generally accepted in The Netherlands and in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion the financial statements for the period August 28, 2000 up to and including August 26, 2001 and including those for fiscal year 1999 (for the period August 31, 1998 up to and including August 29, 1999) and the fiscal year 2000 (for the period August 30, 1999 up to and including August 27, 2000) as previously audited by us give a true and fair view of the financial position of the Company as at August 26, 2001 and of the results of its operations and cash flows for the three years ended August 26, 2001 and have been properly prepared in accordance with accounting principles generally accepted in The Netherlands and comply with the financial reporting requirements included in Part 9, Book 2 of the Dutch Civil Code. Arnhem, October 11, 2001 BDO Walgemoed CampsObers Accountants /s/ BDO Walgemoed CampsObers Arnhem, The Netherlands F-3 ALBECCA INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

~~FOR~~AUGUST ~~THE~~27, ~~YEARS~~2000 ~~ENDED~~AUGUST 26, 2001 --------------- ---------------~~----------~~ ~~AUGUST~~ASSETS 30CURRENT ASSETS: Cash and cash equivalents $ 23,321 ~~AUGUST~~$ 2919,146 ~~AUGUST~~Accounts 27receivable, ~~1998~~less ~~1999~~allowances for doubtful accounts of $5,283 and $4,602 at August 27, 2000 ~~------------~~and August 26, 2001 36,384 32,967 Inventories 48,413 50,423 Other current assets 4,754 6,203 ------------ ------------ ~~Net~~Total ~~sales~~current ~~$381~~assets 112,~~137~~872 ~~$384~~108,~~183~~739 ~~$358~~PROPERTY,~~187~~ ~~Cost~~PLANT ofAND ~~sales 217~~EQUIPMENT,~~094~~ ~~220~~net 36,~~565~~692 ~~199~~35,~~874~~097 OTHER LONG-~~-----------~~TERM ASSETS 41,531 39,297 ------------ ------------ ~~Gross~~$ ~~profit 164~~191,~~043~~095 ~~163,618~~$ ~~158~~183,~~313~~133 ~~Operating~~========== ~~expenses~~========== ~~129,820~~LIABILITIES ~~137,652~~AND ~~113,057~~SHAREHOLDER'S ~~Restructuring~~DEFICIT ~~charges~~CURRENT ~~(Note~~LIABILITIES: ~~12)~~Current ~~2,262~~maturities ~~1,491~~of 1long-term debt $ 7,~~361~~686 ~~Impairment~~$ of5,917 ~~goodwill~~Accounts ~~(Notes~~payable 117,247 ~~and~~17,680 ~~13)~~Accrued -liabilities -24,664 418,~~997~~547 ---------- -- -------- Total current liabilities 49,597 42,144 ---- ------ ---------- ~~Operating income 31,961 24,475 38,898 Net loss (gain) on dispositions of businesses (Note 12)~~ LONG-TERM 4DEBT,~~136~~ ~~(969)~~less ~~Cost~~current ofmaturities ~~cancelled initial public equity offering~~ (Note ~~13) 1,273 - - Interest income (116) (2,254) (~~4~~,587~~) ~~Interest expense 11~~162,~~949~~496 26145,~~163~~240 ~~24,265~~ ---------- -- -------- OTHER LONG-TERM LIABILITIES 8,879 8,976 --- ------- ---------- ~~Income~~SHAREHOLDER'S DEFICIT (~~loss~~Note 6) ~~before~~Preferred ~~provision~~stock, ~~for~~$.01 ~~income~~par ~~taxes~~value; 50,000,000 ~~minority~~shares ~~interest~~authorized and ~~extraordinary~~no ~~gain~~shares 18issued and outstanding at August 27,~~855~~ (32000 and August 26,~~570)~~ 202001 -- -- Class A common stock,~~189~~ ~~Provision~~$0.01 ~~for~~par ~~income~~value; ~~taxes~~250,000,000 4shares authorized,~~021~~ 2374,~~204~~000 3shares issued and outstanding at August 27,~~654~~ ~~Minority~~2000 ~~interest~~and ~~471~~August ~~318~~26, ~~298~~2001 ~~------------~~4 ~~------------~~4 ~~------------~~Class ~~Income~~B ~~(loss)~~common ~~before~~stock, ~~extraordinary~~$0.01 ~~gain~~par 14value; 100,~~363~~000,000 (6shares authorized,~~092)~~ 16,~~237~~626,000 ~~Extraordinary~~shares ~~gain~~issued onand ~~repurchase~~outstanding ofat ~~debt~~August 27, ~~net~~2000 ofand ~~tax~~August 26, 2001 166 166 Additional paid-in capital 7,326 7,326 Accumulated deficit (~~Note~~23,578) 4(6,098) -Cumulative 1foreign currency translation adjustment (13,~~331~~795) 5(14,~~833~~625) ---------- -- -------- Total shareholder's deficit (29,877) (13,227) ---- ------ ---------- ~~Net income (loss)~~ $ 14191,~~363~~095 $ (4183,~~761)~~133 ~~$ 22,070~~ ============ ==========~~== ============~~

The accompanying notes are an integral part of these consolidated financial statements. F-4 ALBECCA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)

~~Class~~FOR ATHE ~~Class~~YEARS BENDED ~~Additional Accumulated Common Stock Common Stock Common Stock Paid~~-~~In Earnings Shares Amount Shares Amount Shares Amount Capital (Deficit)~~ -------------------- --------------------- ---------- AUGUST 29, AUGUST 27, AUGUST 26, 1999 2000 2001 ---------- ---------- ----------- ~~BALANCE,~~Net ~~August~~sales ~~31,~~$ ~~1997 17~~386,~~000,000~~898 $ ~~170~~361,333 - $ -314,124 -Cost $of -sales $233,782 ~~582~~211,399 ~~$ 42~~175,~~408~~791 ~~Compensation related to non~~- ~~qualified stock options (Note 6)~~ - - - - - - ~~244~~ - ~~Conversion of common stock for Class A and Class B common stock (17,000,000) (170) 374,000 4 16,626,000 166~~ - - ~~Capital contributions (Note 11)~~ - - - - - - ~~6,500~~ - ~~Net income~~ - - - - - - ------- ~~14,363~~Gross ~~Distributions~~profit to153,116 ~~shareholders~~149,934 -138,333 -Operating -expenses -127,150 -104,678 -90,049 -Restructuring charges (~~80,800~~Note 11) ~~Currency~~1,491 ~~translation~~1,361 ~~adjustment~~(52) -Impairment -of -goodwill -(Notes -1 -and -12) - -~~-----------~~ ~~------~~4,997 --~~-------~~ ---- ------~~-----~~ ----- -----~~---~~ --------- ~~BALANCE, August 30, 1998~~ - -Operating ~~374,000~~income ~~4 16~~24,~~626,000~~475 ~~166 7~~38,~~326~~898 ~~(24~~48,~~029)~~336 Net loss -(gain) -on -dispositions -of -businesses -(Note -11) (4,~~761~~136 (969) ~~Distributions to shareholders~~ - - -Interest -income -(2,254) ~~- -~~ (4,~~308~~587) ~~Currency~~(7,400) ~~translation~~Interest ~~adjustment~~expense -26,163 -24,265 -23,566 -Other -loss - - - -~~-----------~~ ~~------~~46 --------- -~~---~~ ----------- ----- -----~~---~~ ~~---------~~(Loss) ~~BALANCE,~~income ~~August~~before ~~29,~~provision ~~1999~~for -income ~~- 374~~taxes,~~000~~ 4minority ~~16,626,000~~interest ~~166~~and ~~7,326~~extraordinary gain (333,~~098~~570) ~~Net~~20,189 ~~income~~32,124 -Provision -for -income -taxes -2,204 ~~- - 22~~3,~~070~~654 ~~Distributions~~781 toMinority ~~shareholders~~interest -318 -298 -104 - - - - ~~(12,550) Currency translation adjustment~~ - - - - - - - - --------~~----~~ ------ ----~~-----~~ ~~----~~(Loss) income before extraordinary gain (6,092) 16,237 31,239 Extraordinary gain on repurchase of debt, net of tax (Note 4) 1,331 5,833 341 ----------- ----- -----~~---~~ --------- ~~BALANCE, August 27, 2000~~ - $Net -(loss) ~~374,000~~income $ (4 16,~~626,000~~761) $ ~~166 $ 7~~22,~~326~~070 $ ~~(23~~31,~~578)~~580 ============ ====== ====~~=====~~ ==== ======~~===== ===== ======== =========~~

The accompanying notes are an integral part of these consolidated financial statements. F-5 ALBECCA INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)

~~Cumulative~~CUMULATIVE ~~Foreign~~FOREIGN ~~Currency~~CLASS ~~Translation~~A ~~Adjustment~~CLASS ~~Total~~B ADDITIONAL CURRENCY COMMON STOCK COMMON STOCK PAID-IN ACCUMULATED TRANSLATION SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL -------- ------ ---------- ------ ---------- ----------- ----------- -------- BALANCE, August 3130, ~~1997~~1998 ~~$ (5~~374,~~847)~~000 $ 374 16,~~313~~626,000 ~~Compensation~~$ ~~related~~166 to$7,326 ~~non-~~$(24,029) ~~qualified~~$ ~~stock options~~ (~~Note~~9,111) 6$(25,644) -Net ~~244~~loss ~~Conversion~~-- of-- ~~common~~-- ~~stock~~-- ~~for~~-- ~~Class~~(4,761) A-- ~~and~~Foreign ~~Class~~currency Btranslation ~~common~~adjustment ~~stock~~-- -- -- ~~Capital~~-- ~~contributions~~-- ~~(Note 11)~~ -- ~~6,500~~780 ~~Net~~Total comprehensive income ~~- 14~~(3,~~363~~981) ~~Distributions~~Distribution to shareholders -- ~~(80,800)~~-- ~~Currency~~-- ~~translation~~-- ~~adjustment~~-- (34,~~264~~308) -- (34,~~264~~308) -------- ----- ---------- ----- ------ -------- -------- -------- BALANCE, August 3029, ~~1998~~1999 374,000 4 16,626,000 166 7,326 (933,~~111~~098) (258,~~644~~331) (33,933) Net ~~loss~~income -- -- -- -- -- 22,070 -- Foreign currency translation adjustment -- -- -- -- -- -- (45,~~761~~464) ~~Distributions~~Total comprehensive income 16,606 Distribution to shareholders -- -- -- -- -- (412,~~308~~550) ~~Currency~~-- ~~translation~~(12,550) ~~adjustment~~-------- ~~780~~----- ~~780~~---------- ----- ------ -------- -------- -------- BALANCE, August 2927, ~~1999~~2000 374,000 4 16,626,000 166 7,326 (823,~~331~~578) (3313,~~933~~795) (29,877) Net income -- 22-- -- -- -- 31,~~070~~580 ~~Distributions~~-- toForeign ~~shareholders~~currency translation adjustment -- -- -- -- -- -- (~~12,550~~830) ~~Currency~~Total ~~translation~~comprehensive ~~adjustment~~income 30,750 Distribution to shareholders -- -- -- -- -- (514,~~464~~100) -- (514,~~464~~100) -------- ----- ---------- ----- ------ -------- -------- -------- BALANCE, August 2726, ~~2000~~2001 374,000 $ 4 16,626,000 $ 166 $7,326 $ (136,~~795~~098) $(14,625) $(2913,~~877~~227) ======== ===== ========== ===== ====== ======== ======== ========

The accompanying notes are an integral part of these consolidated financial statements. F-6 ALBECCA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

FOR THE YEARS ENDED ---------------------------------------------------- AUGUST 3029, AUGUST 2927, AUGUST 2726, ~~1998~~ 1999 2000 2001 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net ~~income~~ (loss) $income ~~14,363~~ $ (4,761) $ 22,070 $ 31,580 Adjustments to reconcile net ~~income~~ (loss) income to net cash provided by operating activities: Minority interest ~~471~~ 318 298 104 Depreciation and amortization ~~8,213~~ 9,153 8,010 ~~Compensation~~5,239 ~~related to nonqualified stock options 244 -- --~~ Loss on disposal of property, plant and equipment 32 1,205 1,981 678 Impairment of goodwill -- -- 4,997 -- Net loss (gain) on dispositions of businesses -- 4,136 (969) -- Extraordinary gain on repurchase of debt (Note 4) -- (1,331) (5,833) (341) Changes in operating assets and liabilities: Accounts receivable ~~2,088~~ 1,171 (2,052) 2,938 Inventories ~~348~~ 3,405 11,784 (2,644) Other current assets ~~748~~ 1,502 (306) ~~Accounts payable~~ (21,~~436~~456) Accounts payable 165 (688) 564 Accrued liabilities ~~(4,226)~~ 890 (1,984) ~~Other~~ (26,~~393~~437) Other (2,208) 1,872 589 ---------- ---------- ---------- Net cash provided by operating activities ~~17,452~~ 13,645 39,180 30,814 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (~~8,378) (~~5,948) (8,810) (3,885) Acquisitions of businesses (~~28,065) (~~3,594) (1,872) -- Proceeds from sales of property, plant and equipment ~~509~~ 2,430 1,517 1,348 Proceeds from dispositions of businesses -- 164 30,257 -- Changes in other long-term assets ~~301~~ (3,168) 414 143 ---------- ---------- ---------- Net cash (used in) provided by investing activities (~~35,633) (~~10,116) 21,506 (2,394) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: ~~Proceeds of senior subordinated notes, net of debt issue costs 193,241 -- --~~ Payments for additional debt issue costs -- (516) -- -- Proceeds from revolving credit facilities ~~109,861~~ 24,524 27,112 19,143 Repayments of revolving credit facilities (~~134,707) (~~26,339) (38,798) (20,385) Proceeds from long-term debt 15,~~676 15,~~658 11,591 1,618 Repayments of long-term debt (~~42,113) (~~31,876) (61,109) ~~Repayments of notes payable to shareholders~~ (418,~~000~~829) ~~-- --~~ Distributions to shareholders (~~70,300) (~~4,308) (12,550) (14,100) ---------- ---------- ---------- Net cash ~~provided by (~~used in) financing activities ~~67,658~~ (22,857) (73,754) (32,553) ---------- ---------- ---------- EFFECT OF EXCHANGE ~~RATE~~RATES ON CASH ~~106~~ (498) 1,331 (42) ---------- ---------- ---------- NET ~~INCREASE (~~DECREASE) IN CASH ~~49,583~~ (19,826) (11,737) (4,175) CASH and cash equivalents, beginning of period ~~5,301~~ 54,884 35,058 23,321 ---------- ---------- ---------- CASH and cash equivalents, end of period $ ~~54,884 $~~ 35,058 $ 23,321 $ 19,146 ========== ========== ========== SUPPLEMENTAL INFORMATION: Interest paid $ ~~10,983 $~~ 26,552 $ 24,481 $ 23,679 ========== ========== ========== Income taxes paid $ 32,~~520~~036 $ 2,~~036~~331 $ 2,~~331~~337 ========== ========== ========== Details of acquisitions (Note 2): Fair value of assets acquired $ (~~46,995) $ (~~4,599) $ (1,872) $ -- Liabilities assumed ~~18,029~~ 946 -- -- ---------- ---------- ---------- Cash paid (~~28,966) (~~3,653) (1,872) -- Less cash acquired ~~901~~ 59 -- -- ---------- ---------- ---------- Net cash paid for acquisitions $ (~~28,065) $ (~~3,594) $ (1,872) ~~========= ======== ======== NON-CASH FINANCING ACTIVITIES: Issuance of notes payable for shareholder distributions (Note 11)~~ $ ~~10,500 $~~ -- ~~$ --~~ ========= =~~=======~~ ======== ~~Capital contribution of shareholder notes payable (Note 11) $ 6,500 $ -- $ --~~ ==~~=======~~ ======== ==~~======~~ NON-CASH FINANCING ACTIVITIES: Note receivable from sale of operations in South Africa (Note 1311) $ --393 $ ~~393~~-- $ -- ========== ========== ==========

The accompanying notes are an integral part of these consolidated financial statements. F-7 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Albecca Inc. (the "Company" or "Albecca," formerly Larson-Juhl Inc.) primarily does business under the Larson-Juhl name. The Company designs, manufactures and distributes a complete line of high quality, branded custom framing products, including wood and metal moulding, matboard, foamboard, glass, equipment and other framing supplies. The Company operates in 15 countries, primarily in North America and Europe. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Albecca and its subsidiaries. All significant intercompany transactions are eliminated. Minority interest represents minority shareholders' interests in certain majority-owned subsidiaries. FISCAL PERIOD The reporting period for the Company and its subsidiaries is either a 52- or 53-week period ending on the last Sunday in August. The Company's fiscal years ended August 29, 1999, August 27, 2000 and August 26, 2001 were 52-week years. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS The Company considers all investments with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories consist primarily of finished goods and are stated at the lower of cost or market. Cost is determined using the last-in, first-out method for inventories within the United States (approximately 45.1% and 49.2% of total inventories at August 27, 2000 and August 26, 2001, respectively) and the first-in, first-out method for inventories within foreign countries. Additionally, cost includes materials, direct and indirect labor and capitalizable overhead. If the first-in, first-out method of valuing inventories had been used exclusively, inventories of the Company would have been $3,206,000 and $3,472,000 higher at August 27, 2000 and August 26, 2001, respectively. Inventories consist of the following (in thousands):

AUGUST 2927, AUGUST 2726, ~~1999~~ 2000 2001 ---------- -------- ~~Industrial revenue bonds, due July 2020, principal paid annually beginning in 2005, variable interest paid monthly (4.44% as of August 27, 2000), secured by a letter of credit $~~ -- $Raw ~~4,600~~materials ~~10.75%~~$ ~~senior subordinated notes~~6,290 ~~due~~$ ~~August 2008, interest paid semi-annually in arrears on February 15 and August 15 of each year 188,750 148,930 Demand note payable in French Francs, interest paid quarterly at a rate of 3.~~6~~% to 4.0%~~,218 ~~secured~~Work ~~by a standby letter of credit 3,350 -- Mortgage note due September, 2017, payable~~ in ~~Deutsche~~process ~~Marks, principal paid semi-annually in equal installments, interest paid quarterly at a rate of 5.~~2%,127 ~~secured by certain property 2,917 -- Demand note payable in Dutch Guilders, interest paid quarterly at a base rate plus~~ 1~~.25% (6.25% as of August 27~~,812 ~~2000)~~Finished ~~secured~~goods ~~by certain accounts receivable~~39,996 ~~inventory and property 3~~42,~~011~~393 ~~1,298 Other long~~-~~term notes, interest payable at a weighted average rate of 6.2%, maturing at various dates through 2017, no individual note exceeding $1,300 41,772 15,354~~ -------- -------- ~~239,800~~$ ~~170~~48,~~182~~413 ~~Less current maturities 26,589 7,686 -------- -------- Long-term portion~~ $~~213,211~~ ~~$162~~50,~~496~~423 ======== ========

F-8 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets (buildings -- 15-40 years, machinery and equipment -- 7-20 years, and furniture and fixtures -- 3-7 years) using primarily the straight-line method. Property, plant, and equipment consist of the following (in thousands):

~~For~~AUGUST ~~the years ended ------------------------------------------------------------------------------------------------------------------------- August 30~~27, ~~1998~~AUGUST ~~August 29~~26, ~~1999 August 27,~~ 2000 ~~Options~~2001 ~~in thousands Options Exercise Price Options Exercise Price Options Exercise Price~~ ---------- ----------~~-----------------------------------------------------------------------------------------------------~~ ~~Outstanding,~~Land ~~beginning~~and ofbuildings ~~year -~~ $ ~~- 34~~29,~~062~~120 $ ~~8.80 412~~28,~~062~~615 $Machinery ~~6.46~~and ~~Granted~~equipment -24,358 ~~- - - 390~~24,~~062~~614 ~~5.80~~Furniture ~~Granted~~and ~~34,062~~fixtures 8~~.80 412~~,~~062~~863 ~~6.46 99~~8,~~062~~883 ~~7.00 Exercised~~ - - - - - - ~~Cancelled~~ - - ~~34,062 8.80 412,062 6.46~~ -------~~------------------------------------------------------------------------------------------------------------------~~ ~~Outstanding~~62,341 ~~end of year 34~~62,~~062~~112 $Less ~~8.80~~accumulated ~~412~~depreciation 25,~~062~~649 ~~$ 6.46 489~~27,~~124~~015 ~~$5.80~~-~~$7.00~~ ------- -------~~-----------------------------------------------------------------------------------------------------------~~ ~~Exercisable~~$ 36,692 ~~end~~$35,097 of======== ~~year -------------------------------------------------------------------------------------------------------------------------~~=======

Depreciation expense included in the accompanying consolidated statements of operations for the years ended August 29, 1999, August 27, 2000 and August 26, 2001 was approximately $6,637,000, $5,713,000 and $3,454,000, respectively. OTHER LONG-TERM ASSETS Other long-term assets consist primarily of goodwill and other acquisition-related intangible assets which are stated at cost or fair value less accumulated amortization. Goodwill is generally amortized over 40 years using the straight-line method. Trademarks, trade names and other intangible assets are stated at cost, less accumulated amortization, and are amortized over 10 to 15 years using the straight-line method. Bond issuance costs are amortized over the life of the senior subordinated notes (10 years) using the effective interest method. The Company evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. It is the Company's policy to amortize goodwill and other intangible assets over future periods estimated to be benefited based on relevant factors. The Company reviews all known factors in evaluating the period of goodwill amortization. Such factors include the nature of the industry in which the Company and its acquisitions operate (i.e. a mature industry with relatively high barriers to entry), the dominant market position of the acquired businesses, the competitive advantages of the existing distribution networks and manufacturing processes of the acquired businesses, the existence of strategic and loyal customer and/or supplier bases, and a solid reputation of the acquired businesses for the delivery and/or manufacture of quality products. During fiscal year 2001, the Company repurchased $14,000,000 of its 10.75% senior subordinated notes (Note 4). The repurchase resulted in a reduction of $381,000 of the related capitalized bond issuance costs. During fiscal year 2000, the Company repurchased $39,820,000 of its 10.75% senior subordinated notes. The repurchase resulted in a reduction of $1,256,000 of the related capitalized bond issuance costs. During fiscal 2000, as more fully discussed in Note 12, the Company adjusted the carrying value of the unamortized goodwill related to its Robert F. deCastro Inc. acquisition to its estimated fair value of $192,000, resulting in a non-cash impairment charge of $4,997,000. F-9 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Other long-term assets consist of the following (in thousands):

AUGUST 3027, AUGUST 2926, ~~AUGUST 27, 1998 1999~~ 2000 ~~------------~~2001 ------------ ------------ ~~Net~~Goodwill ~~income~~$ ~~(loss):~~33,208 As$ ~~reported~~32,887 inTrademarks ~~the~~and ~~financial~~trade ~~statements~~names $3,715 143,~~363~~765 $Bond (4issuance costs 5,~~761)~~715 $5,334 22Other 4,~~070~~594 4,488 -------- ---- ---- 47,232 46,474 Less accumulated amortization 5,701 7,177 -------- --------~~----~~ ~~Pro forma in accordance with SFAS No. 123~~ $ 1441,~~158~~531 $ (439,~~986)~~297 ~~$ 21,717~~ ========~~====~~ ========~~==== ============~~

Amortization expense included in the accompanying Consolidated Statements of Operations for the years ended August 29, 1999, August 27, 2000 and August 26, 2001 was approximately $2,516,000, $2,297,000 and $1,785,000 respectively. INCOME TAXES Albecca is an S corporation and several of its subsidiaries are classified as either partnerships or single member entities, and as such are treated as pass-through entities 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 its shareholder to pay his 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. FOREIGN CURRENCY TRANSLATION AND EXPOSURE The asset and liability accounts of foreign subsidiaries have been translated into U.S. Dollars at the rate of exchange in effect at each balance sheet date. Shareholder's deficit is translated at historical rates. Resulting translation adjustments are reflected as a separate component of shareholder's deficit. The accounts of foreign subsidiaries' statements of operations are translated at the weighted average exchange rate during the period. Gains or losses on foreign currency transactions are included in income as incurred and are not material to the Company's statements of operations for the years presented. The denomination of foreign subsidiaries' account balances in their local currency exposes the Company to certain foreign exchange rate risks. The Company addresses the exposure by financing most working capital needs in the applicable foreign currencies. Management does not believe the remaining risks to be significant. 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, 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 a cumulative transition adjustment to earnings and other comprehensive income (equity). The Company adopted SFAS 133 on August 28, 2000. The adoption was not material to the consolidated financial statements. 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, French Franc, and the Euro, and its United Kingdom subsidiary primarily enters into U.S. Dollar and Euro forward exchange contracts. F-10 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) At August 27, 2000, the Company's United Kingdom subsidiary had (pound)1,900,000 ($3,094,000) of U.S. Dollar forward exchange contracts, maturing in one year or less, related to inventory purchase transactions as well as EUR 2,596,000 ($2,371,000) of Euro forward exchange contracts at August 26, 2001. The subsidiary had no Euro forward exchange contracts at August 27, 2000 and no U.S. Dollar forward exchange contracts at August 26, 2001. The Company's U.S. operations held Euro and Italian Lira forward exchange contracts at August 26, 2001 of EUR 775,000 ($672,000) and ITL 500,000,000 ($224,000), maturing before the end of the first quarter of fiscal 2002. The carrying amount of derivatives at fair value as of August 26, 2001 was a net asset of $42,000. For fiscal year 2001, an offsetting gain of $42,000 was recorded, representing the change in fair value of the derivatives. As of August 26, 2001, the maximum period of time the Company was hedging its exposure to the variability in future cash flows for forecasted transactions was approximately nine months. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's long-term debt is estimated based on current rates offered for debt of similar terms and maturities. Under this method, the Company's fair value of long-term debt was not significantly different than the stated value at August 27, 2000 and August 26, 2001. REVENUE RECOGNITION The Company recognizes revenue at the time of shipment of products. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). The Company did not experience a material impact to its consolidated financial statements as a result of the adoption of SAB No. 101, as the Company had already been complying with the provisions of the bulletin. ADVERTISING All costs associated with advertising and promoting products are expensed in the period incurred. The amounts expensed for the years ended August 29, 1999, August 27, 2000 and August 26, 2001 were approximately $4,994,000, $3,138,000 and $2,823,000, respectively. 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. As required, the Company implemented EITF Issue 00-10 during the fourth quarter of fiscal 2001. Prior to implementation, the Company classified most shipping and handling revenues and costs, on a net basis, in selling and administrative expense. Accordingly, these costs were reclassified to sales and cost of sales for the current period and all prior periods presented. Costs reclassified to cost of sales for the purpose of EITF Issue 00-10 included all third party shipping expenses as well as variable handling costs such as shipping supplies. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, eliminating the pooling-of-interests method. SFAS No. 141 also establishes criteria to be used in identifying intangible assets to be recognized separately from goodwill in an acquisition. SFAS No. 142 outlines the methods to be used to account for goodwill and other intangible assets after their acquisition. Specifically, goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead be tested for impairment annually. Intangible assets with definite useful lives will be amortized over their estimated useful life, which will no longer be limited to forty years. The Company intends to implement SFAS No. 142, as required, on the first day of fiscal 2003. Management is currently evaluating the effect of this Statement on the Company's financial position and results of operations. (See Note 1, Other Long-Term Assets, for details of the Company's current goodwill, intangible assets and amortization expense.) F-11 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for asset retirement costs of long-lived assets resulting from legal obligations associated with acquisition, construction or development transactions. The Company plans to adopt SFAS No. 143 on the first day of fiscal 2003. The adoption of this Statement is not expected to have a material impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." This Statement clarifies accounting and reporting for assets held for sale, scheduled for abandonment or other disposal, and recognition of impairment loss related to the carrying value of long-lived assets. This Statement is effective for fiscal years beginning after December 15, 2001. The adoption of this Statement is not expected to have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. 2. ACQUISITIONS The following acquisitions were accounted for under the purchase method of accounting, applying the provisions of Accounting Principles Board ("APB") Opinion No. 16, and as a result, the Company has recorded the tangible and identifiable intangible assets and liabilities of the acquired businesses at their estimated fair values with the excess of the purchase price over these amounts being recorded as goodwill, which is generally amortized over 40 years. The acquisitions were primarily financed with available cash borrowings under the Company's former revolving credit facility and other debt instruments (Note 4). The accompanying consolidated financial statements reflect the operations of the acquired businesses for the periods after their respective dates of acquisition. During March 2000, the Company acquired the outstanding 23% interest in its Italian subsidiary for $1,872,000 in cash. Goodwill of $1,872,000 was recorded in connection with this acquisition. During October 1998, the Company acquired all of the outstanding stock of a distributor of custom framing products in Canada and increased its interest in its Italian subsidiary, for aggregate consideration of $3,594,000 in cash. Goodwill and other intangible assets of $3,345,000 were recorded in connection with these acquisitions. These acquisitions did not have a material pro forma impact on the consolidated financial statements for the year ended August 29, 1999. 3. ACCRUED LIABILITIES AND OTHER LONG-TERM LIABILITIES Accrued liabilities consist of the following (in thousands):

~~NOVEMBER 29, FEBRUARY 28, MAY 30,~~ AUGUST ~~29, NOVEMBER 28, FEBRUARY~~ 27, ~~MAY 28,~~ AUGUST 2726, ~~1998 1999 1999 1999 1999~~ 2000 ~~2000~~2001 ~~2000~~ --------- -~~-------~~ -------- --~~------~~ ~~---------~~Accrued ~~--------~~operating ~~--------~~expenses ~~-------- Net sales~~ $ ~~103~~6,~~575~~385 $ 972,~~725~~706 $Accrued ~~96,224~~payroll $and ~~86,659~~benefits ~~$ 100~~9,~~120~~566 ~~$ 94~~7,~~153~~836 $Accrued 87,883 $ 76,031 Cost of sales 58,935 55,571 55,765 50,294 57,299 52,389 47,647 42,539 --------- -------- -------- -------- --------- -------- -------- -------- Gross profit 44,640 42,154 40,459 36,365 42,821 41,764 40,236 33,492 Operating expenses 36,224 35,613 33,932 31,883 32,097 31,522 24,645 24,793 Restructuring charges 117 129 1,245 -- -- -- 855 506 Impairment of goodwill -- -- -- -- -- 4,997 -- -- ------------------------------------------------------------------------------------------------------ Operating income ~~8,299~~taxes 62,~~412~~666 ~~5,282~~713 ~~4,482~~Accrued ~~10,724~~interest ~~5,245~~879 ~~14,736~~783 ~~8,193~~Accrued ~~Net~~taxes ~~loss~~ (~~gain)~~other onthan ~~dispositions of businesses -- -- -- 4,136 -- 1,382 472 (2,823) Interest~~ income ~~(555~~) ~~(462) (604) (633) (820) (~~1,~~011)~~386 (1,~~263)~~308 ~~(1,493)~~Other ~~Interest expense 7~~3,~~125~~782 ~~6,545 6,245 6,248 6,413~~ 5,~~956~~201 ~~6,033 5,863~~ --------- -------- -------- -------- --------- -------- -------- -------- Income (loss) before provision for income taxes, minority interest and extraordinary gain 1,729 329 (359) (5,269) 5,131 (1,082) 9,494 6,646 Provision for income taxes 1,059 251 539 355 862 363 358 2,071 Minority interest 197 51 107 (37) 114 90 58 36 --------- -------- -------- -------- --------- -------- -------- -------- Income (loss) before extraordinary gain 473 27 (1,005) (5,587) 4,155 (1,535) 9,078 4,539 Extraordinary gain on repurchase of debt, net of tax -- -- 1,008 323 2,980 1,544 -- 1,309 ========= ======== ======== ======== ========= ======== ======== ======== Net income (loss) $ ~~473 $ 27 $ 3 $ (5~~24,~~264)~~664 $ 718,~~135~~547 ~~$ 9 $ 9,078 $ 5,848~~ ========= ======== ~~======== ======== ========= ======== ======== ========~~

During May 1998, Albecca amended certain bonus arrangements with shareholders and certain members of management whereby the payment of accrued amounts aggregating $4,420,000 would be deferred and paid in varying increments through fiscal 2005. Additionally, during fiscal 2000, amounts approximating $1,800,000, awarded during fiscal years 1998 and 1999 to certain members of management, including the majority shareholder, were also deferred. Accruals related to these compensation arrangements of $5,852,000 as of August 27, 2000 and $5,057,000 as of August 26, 2001 are included as a component of accrued payroll and benefits and other long-term liabilities. During fiscal 2000, the majority shareholder and the Company agreed to pay the portion of this deferred compensation due the majority F-12 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) shareholder in annual payments of $500,000 beginning in fiscal year 2001 through fiscal year 2009. Interest will accrue on the unpaid deferred compensation at an annual rate of prime less 1%. 4. LONG-TERM DEBT Long-term debt consists of the following (in thousands):

~~Severance~~AUGUST ~~and~~27, ~~Lease~~AUGUST ~~Write-down~~26, of2000 ~~other~~2001 ~~termination Closure of United Kingdom~~ - ~~property and termination and other exit Northampton: equipment benefits costs Total~~ ----------- ----------- ~~-----------~~Industrial ~~-----------~~revenue ~~2000 Provision $ 499~~bonds,~~000~~ $due ~~298,000~~July ~~$ 618~~2020,~~000~~ $principal ~~1,415,000~~paid ~~Non-cash~~annually ~~499,000~~beginning --in ~~-- 499~~2005,~~000~~ ~~-----------~~variable ~~-----------~~interest ~~-----------~~paid ~~-----------~~monthly ~~Cash -- 298,000 618,000 916,000 Fiscal 2000 cash activity --~~ (~~116,000)~~2.35% ~~(84,000) (200,000) ----------- ----------- ----------- ----------- Balance~~ as of August 2726, ~~2000 $ -- $ 182~~2001),~~000~~ $secured ~~534,000~~by $a ~~716,000~~letter ~~=========== =========== =========== =========== Severance and Write-down~~ of ~~other~~credit ~~Closure of Sweden duplicate property and termination Other exit facility: equipment benefits costs Total ----------- ----------- ----------- ----------- 1999 Provision~~ $ ~~700~~4,~~000~~600 $ ~~275~~4,~~000~~600 $10.75% ~~45,000~~senior $subordinated 1notes,~~020,000~~ ~~Non-cash~~due ~~700,000~~August ~~-- -- 700~~2008,~~000~~ ~~-----------~~interest ~~-----------~~paid semi-~~----------~~annually ~~-----------~~in ~~Cash~~arrears --on ~~275,000~~February ~~45,000~~15 ~~320,000~~and ~~Fiscal~~August ~~1999~~15 ~~cash~~of ~~activity~~each --year ~~(125~~148,~~000)~~930 ~~(30~~134,~~000)~~930 ~~(155,000)~~Demand ~~-----------~~note ~~-----------~~payable ~~-----------~~in ~~-----------~~Dutch ~~Balance as of August 29~~Guilders, ~~1999~~interest --paid ~~150,000~~quarterly ~~15,000~~at ~~165,000~~a ~~Fiscal~~base ~~2000~~rate ~~cash~~plus ~~activity~~1.25% -- (~~150,000)~~6.25% ~~(15,000) (165,000) ----------- ----------- ----------- ----------- Balance~~ as of August 2726, ~~2000~~2001) $secured --by $certain --accounts $receivable, --inventory ~~$ -- =========== =========== =========== =========== Severance~~ and ~~Write-down of other Closure of operations in~~ property ~~and~~1,298 ~~termination~~1,194 Other ~~exit New Zealand: equipment benefits costs Total~~ long-~~----------~~term ~~----------- ----------- ----------- 1999 Provision $ 75~~notes,~~000~~ $interest ~~48,000~~payable $at ~~102,000~~a $weighted ~~225,000~~average ~~Non-cash~~rate ~~75,000~~of ~~-- -- 75~~6.2%,~~000~~ ~~-----------~~maturing ~~-----------~~at ~~-----------~~various ~~-----------~~dates ~~Cash~~through ~~-- 48~~2017,~~000~~ ~~102,000~~no ~~150,000~~individual ~~Fiscal~~note ~~1999~~exceeding ~~cash activity -- (30~~$1,~~000)~~100 ~~(75~~15,~~000)~~354 ~~(105~~10,~~000)~~433 ----------- ----------- ~~----------- ----------- Balance as of August 29~~170,182 ~~1999 -- 18~~151,~~000~~157 ~~27,000~~Less ~~45,000~~current ~~Fiscal~~maturities ~~2000 cash activity -- (3~~7,~~000)~~686 (35,~~000)~~917 ~~(6,000)~~ ----------- ----------- Long-~~----------~~term ~~-----------~~portion ~~Balance as of August 27, 2000~~ $ ~~-- $ 15~~162,~~000~~496 $ 24145,~~000~~240 ~~$ 39,000~~ =========== ==========~~= =========== ===========~~

Certain of the above facilities are subject to restrictive financial covenants related to adjusted tangible net worth and cash flow, as defined. Additionally, the notes in foreign currencies above generally restrict the foreign subsidiary holding the applicable notes from the payment of dividends or repayments of intercompany loans to Albecca or other subsidiaries. Certain revolving facilities provide Albecca with additional borrowings of up to $8,696,000 as of August 26, 2001. Albecca had outstanding letters of credit totaling $1,087,000 as of August 26, 2001. On August 11, 1998, Albecca issued $200,000,000 of 10.75% senior subordinated notes (the "Notes"). The Notes are subject to certain redemption and repurchase terms, as defined. In addition, the Notes contain certain covenants that limit, among other things, the ability of Albecca and its subsidiaries to: (1) pay dividends, redeem capital stock, or make certain other restricted payments or investments; (2) incur additional indebtedness or issue preferred equity interests; (3) merge, consolidate, or sell all or substantially all of its assets; (4) create liens on assets, and; (5) enter into certain transactions with affiliates. The Company's payment obligations under the Notes are jointly and severally guaranteed by the Subsidiary Guarantors, as defined (Note 13). The subsidiary guarantees are unconditional in nature. The indenture to the Notes provides that no Subsidiary Guarantor may consolidate with or merge with or into another entity unless the surviving entity of such a consolidation or merger assumes all the obligations of the Subsidiary Guarantor. The Notes will not be redeemable at the Company's option prior to August 15, 2003. Thereafter, the Notes will be subject to redemption at any time at the option of the Company, in whole or in part, at the redemption prices listed below plus accrued and unpaid interest and liquidated damages, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on August 15 of the years indicated as follows: 2003 105.375% 2004 103.583% 2005 101.792% 2006 and thereafter 100.000%

During fiscal 2001, the Company repurchased a portion of the Notes with a face value of $14,000,000. The repurchase resulted in a net extraordinary gain of $341,000, net of applicable state taxes of $12,000. During fiscal 2000, the Company repurchased a portion of the Notes with a face value of $39,820,000. The repurchases resulted in a net extraordinary gain of $5,833,000, net of applicable state taxes of $222,000. Other long-term notes included borrowings denominated in foreign currencies in the aggregate amounts of $13,305,000 and $8,400,000 as of August 27, 2000 and August 26, 2001, respectively. F-13 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Aggregate maturities of long-term debt as of August 26, 2001 are as follows: 2002 - $5,917,000; 2003 - $1,646,000; 2004 - $883,000; 2005 - $954,000; 2006 - $945,000; thereafter, $140,812,000. 5. GEOGRAPHIC INFORMATION Albecca primarily manages its business geographically. The geographic regions are organized into the following categories: United States, Canada and International. These segments represent the informational format of internal management reporting used by the chief decision-maker. Relevant data for these reportable segments is presented below (in thousands):

~~Severance~~2001 ~~and other Write~~-~~off termination Other exit Closure of operations in Greece of Goodwill benefits costs Total~~ ----------- ----------- ----------- ----------- ~~1998 Provision $ 333,000 $ 79,000 $ 104,000 $ 516,000 Non~~-~~cash 333,000~~ -- -- ~~333,000~~ ----------- --~~---------~~ ~~-----------~~UNITED INTER-~~----------~~ ~~Cash~~STATES --CANADA ~~79,000~~NATIONAL ~~104,000~~TOTAL ~~183,000 Fiscal 1998 cash activity~~ -- -- -- -- -------~~----~~ --------~~---~~ ----------- ~~-----------~~Net ~~Balance~~sales, asaggregate of$213,425 ~~August 30~~$25,437 ~~1998~~$ ~~-- 79~~84,~~000~~803 ~~104,000~~$ ~~183~~323,~~000~~665 ~~1999~~Net ~~provision~~sales, --intersegment ~~-- 129~~2,~~000~~689 ~~129~~3,~~000~~419 ~~Fiscal 1999 cash activity -- (70~~3,~~000)~~433 ~~(129~~9,~~000)~~541 ~~(199,000)~~ --------~~---~~ -------~~----~~ --------~~---~~ ----------- ~~Balance~~Net ~~as of August 29~~sales, ~~1999~~external ~~-- 9~~210,~~000~~736 ~~104~~22,~~000~~018 ~~113~~81,~~000~~370 ~~Fiscal 2000 cash activity -- -- (4~~314,~~000)~~124 ~~(4,000)~~Cost ~~----------- ----------- ----------- ----------- Balance as~~ of ~~August~~sales 27111,238 ~~2000 $ -- $ 9~~13,~~000~~627 ~~$ 100~~50,~~000~~926 ~~$ 109~~175,~~000~~791 ~~=========== =========== =========== =========== severance and other termination Other exit Closure of U.S. duplicate facilities: benefits costs Total~~ --------~~---~~ -------~~----~~ --------~~---~~ ~~1998 Provision $ 234,000 $ 42,000 $ 276,000 Non~~-~~cash~~ -- -- -- --~~---------~~ ~~-----------~~Gross ~~-----------~~profit ~~Cash~~99,498 ~~234~~8,~~000~~391 4230,~~000~~444 ~~276~~138,~~000~~333 ~~Fiscal~~Operating ~~1998~~expenses ~~cash~~55,990 ~~activity -- (42~~6,~~000)~~514 ~~(42~~27,~~000)~~545 ~~----------- ----------- ----------- Balance as of August 30~~90,049 ~~1998~~Restructuring ~~234,000~~charges -- ~~234,000 1999 provision~~ -- ~~117,000 117,000 Fiscal 1999 cash activity~~ (~~145,000~~52) (~~108,000~~52) ~~(253,000)~~ --------~~---~~ ------- ---- ---- ------- ~~Balance as of August 29, 1999 89,000 9,000 98,000 2000 provision (54,000) 54,000~~ -- ~~Fiscal~~Operating ~~2000~~income ~~cash~~$ ~~activity (15~~43,~~000)~~508 ~~(54,000)~~$ ~~(69~~1,~~000)~~877 ~~2000~~$ ~~reversal of excess provision (20~~2,~~000)~~951 ~~(9,000)~~$ ~~(29~~48,~~000)~~336 --------~~---~~ -------~~----~~ -------- --- ~~Balance as of August 27, 2000 $~~ -- $ -- $ -- ~~===========~~Depreciation ~~=========== =========== Lease Severance~~ and ~~termination~~amortization ~~Write-down~~2,053 of487 ~~other~~2,699 ~~and~~5,239 ~~Closure of the United Kingdom plastic property and termination other exit moulding manufacturing operations: equipment benefits costs Total~~ --------~~---~~ -------~~----~~ --------~~---~~ ----------- ~~1998~~ Provision $for ~~775,000~~income $taxes ~~230,000~~597 $773 ~~465,000~~(589) $781 ~~1,470,000 Non~~-~~cash 775,000~~ -- -- ~~775,000~~ ---~~--------~~ -------~~----~~ --------~~---~~ ----------- ~~Cash~~Extraordinary --gain ~~230,000~~on ~~465,000~~repurchase ~~695~~of debt,~~000~~ ~~Fiscal~~net ~~1998~~of ~~cash~~tax ~~activity~~341 -- ~~(216,000)~~ -- ~~(216,000)~~341 --------~~---~~ -------~~----~~ --------~~---~~ ----------- ~~Balance~~Assets ~~as of August 30~~85,503 ~~1998 -- 14~~13,~~000~~301 ~~465~~84,~~000~~329 ~~479~~183,~~000~~133 ~~Fiscal 1999 cash activity~~ -- ~~(14,000) (440,000) (454,000)~~ ------~~-----~~ -------~~----~~ --------~~---~~ ----------- ~~Balance~~Capital asexpenditures ~~of August 29~~1,747 ~~1999~~149 ~~-- -- 25~~1,~~000~~989 253,~~000~~885 ~~2000 reversal of excess provision~~ -- -- ~~(25,000) (25,000)~~ ----~~-------~~ -------~~----~~ --------~~---~~ ---------~~-- Balance as of August 27, 2000 $ -- $ -- $ -- $ -- =========== =========== =========== ===========~~

~~For~~2000 ~~the~~--------------------------------------------------------------- ~~years~~UNITED ~~ended~~INTER- STATES CANADA NATIONAL TOTAL -------- ------- -------- --------- Net sales, aggregate $219,279 $27,035 $124,529 $ 370,843 Net sales, intersegment 2,267 4,041 3,202 9,510 -------- ------- -------- --------- ~~August~~Net 30sales, ~~1998~~external ~~August~~217,012 2922,994 ~~1999~~121,327 ~~August~~361,333 27Cost of sales 118,112 ~~2000~~14,464 78,823 211,399 -------- ------- -------- --------- Gross profit 98,900 8,530 42,504 149,934 Operating expenses 54,437 6,304 43,937 104,678 Restructuring charges -- -- 1,361 1,361 Impairment of goodwill 4,997 -- -- 4,997 -------- ------- -------- ~~Net~~--------- Operating income (loss), as$ ~~reported~~39,466 $ 142,~~363~~226 $ (42,~~761~~794) $ 2238,~~070~~898 ~~Comprehensive~~-------- ~~income:~~------- ~~Foreign~~-------- ~~currency~~--------- ~~translation~~Depreciation ~~adjustment~~and (amortization 3,~~264)~~068 ~~780~~534 (54,~~464)~~408 8,010 -------- ------- -------- --------- Provision for income taxes 316 658 2,680 3,654 -------- ------- -------- --------- ~~Total~~Extraordinary ~~comprehensive~~gain ~~income~~on ~~(loss)~~repurchase $of 11debt,~~099~~ $net (3of tax 5,~~981)~~833 $-- 16-- 5,~~606~~833 ~~=================~~-------- ~~=================~~------- ~~=================~~-------- --------- Assets 86,421 14,151 90,523 191,095 -------- ------- -------- --------- Capital expenditures 5,487 100 3,223 8,810 -------- ------- -------- ---------

~~August~~1999 ~~27, 2000~~ ---------------------------------------------------------------~~--------~~ ~~Subsidiary~~UNITED ~~Consolidated Subsidiary Non~~INTER- ~~Elimination~~STATES ~~Consolidated~~CANADA ~~Albecca~~NATIONAL ~~Inc.~~TOTAL ~~Guarantors Guarantors Entries Total~~ --------~~----~~ -------~~---~~ ---------- ---------~~---~~ ~~------------~~Net ~~ASSETS~~sales, ~~CURRENT~~aggregate ~~ASSETS: Cash and cash equivalents~~ $ 13201,~~745~~830 $ 127,~~855~~389 $ 7164,~~721~~947 $ ~~-- $ 23~~394,~~321~~166 ~~Accounts~~Net ~~receivable~~sales, ~~net~~intersegment ~~-- 20~~2,~~291~~267 163,~~093~~684 ~~-- 36,384 Intercompany accounts receivable -- 73,310~~ 1,~~336~~317 ~~(74~~7,~~646)~~268 -- ~~Inventories~~ -- ~~23,617 24,796~~ -- ~~48,413 Other current assets 180 987 3,587~~ -- ~~4,754~~ --------- --------- --------- ~~---------~~Net ~~--------- Total current assets 13~~sales,~~925~~ ~~120,060~~external 53$199,~~533~~563 ~~(74~~$23,~~646)~~705 ~~112~~$163,~~872~~630 ~~PROPERTY,~~$ ~~PLANT AND EQUIPMENT~~386,898 ~~net~~Cost --of ~~11,095~~sales 25112,~~597~~560 ~~-- 36~~14,~~692~~245 ~~OTHER LONG-TERM ASSETS 4~~106,~~894~~977 13233,~~745~~782 ~~22,892~~ -- ~~41,531 INVESTMENT IN SUBSIDIARIES 107,397~~ -- ~~7,884 (115,281)~~ -- ~~INTERCOMPANY LOANS RECEIVABLE 91,985~~ -- ~~532 (92,517)~~ -- -----~~----~~ --------- --------- ~~---------~~Gross ~~---------~~profit ~~Total assets $ 218~~87,~~201~~003 ~~$ 144~~9,~~900~~460 ~~$ 110~~56,~~438~~653 ~~$(282~~153,~~444)~~116 $Operating ~~191,095~~expenses ~~========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ -- $ 563 $ 7~~63,~~123~~154 ~~$ -- $~~ 7,~~686~~460 ~~Accounts payable -- 9~~56,~~484~~536 7127,~~763~~150 --Restructuring ~~17,247~~charges ~~Intercompany~~117 ~~accounts payable 67,854 114 6,678 (74,646)~~ -- ~~Accrued liabilities 814 11~~1,~~856~~374 111,~~994~~491 -- ~~24,664~~ ------~~---~~ --------- --------- --------- ~~---------~~Operating ~~Total~~income ~~current~~(loss) ~~liabilities~~$ 6823,~~668~~732 ~~22,017~~$ 332,~~558~~000 $ (741,~~646~~257) 49$ 24,~~597~~475 --------- --------- --------- --------- ~~---------~~Depreciation ~~LONG-TERM~~and ~~DEBT,~~amortization ~~less current maturities 148~~2,~~930~~705 ~~6,085~~535 75,~~481~~913 ~~-- 162~~9,~~496~~153 --------- --------- --------- --------- ~~---------~~Provision ~~INTERCOMPANY~~for ~~LOANS~~income ~~PAYABLE~~taxes --483 ~~388~~631 921,~~129~~090 ~~(92~~2,~~517)~~204 -- ------~~---~~ --------- --------- --------- ~~---------~~Extraordinary ~~OTHER~~gain ~~LONG-TERM~~on ~~LIABILITIES~~repurchase ~~220~~of 5debt,~~961~~ ~~2,698~~net --of 8tax 1,~~879~~331 --~~-------~~ --~~-------~~ ~~---------~~1,331 --------- --------- ~~SHAREHOLDERS' EQUITY (DEFICIT) Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding at August 27, 2000~~ -- -- -- -- -- ~~Class A common stock, $0.01 par value; 250,000,000 shares authorized, 374,000 shares issued and outstanding at August 27, 2000 4~~ -- -- -- ~~4 Class B common stock, $0.01 par value; 100,000,000 shares authorized, 16,626,000 shares issued and outstanding at August 27, 2000 166~~ -- --Assets ~~-- 166 Additional paid-in capital 7~~103,~~326~~659 4114,~~825~~907 7147,~~926~~992 ~~(49~~266,~~751)~~558 ~~7,326 Accumulated (deficit) earnings (7,113) 68,199 (19,134) (65,530) (23,578) Cumulative foreign currency translation adjustment~~ -- ~~425 (14,220)~~ -- ~~(13,795)~~ ----~~-----~~ --------- --------- --------- ~~---------~~Capital ~~Total~~expenditures ~~shareholders' equity (deficit) 383 110~~1,~~449~~618 ~~(25,428)~~221 ~~(115~~4,~~281)~~109 ~~(29~~5,~~877)~~948 --------- --------- --------- --------- ~~--------- $ 218,201 $ 144,900 $ 110,438 $(282,444) $ 191,095 ========= ========= ========= ========= =========~~

F-14 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. SHAREHOLDER'S DEFICIT STOCK OPTIONS AND STOCK APPRECIATION RIGHTS In November 1995, the Company's majority shareholder established a stock performance program whereby a certain key employee could receive annually an option to acquire 0.2% of the then outstanding shares of Albecca's common stock and 0.2% member interest in Larson-Juhl International LLC from the Company's majority shareholder for $300,000, contingent upon the Company achieving its performance goals, including, sales, profits, asset management, and future positioning, for each fiscal year through fiscal 2000. Compensation expense under this program is recognized over the performance period based on the difference, if any, between the exercise price and the fair value measured at the end of each period within the performance period. To the extent that fair value exceeds the stated exercise price during the performance period, changes in the fair value are reflected as an adjustment of accrued compensation and compensation expense in the periods in which the changes occur until the performance period is completed and such options are either granted or forfeited. On May 1, 1998, the provisions of the stock performance program discussed above were amended whereby any option grant under such program would be granted by the Company under the Albecca Inc. 1998 Stock Option Plan (the "Stock Option Plan") discussed below. The Company awarded the key employee an option to acquire 34,062 shares of common stock under the Stock Option Plan at $6.46 per share, the fair value at the date of grant. The option vests to the key employee on May 1, 2003. In May 1999, the Company further amended the provisions of the stock performance program, whereby the key employee would be eligible to receive up to a total of 170,310 options to acquire shares of common stock at $8.80 per share, including 34,062 of options granted in May 1998. All 170,310 options, if granted, vest to the key employee on May 1, 2003. In August 2000, the Company awarded the key employee an option to acquire 34,062 shares of common stock at $7.00 per share under this amended program. The Company has recorded approximately $350,000 and $456,000, respectively, of compensation expense with respect to this contingent stock performance program as of August 27, 2000 and August 26, 2001. Compensation expense under this program is recognized over the performance period based on the difference between the exercise price and the fair value, if any, measured at the end of each period within the performance period. To the extent that fair value exceeds the stated exercise price during the performance period, changes in fair value are reflected as an adjustment of accrued compensation and compensation expense in the periods in which the changes occur until the performance period is completed and such options are either granted or forfeited. No compensation expense was recorded as of August 29, 1999 since, in the opinion of management, the exercise prices of both outstanding and future options were equal to or above fair market value. On May 1, 1998, the Company adopted the Albecca Inc. 1998 Stock Option Plan (the "Stock Option Plan") for which 2,600,000 shares of common stock were authorized for issuance in connection with stock option grants under such plan. The Stock Option Plan provides for non-qualified and incentive stock options. The options that are not incentive stock options granted under the Stock Option Plan shall terminate and no longer be exercisable upon the earlier to occur of (i) five years after a determination by the Committee that the Option shall terminate in five years, or (ii) five years after an initial public equity offering. An incentive stock option shall not be exercisable after the expiration of ten years from the date of grant. In March 1999, the Company awarded 378,000 non-qualified options to acquire shares of common stock at $6.46 per share to certain members of management under the Stock Option Plan. No compensation expense was recognized relating to these grants, as the exercise price was equal to the fair market value as determined by management's estimation at the time of grant. The options granted vest on November 1, 2003. On May 1, 2000, the Company repriced all of its outstanding options under the 1998 Stock Option Plan to $5.80 per share, and awarded an additional 30,000 options to acquire shares of common stock under the Stock Option Plan at a stated price of $5.80 per F-15 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) share to certain members of management. The Company also declared its intention to settle all options in cash upon exercise by the employee. As such, the Company began accounting for all outstanding options under variable plan accounting. On May 1, 2000, the Company adopted the Larson-Juhl Canada 2000 Stock Appreciation Rights Plan and the Larson-Juhl US 2000 Stock Appreciation Rights Plan (the "SAR Plans"). These plans operate substantially similar to the Albecca Inc. 1998 Stock Option Plan. In May 2000, the Company awarded 78,000 stock appreciation rights tied to the fair market value of the Company's common stock at a stated price of $5.80 per share to certain members of management under the SAR Plans. The stock appreciation rights vest on November 30, 2003. In May 2000, an officer and minority shareholder employee left the Company and in July 2000, the majority shareholder purchased the 170,000 shares from the former employee. No compensation was recognized for this transaction since, in the opinion of management, the purchase price did not exceed the fair market value of shares at the time of purchase. In August 2000, the Company awarded an additional 84,000 stock appreciation rights under the SAR Plans and 99,062 options to acquire shares of common stock under the Stock Option Plan with a stated price and exercise price of $7.00 per share to certain members of management. The stock appreciation rights and options vest on November 30, 2005. In December 2000, the Company awarded an additional 107,407 options to acquire shares of common stock under the Stock Option Plan with an exercise price of $7.95 per share to certain members of management. The options vest on November 1, 2005. In April 2001, the majority shareholder purchased the remaining 170,000 outstanding shares of common stock from the sole minority shareholder. No compensation was recognized for this transaction since, in the opinion of management, the purchase price did not exceed the fair market value of shares at the time of purchase. In June 2001, the Company awarded an additional 12,000 stock appreciation rights under the SAR Plans with a stated price of $5.80 to certain members of management. The stock appreciation rights vest on November 1, 2003. The Company recorded approximately $173,000 and $1,284,000 of compensation expense during the years ended August 27, 2000 and August 26, 2001, respectively, representing the difference between the fair market value and exercise and stated prices as of August 27, 2000 and August 26, 2001, respectively. A summary of stock option activity and the related exercise prices are as follows:

~~August~~FOR ~~29,~~THE ~~1999~~YEARS ENDED ----------------------------------------------------------------------- ~~Subsidiary Consolidated Subsidiary Non~~- ~~Elimination Consolidated Albecca Inc. Guarantors Guarantors Entries Total~~ ------------ ~~----------~~AUGUST ~~---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 27,424 $ 1,747 $ 5,887 $ -- $ 35,058 Accounts receivable, net -- 17,526~~ 29,~~772~~ --1999 ~~47,298~~AUGUST ~~Intercompany accounts receivable -- 29~~27,~~917~~ ~~513~~2000 ~~(30,430)~~AUGUST ~~-- Inventories -- 28~~26,~~212~~ ~~39,408~~2001 WEIGHTED-- ~~67,620 Other current assets 49 432 4,576~~ WEIGHTED-- ~~5,057~~ WEIGHTED-~~--------~~ ~~---------~~AVERAGE ~~---------~~AVERAGE ~~---------~~AVERAGE ~~---------~~EXERCISE ~~Total~~EXERCISE ~~current~~EXERCISE ~~assets~~OPTIONS ~~27,473~~IN ~~77,834~~THOUSANDS ~~80,156~~OPTIONS ~~(30,430)~~PRICE ~~155,033~~OPTIONS ~~PROPERTY,~~PRICE ~~PLANT~~OPTIONS ~~AND~~PRICE ~~EQUIPMENT, net~~ -- ~~8,088 45,397~~ -- ~~53,485 OTHER LONG~~-~~TERM ASSETS 6,443 18,884 32,713~~ -- ~~58,040 INVESTMENT IN SUBSIDIARIES 71,791~~ -- ~~7,559 (79,350)~~ -- ~~INTERCOMPANY LOANS RECEIVABLE 94,598~~ -- ~~13 (94,611)~~ -- --~~-------~~ --------- --------- --------- --------- ~~Total assets $ 200~~Outstanding,~~305~~ $beginning ~~104,806~~of $year ~~165~~34,~~838~~062 $~~(204,391)~~ $8.80 ~~266~~412,~~558~~062 ~~========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Current maturities of long-term debt~~ $ --6.46 ~~$ 2~~489,~~209~~124 $ ~~24,380~~6.04 $Granted ~~-- $ 26~~412,~~589~~062 ~~Accounts~~6.46 ~~payable -- 8~~489,~~611~~124 ~~17,812~~6.04 ~~-- 26~~107,~~423~~407 ~~Intercompany~~7.95 ~~accounts~~Exercised ~~payable 21,742 155 8,533 (30,430)~~ -- ~~Accrued liabilities 895 16,336 9,100~~ -- ~~26,331~~ --~~-------~~ --~~-------~~ --~~-------~~ --~~-------~~ ~~---------~~Cancelled ~~Total current liabilities 22~~34,~~637~~062 ~~27,311~~8.80 59412,~~825~~062 ~~(30,430)~~6.46 7927,~~343~~000 ~~---------~~5.80 --------- --------- --------- --------- ~~LONG~~-~~TERM DEBT, less current maturities 188,750 2,045 22,416~~ -- ~~213,211~~ -----~~----~~ --------- ~~---------~~Outstanding, ~~---------~~end ~~---------~~of ~~INTERCOMPANY~~year ~~LOANS PAYABLE -- 13 94~~412,~~598~~062 ~~(94,611)~~$ --6.46 ~~--------- --------- --------- --------- --------- OTHER LONG-TERM LIABILITIES -- 3~~489,~~975~~124 ~~3,962~~$ --6.04 7569,~~937~~531 ~~---------~~$ ~~---------~~6.41 --------- --------- --------- ~~SHAREHOLDERS' (DEFICIT) EQUITY Preferred stock, $0.01 par value; 50,000,000 shares authorized and no shares issued and outstanding at August 29, 1999~~ -- -- -- -- -- ~~Class A common stock, $0.01 par value; 250,000,000 shares authorized, 374,000 shares issued and outstanding at August 29, 1999 4~~ -- -- -- ~~4 Class B common stock, $0.01 par value; 100,000,000 shares authorized, 16,626,000 shares issued and outstanding at August 29, 1999 166~~ -- -- -- ~~166 Additional paid~~-in ~~capital 7~~Exercisable,~~326~~ ~~41,500~~end ~~7,926~~of ~~(49,426)~~year ~~7,326 Accumulated (deficit) earnings (18,578) 29,811 (14,407) (29,924) (33,098) Cumulative foreign currency translation adjustment~~ -- ~~151 (8,482)~~ -- ~~(8,331)~~ --~~-------~~ --~~-------~~ --~~-------~~ --~~-------~~ --------- ~~Total shareholders' (deficit) equity (11,082) 71,462 (14,963) (79,350) (33,933)~~ --------- --------- --------- --------- -------~~-- $ 200,305 $ 104,806 $ 165,838 $(204,391) $ 266,558 ========= ========= ========= ========= =========~~

At August 27, 2000 and August 26, 2001 there were 489,124 and 569,531 options outstanding with a weighted average remaining contractual life of 9.0 and 7.7 years, respectively. The prices for these options ranged from $5.80 to $7.00 per share at August 27, 2000 and $5.80 to $7.95 per share at August 26, 2001. SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair-value based method of accounting for an employee stock option plan or similar equity instrument and allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair-value based method of accounting defined in the statement had been applied. The Company has elected to account for its stock-based compensation plans under APB Opinion No. 25, however, the Company has computed for pro forma disclosure purposes the value of all options granted during the years ended August 29, 1999, August 27, 2000 and August 26, 2001, using the minimum value method as prescribed by SFAS No. 123 using the following assumptions:

~~Year Ended August 27, 2000~~ Risk-~~----------------------------------------------------------------------~~free Subsidiary Consolidated Subsidiary Non- Elimination Consolidated Albecca Inc. Guarantors Guarantors Entries Total ------------ ---------- ---------- ------------ ------------ Net sales $ -- $ 219,850 $ 147,358 $ (9,021) $ 358,187 Cost of sales -- 115,747 93,148 (9,021) 199,874 --------- --------- --------- --------- --------- Gross profit -- 104,103 54,210 -- 158,313 Operating expenses 167 60,087 52,803 -- 113,057 Restructuring charges -- (29) 1,390 -- 1,361 Impairment of goodwill -- 4,997 -- -- 4,997 --------- --------- --------- --------- --------- Operating (loss) income (167) 39,048 17 -- 38,898 Net gain on dispositions of businesses -- -- (969) -- (969) Interest income (4,539) -- (48) -- (4,587) Interest expense 21,796 344 2,125 -- 24,265 --------- --------- --------- --------- --------- (Loss) income before provision for income taxes, minority interest ~~and~~rate extraordinary gain (17,424) 38,704 (1,091) -- 20,189 Provision for income taxes -- 316 3,338 -- 3,654 Minority interest -- -- 298 -- 298 --------- --------- --------- --------- --------- (Loss) income before extraordinary gain (17,424) 38,388 (4,727) -- 16,237 Extraordinary gain on repurchase of debt, net of tax 5,833 -- -- -- 5,833 Equity in earnings of subsidiaries 35,606 -- -- (35,606) -- --------- --------- --------- --------- --------- Net income (loss) $ 24,015 $ 38,388 $ (4,727) $ (35,606) $ 22,070 ========= ========= ========= ========= ========= CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (IN THOUSANDS) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 31,721 $ 3,030 $ 4,429 $ -- $ 39,180 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment -- (5,570) (3,240) -- (.8~~,810)~~% ~~Acquisitions~~Expected ofdividend ~~businesses~~yield -- --Expected ~~(1,872)~~lives --7 (1,872) Proceeds from sales of property, plant and equipment -- 74 1,443 -- 1,517 Proceeds from dispositions of businesses -- -- 30,257 -- 30,257 Changes in other long-term assets 1,137 (331) (392) -- 414 --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities 1,137 (5,827) 26,196 -- 21,506 --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities -- -- 27,112 -- 27,112 Repayments of revolving credit facilities -- -- (38,798) -- (38,798) Proceeds from long-term debt -- 4,755 6,836 -- 11,591 Repayments of long-term debt (33,987) (2,339) (24,783) -- (61,109) Subsidiary capital contributions/distributions -- 312 (312) -- -- Distributions to ~~shareholders~~9 ~~(12,550)~~years --Expected --volatility -- (12,550) --------- --------- --------- --------- --------- Net cash (used in) provided by financing activities (46,537) 2,728 (29,945) -- (73,754) --------- --------- --------- --------- --------- EFFECT OF EXCHANGE RATE ON CASH -- 177 1,154 -- 1,331 --------- --------- --------- --------- --------- NET (DECREASE) INCREASE IN CASH (13,679) 108 1,834 -- (11,737) Cash and cash equivalents, beginning of period 27,424 1,747 5,887 -- 35,058 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period $ 13,745 $ 1,855 $ 7,721 $ -- $ 23,321 ========= ========= ========= ========= =========

F-16 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) If the Company had accounted for these grants in accordance with SFAS No. 123, the Company's reported pro forma net (loss) income for the years ended August 29, 1999, August 27, 2000 and August 26, 2001 would have been as follows (in thousands):

~~Year~~AUGUST ~~Ended August~~ 29, ~~1999~~AUGUST ----------------------------------------------------------------------- Subsidiary Consolidated Subsidiary Non- Elimination Consolidated Albecca Inc. Guarantors Guarantors Entries Total ------------ ---------- ---------- ------------ ------------ Net sales $ -- $ 20427,~~636~~ $AUGUST ~~187~~26,~~833~~ $1999 ~~(8,286)~~2000 $2001 ~~384,183 Cost of sales~~ -- ~~113,824 115,027 (8,286) 220,565~~ --------- --------- --------- -~~--------~~ ~~---------~~Net ~~Gross profit -- 90,812 72,806 -- 163,618 Operating expenses 140 70,553 66,959 -- 137,652 Restructuring charges -- 342 1,149 -- 1,491 --------- --------- --------- --------- --------- Operating~~ (loss) income: ~~(140)~~As ~~19,917~~reported 4,698 -- 24,475 Loss on disposition of business -- -- 4,136 -- 4,136 Interest income (2,254) -- (159) 159 (2,254) Interest expense 22,086 616 3,620 (159) 26,163 --------- --------- --------- --------- --------- (Loss) income before provision for income taxes, minority interest and extraordinary gain (19,972) 19,301 (2,899) -- (3,570) Provision for income taxes -- 408 1,796 -- 2,204 Minority interest -- -- 318 -- 318 --------- --------- --------- --------- --------- (Loss) income before extraordinary gain (19,972) 18,893 (5,013) -- (6,092) Extraordinary gain on repurchase of debt, net of tax 1,331 -- -- -- 1,331 Equity in ~~earnings~~the offinancial ~~subsidiaries~~statements ~~13,880 -- -- (13,880) -- --------- --------- --------- --------- --------- Net (loss) income~~ $ (4,761) $ 1822,~~893~~070 $ (531,~~013)~~580 ~~$ (13,880) $ (4,761)~~ ========= ========= ========= ~~=========~~Pro ~~=========~~forma ~~CONDENSED~~in ~~CONSOLIDATING~~accordance ~~STATEMENT~~with OFSFAS ~~CASH~~No. ~~FLOWS~~123 ~~(In thousands) NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES~~ $ (74,~~482~~986) $ 121,~~865~~717 $ 19,262 $ -- $ 13,645 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment -- (1,811) (4,137) -- (5,948) Acquisitions of businesses -- -- (3,594) -- (3,594) Proceeds from sales of property, plant and equipment -- 110 2,320 -- 2,430 Proceeds from disposition of business -- -- 164 -- 164 Changes in other long-term assets -- (81) (3,087) -- (3,168) --------- --------- --------- --------- --------- Net cash used in investing activities -- (1,782) (8,334) -- (10,116) --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments for additional bond issuance costs (516) -- -- -- (516) Changes in intercompany loan balances -- (1,824) 1,824 -- -- Proceeds from revolving credit facilities -- 517 24,007 -- 24,524 Repayments of revolving credit facilities -- (59) (26,280) -- (26,339) Proceeds from long-term debt -- 2,775 12,883 -- 15,658 Repayments of long-term debt (9,458) (3,756) (18,662) -- (31,~~876)~~261 Subsidiary capital contributions/distributions -- 3,980 (3,980) -- -- Distributions to shareholders (4,308) -- -- -- (4,308) --------- --------- --------- --------- --------- Net cash (used in) provided by financing activities (14,282) 1,633 (10,208) -- (22,857) --------- --------- --------- --------- --------- EFFECT OF EXCHANGE RATE ON CASH -- 13 (511) -- (498) --------- --------- --------- --------- --------- NET (DECREASE) INCREASE IN CASH (21,764) 1,729 209 -- (19,826) Cash and cash equivalents, beginning of period 49,188 18 5,678 -- 54,884 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period $ 27,424 $ 1,747 $ 5,887 $ -- $ 35,058 ========= ========= ========= ~~========= =========~~

The estimated pro forma compensation cost resulting in the pro forma net (loss) income may not be representative of actual results had the Company accounted for the stock options using the fair-value based method. 7. RELATED PARTY TRANSACTIONS The Company's principal executive offices are located in a 65,000 square-foot office building located in Norcross, Georgia owned by L-J Properties Inc., a company owned by Messrs. Ponzio, Trimarco and McKenzie, each of whom is an executive officer of the Company. The Company's lease for this facility terminates in August 2009. The total rent payments for the years ended August 29, 1999, August 27, 2000 and August 26, 2001 were $708,000, $738,000 and $768,000, respectively. The Company believes that the lease is on terms as favorable to the Company as those attainable from unaffiliated third parties. In August 2001, the Company purchased the Evergreen, Colorado design center building from Mr. Ponzio for $800,000. The purchase price represented the fair market value of the property at the date of sale. Prior to the purchase, the Company leased this facility from Mr. Ponzio at an annual rental rate of approximately $50,000 per year from January 2000 to the purchase date. 8. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases certain operating facilities and equipment under operating leases. Future minimum annual rentals under noncancelable leases as of August 26, 2001 are as follows: 2002 -- $8,478,000; 2003 -- $5,168,000; 2004 -- $3,402,000; 2005 -- $2,008,000; 2006 -- $893,000 and thereafter -- $1,244,000. The total lease payments for the years ended August 29, 1999, August 27, 2000 and August 26, 2001 were approximately $9,646,000, $8,338,000 and $8,806,000, respectively. LITIGATION During fiscal 2000, the Company settled certain outstanding litigation. As a result of the settlement of this litigation, the Company reversed $3,839,000 of previously-provided reserves recorded during fiscal 1998 and prior periods. These amounts are reflected as a reduction of fiscal 2000 operating expenses in the accompanying consolidated statement of operations. 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. 9. BENEFIT PLANS The Company sponsors a defined contribution 401(k) retirement investment plan (the "Plan") for all of its U.S. employees with more than one year of service. The Company makes discretionary contributions to the Plan, including a limited 50% matching contribution. Under the terms of the Plan, a participant is 100% vested in the Company's matching and discretionary contributions after six years of service. Matching and discretionary contributions made by the Company for the years ended August 29, 1999, August 27, 2000 and August 26, 2001 were approximately $427,000, $521,000 and $753,000, respectively. F-17 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. QUARTERLY DATA (UNAUDITED) The following table presents quarterly information regarding the Company's historical operations for each quarter for each of the two years in the period ended August 26, 2001 (in thousands):

~~Year~~2000 ~~Ended~~2001 ~~August 30, 1998~~ ----------------------------------------- ----------------------------------------- ~~Subsidiary~~FIRST ~~Consolidated~~SECOND ~~Subsidiary~~THIRD ~~Non-~~FOURTH ~~Elimination~~FIRST ~~Consolidated~~SECOND ~~Albecca~~THIRD ~~Inc.~~FOURTH ~~Guarantors~~QUARTER ~~Guarantors~~QUARTER ~~Entries~~QUARTER ~~Total~~QUARTER QUARTER QUARTER QUARTER QUARTER -------- ---- --- ------- ------- --- ---- -------- ------- ------- Net sales $ ~~170~~100,~~885~~906 $ 2294,~~690~~939 $88,669 ~~193~~$76,~~218~~819 $84,099 (5$82,~~656)~~287 $76,122 ~~381~~$71,~~137~~616 Cost of sales 9260,~~880~~180 1255,~~323~~270 ~~117~~50,~~534~~528 (545,~~656)~~421 ~~217~~46,~~081~~962 ~~---------~~44,932 ~~---------~~42,324 ~~---------~~41,573 --------- --------- ~~Gross profit 78,005 10,367 75,684~~ -- ~~164,056 Operating expenses 53,182 8,319 68,332~~ -- ~~129,833 Restructuring charges~~ -- ~~276 1,986~~ -- ~~2,262~~ --------- --------- --------- --------- --------- ~~Operating~~Gross ~~income~~profit 2440,~~823~~726 139,~~772~~669 538,~~366~~141 -- 31,~~961~~398 ~~Cost~~37,137 of37,355 ~~cancelled~~33,798 ~~initial~~30,043 ~~public~~Operating ~~equity~~expenses ~~offering~~30,002 129,~~273~~427 --22,550 --22,699 --23,683 123,~~273~~847 ~~Interest~~21,468 ~~expense~~21,051 ~~623~~Restructuring ~~655~~charges ~~10,671~~-- -- ~~11,949~~855 ~~Interest~~506 ~~income (116)~~ -- -- -- (~~116~~52) Impairment of goodwill -- 4,997 -- -- --- --~~-------~~ --~~-------~~ --~~-------~~ --------- ~~Income (loss) before provision for income taxes and minority interest 23,043 1,117 (5,305)~~ -- ~~18,855 Provision for income taxes 864 24 3,133~~ -- ~~4,021 Minority interest~~ -- -- ~~471~~ -- ~~471 Equity in earnings of subsidiaries 16,044~~ -- -- ~~(16,044)~~ -- --------- --------- --------- --------- --------- ~~Net~~Operating income ~~(loss)~~10,724 ~~$ 38~~5,~~223~~245 ~~$ 1~~14,~~093~~736 ~~$ (~~8,~~909)~~193 $13,454 ~~(16~~13,~~044)~~508 $12,330 149,~~363~~044 ~~=========~~Net ~~=========~~loss ~~========= ========= ========= CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS~~ (~~In thousands~~gain) ~~NET~~on ~~CASH~~dispositions ~~PROVIDED~~of BYbusinesses ~~(USED~~-- ~~IN) OPERATING ACTIVITIES $ 19,906 $~~ 1,~~054~~382 $472 (32,~~508~~823) $ -- ~~$ 17,452~~ --~~-------~~ --~~-------~~ --~~-------~~ ~~---------~~Interest ~~---------~~income ~~CASH~~(820) ~~FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment~~ (~~955~~1,011) (621,263) (71,~~361~~493) -- (81,~~378~~576) ~~Acquisitions of businesses~~ (201,~~989~~905) -- (71,~~076~~954) -- (281,~~065~~965) ~~Proceeds~~Interest ~~from~~expense ~~sales~~6,413 of5,956 ~~property~~6,033 ~~plant~~5,863 ~~and~~5,890 ~~equipment~~5,778 376,056 545,842 ~~418~~Other --loss ~~509 Changes in other long-term assets --~~ (~~1,618~~gain) ~~1,919~~ -- ~~301~~ -- --~~-----~~ --~~-------~~ 361 (430) 422 (307) --------- --------- --------- ~~Net cash used in investing activities (21,907) (1,626) (12,100)~~ -- ~~(35,633)~~ -----~~----~~ --------- --------- --------- --------- ~~CASH~~Income ~~FLOWS~~(loss) ~~FROM~~before ~~FINANCING~~provision ~~ACTIVITIES:~~for ~~Proceeds~~income ~~from issue of senior subordinated notes~~taxes, ~~net~~minority ofinterest ~~debt~~and ~~issue~~extraordinary ~~costs~~gain ~~193~~5,~~241~~131 ~~-- -- -- 193,241 Changes in intercompany loan balances~~ (571,~~478~~082) ~~433 57~~9,~~045~~494 ~~-- -- Proceeds from revolving credit facilities 87~~6,~~685~~646 ~~327 21~~8,~~849~~779 ~~-- 109~~10,~~861~~065 ~~Repayments of revolving credit facilities (92~~7,~~585)~~806 ~~(64) (42~~5,~~058)~~474 --Provision ~~(134,707)~~for ~~Proceeds~~income ~~from~~taxes ~~long-term~~862 ~~debt~~363 358 2,~~641~~071 ~~777~~879 ~~12,258~~388 --505 ~~15,676 Repayments of long-term debt~~ (~~8,509~~991) ~~(763)~~Minority ~~(32,841)~~interest --114 ~~(42,113)~~90 ~~Repayments~~58 of36 ~~notes~~31 ~~payable~~23 to35 ~~shareholders~~15 ~~(4,000)~~ -- -- -- ~~(4,000) Distributions to shareholders (70,300)~~ -- -- -- ~~(70,300)~~ --- ------- --------- ------- -- ----- ---- --- ------- ~~Net~~Income ~~cash~~(loss) ~~provided~~before byextraordinary ~~financing~~gain ~~activities~~4,155 50(1,~~695~~535) ~~710~~9,078 164,~~253~~539 --7,869 679,~~658~~654 ~~---------~~7,266 ~~---------~~6,450 ~~---------~~Extraordinary ~~---------~~gain ~~---------~~(loss) ~~EFFECT~~on OFrepurchase ~~EXCHANGE~~of ~~RATE~~debt, ONnet ~~CASH~~of 95tax ~~(253)~~2,980 ~~264~~1,544 -- ~~106~~1,309 ~~---------~~247 251 (157) --~~-------~~ --------- --------- --------- ~~NET INCREASE (DECREASE) IN CASH 48,789 (115) 909~~ -- ~~49,583 Cash and cash equivalents, beginning of period 399 133 4,769~~ -- ~~5,301~~ ---~~------~~ --------- --------- --------- --------- ~~Cash~~Net ~~and~~income ~~cash~~$ ~~equivalents~~7,135 ~~end~~$ of9 ~~period~~$ 9,078 $ 495,~~188~~848 $ 188,116 $ 59,~~678~~905 $ --7,109 $ 546,~~884~~450 ========= ======= == ===== ======= ======= ======= ======= =======

11. RESTRUCTURING CHARGES AND DISPOSITIONS OF BUSINESSES THE NETHERLANDS - LEVER In August 2001, the Company initiated a plan to close its Lever manufacturing and distribution facility located in Bergambacht, The Netherlands, and recorded a charge to operations of approximately $182,000. The closure decision was based on management's belief that the Company could more efficiently serve the Dutch market by integrating these operations with its other operations in The Netherlands. This charge included severance costs of $120,000 for 28 team members, a $22,000 write-down of property, plant and equipment to its net estimated realizable value and other exit costs of $40,000. These costs have been charged to operating expenses in the consolidated statements of operations. No cash payments were made with respect to The Netherlands - Lever restructuring as of the end of fiscal 2001 and $160,000 was included in accrued liabilities at the end of the year. 22 of the original 28 team members remained at the facility at August 26, 2001. The Company anticipates that The Netherlands - Lever restructuring plan will be completed prior to the end of fiscal 2002. CANADA - EDMONTON In May 2001, the Company initiated a plan to close one of its Canadian distribution facilities, located in Edmonton, and recorded a charge to operations of approximately $252,000. Management made the decision to close the Company's distribution center in Edmonton based on the belief that it could serve its customers efficiently and more cost-effectively from its Calgary location. This charge included severance costs for 5 team members approximating $72,000, a $38,000 write-down of property, plant and equipment to its net estimated realizable value, $73,000 of lease termination costs, and $69,000 of other exit costs. These costs have been charged to operating expenses in the consolidated statements of operations. During fiscal 2001, cash payments were made with respect to the Canada - Edmonton restructuring of $108,000, including $59,000 for severance payments, $19,000 of lease termination costs and $30,000 for other exit costs, leaving $106,000 in accrued liabilities at August 26, 2001. There were no team members remaining at the facility at August 26, 2001. The Company anticipates that the Canada - Edmonton restructuring plan will be completed prior to the end of fiscal 2002. F-18 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) UNITED KINGDOM - NORTHAMPTON In May 2000, the Company initiated a restructuring plan related to the closure of its United Kingdom - Northampton operation and recorded a charge to operations of $909,000. Management made the decision to close this operation following a series of under-performing quarters, at which time management determined that the Company's resources, both financial and managerial, could be more effectively invested in operations with a greater potential return. This charge included severance costs for 37 team members of $222,000, a $270,000 write-down of property, plant and equipment to its estimated net realizable value, $233,000 of lease termination costs and $184,000 of other exit costs. The $233,000 of lease termination costs represented the Company's estimated future obligations under the existing lease commitments of the closed facility, net of estimated recoverable costs through subleasing. During August 2000, additional costs of $506,000 relating to the closure of the United Kingdom - Northampton facilities were identified. This charge included additional severance costs of $76,000, an additional $229,000 write-down of property, plant and equipment due to a redetermination of estimated net realizable value, and $201,000 of additional lease termination costs and other exit costs related to a reevaluation of the period that will be required to find a sub-tenant for the building. As of August 26, 2001, no team members remained at the facility and the restructuring plan was substantially complete, except for remaining accrued lease termination costs of $160,000 representing the Company's estimate of its continued lease commitments for the closed facility until 2005, less the Company's estimate of the benefit from the building's subletting, and severance benefits to be paid during fiscal 2002 of $32,000. SWEDEN In May 1999, the Company initiated a restructuring plan related to one of its facilities in Sweden and recorded a charge to operations of approximately $1,100,000. Management made the decision to close this operation in Sweden because the facility was deemed to be duplicative. This charge included severance costs for 25 team members approximating $275,000, a $700,000 write-down of the owned facility to the estimated net realizable value on the future sale of the building, $80,000 for inventory reserves related to inventory outside of the region's core operating focus, and other exit costs of $45,000. The inventory reserve was included in cost of goods sold in the accompanying consolidated statement of operations for the year ended August 29, 1999. As of August 26, 2001, the Company's closure of its duplicate facility in Sweden was complete. None of the 25 team members originally identified for termination remained at the facility. The facility was sold in August 1999 at its recorded book value and physical possession was transferred during fiscal 2000. NEW ZEALAND In March 1999, the Company initiated a plan to close its operations located in New Zealand, and recorded a charge to operations of $375,000 related to this closure. The plan to close the operation in New Zealand was adopted following a series of under-performing quarters, at which time management determined that the Company's resources, both financial and managerial, could be more effectively invested in operations with a greater potential return. These costs consisted of $48,000 in severance costs for 9 team members, $75,000 for the write-down of machinery and equipment to its estimated net realizable value from its future sale, $100,000 of inventory reserves related to product not transferred to other locations within the Company, $50,000 in additional reserves for accounts receivable deemed uncollectable, and $102,000 of other exit costs, including lease termination costs. The reserves for inventory and accounts receivable have been included as components of cost of goods sold and operating expenses, respectively, in the accompanying consolidated statement of operations for the year ended August 29, 1999. During fiscal 2001, excess provision of $52,000 was reversed and was included in current restructuring charges on the Company's consolidated statement of operations. As of August 26, 2001, none of the 9 team members originally identified for termination remained at the facility, and the restructuring plan was substantially complete, except for unbilled professional fees associated with the legal liquidation of the entity. GREECE In June 1998, the Company initiated a plan to close its sole distribution facility in Greece and recorded a charge to operations of $694,000. Management elected to close the operations in Greece following a series of under-performing quarters, at which time management determined that the Company's resources, both financial and managerial, would be more effectively invested in F-19 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) operations with a greater potential return. This charge included severance costs for 14 team members aggregating $79,000, write-off of goodwill of $333,000, additional reserves for uncollectable accounts receivable of $178,000 and other exit costs of $104,000 including lease disposal costs and legal fees directly related to the closure of the Greek operations. The charge related to the additional reserves for uncollectable accounts receivable was included in operating expenses for the year ended August 30, 1998. In the opinion of management, these additional reserves for uncollectable accounts receivable were a direct result of its decision to close these operations (and its communication of the closure) since, with the closure, the Company forfeited the collection leverage inherent in the customers need for future products from the Company. In consultation with its attorneys, the Company determined in many cases that the cost of collection would significantly exceed any expected return. This situation was one of the material factors in the Company's determination to close the business and was supported by a specific analysis of each customer prior to and following the disclosure of the closing. During fiscal 1999, a restructuring charge of $129,000 was recorded primarily for additional exit costs. The Company also recorded an additional reserve of $50,000 for uncollectable accounts receivable which was included in operating expenses in the accompanying consolidated statement of operations for the year ended August 29, 1999. After consultation with the Company's attorneys, this amount was deemed necessary for accounts that were previously estimated to be collectable. As of August 26, 2001, none of the original 14 team members remained at the facility. The Company, through its local counsel, is finalizing the legal liquidation of its Greek operations. The Company estimates that the restructuring plan will be completed prior to the end of fiscal 2002. The remaining accrual primarily relates to estimated legal costs necessary to complete the exit. UNITED STATES In June 1998, the Company initiated a plan to close duplicate facilities in the U.S., and recorded a charge to operations of $276,000 related to these closures, primarily consisting of $234,000 for the severance and other termination benefits of 17 team members. These facilities were operated by the Company, but, as a result of acquisitions made in 1998, were deemed to be duplicative and thus management made the decision for closure. During fiscal 1999, the Company incurred additional restructuring charges of $117,000 of other exit costs related to its fiscal 1998 U.S. restructuring plan. As of August 26, 2001, the Company's closure of its duplicate facilities in the United States was complete. None of the 17 team members originally identified for termination remained at the facility. The unused balance of $29,000 of the remaining restructuring provision was reversed during fiscal 2000 and reflected as a decrease of the restructuring charges incurred during fiscal 2000. UNITED KINGDOM - PLASTIC MOULDING MANUFACTURING OPERATIONS In June 1998, the Company initiated a plan to close its plastic moulding manufacturing operations located in the United Kingdom and recorded a charge to operations of approximately $1,800,000. The plan to close the operations in the United Kingdom was adopted as it was not able to achieve acceptable operating results; therefore, the Company made a decision to focus its energies and resources, both financial and managerial, on the more profitable custom picture framing market. This charge included $45,000 for the write-down of one of its facilities, which was owned, to estimated net realizable value from the future sale of the building, $230,000 related to severance and other termination benefits for 59 team members terminated in connection with this plan, $465,000 of lease termination and exit costs, and $730,000 for the write-off of non-current assets. The $465,000 of lease termination and exit costs represented Albecca's estimated future obligations under the existing lease commitments of the closed leased facility net of estimated recoverable costs through subleasing. The write-off of non-current assets is related primarily to machinery and equipment used in the manufacturing of plastic moulding which was dismantled and was not sold nor used by the Company due to direct competitive pressures of plastic moulding on traditional moulding lines. This charge also included additional reserves for uncollectable accounts receivable of $330,000, which were included in operating expenses in the accompanying consolidated statement of operations for the year ended August 30, 1998. In the opinion of management, these additional reserves for uncollectable accounts receivable were a direct result of its decision to close these operations (and its communication of the closure), since, with the closure, the Company forfeited the collection leverage inherent in the customers need for future products from the Company. The determination of the uncollectable accounts receivable was based on a customer by customer review by management after communicating its closure decision to each of these customers. F-20 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) As of August 26, 2001, none of the original 59 team members remained with respect to the closure of the Company's plastic moulding manufacturing operations in the United Kingdom and all material events associated with the restructuring plan had been completed. The unused balance of $25,000 of the remaining restructuring provision was reversed during fiscal 2000 and reflected as a decrease of the restructuring charges incurred during fiscal 2000. SUMMARY OF RESTRUCTURING PLANS At August 26, 2001, $562,000 of restructuring charges remained in accrued liabilities representing severance and other termination costs of $165,000 and lease termination and other exit costs of $397,000. A summary of the restructuring activity from each plan's adoption through August 26, 2001 consists of the following:

~~Long~~Severance ~~Term~~Lease ~~Annual~~Write-down ~~Compensation~~of ~~Compensation~~and other termination property and termination and other CLOSURE OF UNITED KINGDOM - NORTHAMPTON: equipment benefits exit costs Total ------------- ----------- -----------~~---------------~~ ------------ ~~Securities~~2000 ~~Other~~Provision ~~Annual~~$ ~~Underlying~~499,000 ~~All Other Name and Principal Position Year Salary(~~$) ~~Bonus~~298,000 ($) ~~Compensation~~618,000 ($) ~~Options/SARs~~1,415,000 ~~Compensation~~Non-cash ~~($)~~499,000 -- -- 499,000 ---------- ----------- -- ---- ----- ---- ------- Cash -- 298,000 618,000 916,000 Fiscal 2000 cash activity -- (116,000) (84,000) (200,000) ---------- ---- ------- ----- ------ ----------- ~~Craig~~Balance A.as ~~Ponzio, Chairman~~ of ~~2000~~August ~~680~~27,~~000~~ ~~(1)~~2000 -- ~~- 326~~182,~~250~~000 ~~(2) the Board~~534, ~~President and 1999 680,~~000 ~~-- 450~~716,000 ~~(3)~~Fiscal -2001 -cash ~~Chief~~activity ~~Executive Officer 1998 680,000~~ -- ~~419~~(150,000 (4) ~~- 950~~(374,000 (5) ~~William P. Trimarco~~(524, ~~2000 205,~~000 (1) - ~~34,062~~ - ~~President, International 34,062 (6) 1999 245,000 585,000~~ - - - ~~1998 240,000 220,000~~ - ~~34,062~~ - ~~Randall D. Fretz (4) 2000 188,600 (1)~~ - ~~120,000~~ - ~~President, North America 1999 162,000 62,500 24,000~~ - - ~~Stephen E. McKenzie, 2000 184,300 (1)~~ - ~~35,000~~ - ~~Senior Vice President, 30,000 (6) Marketing 1999 159,000 62,500 100,000 30,000~~ - ~~1998 117,000 55,000~~ - - ----- ~~R. Bradley Goodson, 2000 142,300 (1)~~ ----------- ~~35,000~~ ----------- ~~Vice~~Balance ~~President,~~as ~~Finance~~of ~~and~~August 2526,~~000~~ ~~(6)~~2001 ~~Chief~~$ ~~Financial~~-- ~~Officer~~$ ~~1999 135~~32,~~200 25,~~000 -$ 25160,000 -$ ~~1998 113~~192,000 ~~42,000~~========== -=========== -=========== -===========

~~Potential~~Severance ~~Realizable~~Write-down ~~Value~~of Atand ~~Assumed~~other ~~Annual~~property ~~Rate~~and Oftermination ~~Stock~~Other ~~Price~~CLOSURE ~~Appreciation~~OF ~~Individual~~SWEDEN ~~Grants~~DUPLICATE ~~For~~FACILITY: ~~Option~~equipment ~~Term~~benefits ~~(1)~~exit costs Total ------------- ----------- ----------- ----------- 1999 Provision $ 700,000 $ 275,000 $ 45,000 $ 1,020,000 Non-cash 700,000 -- -- 700,000 ---------- ------------- ----------- ----------- ~~Number~~Cash of-- ~~Securities~~275,000 ~~Percent~~45,000 of320,000 ~~Total~~Fiscal ~~Underlying~~1999 ~~Options/Sars~~cash ~~Granted~~activity ~~Exercise~~-- ~~Options/SARs To Employees In or Base Price Expiration Name Granted~~ (#125,000) ~~Fiscal Year~~ (230,000) (~~$/Sh~~155,000) ~~Date 5%($) 10%($)~~ ---------- --------- -- ----------- ------- ---- Balance as of August 29, 1999 -- 150,000 15,000 165,000 Fiscal 2000 cash activity -- (150,000) (15,000) (165,000) ------------ ------------- ----------- -------- ---~~-----~~ ~~William~~Balance P.as ~~Trimarco~~of ~~34,062~~August ~~5.2 7.00 (3) $217~~27,~~316~~ ~~$336,533~~2000 ~~34,062 (4) (5) 5.2 5.80 (3)~~ $~~258,190~~ ~~$377,407~~-- ~~Randall D. Fretz 84,000 12.9 7.00 (6)~~ $~~272,880~~ ~~$398,880~~-- ~~36,000 5.5 5.80 (6)~~ $~~535,920~~ ~~$829,920~~-- ~~Stephen E. McKenzie 35,000 5.4 7.00 (3)~~ $~~223,300~~ ~~$345,800~~-- ~~30,000~~========== ~~(4)~~=========== ~~4.6~~=========== ~~5.80 (3) $227,400 $332,400 R. Bradley Goodson 30,000 4.6 7.00 (3) $191,400 $296,400 5,000 0.8 5.80 (3) $37,900 $55,400 25,000 (4) 3.8 5.80 (3) $189,500 $277,000~~===========

~~Number~~Severance OfWrite-down ~~Securities~~of ~~Underlying~~and ~~Unexercised~~other ~~Value~~property Ofand ~~Unexercised~~termination InOther CLOSURE OF OPERATIONS IN NEW ZEALAND: equipment benefits exit costs Total -~~The~~-~~Money~~----------- ~~Options/SARs~~----------- At---------- ~~Fiscal~~---------- ~~Year~~1999 Provision $ 75,000 $48,000 $102,000 $ 225,000 Non-~~End~~cash ~~Options/SARs~~75,000 At-- -- 75,000 -------- ------- -------- --------- Cash -- 48,000 102,000 150,000 Fiscal ~~Year~~1999 cash activity -~~End~~- ~~Name~~(30,000) (#75,000) ~~Exercisable/Unexercisable~~ ($105,000) ~~Exercisable/Unexercisable~~ ---- ---- ------- -------- --------- Balance as of August 29, 1999 -- 18,000 27,000 45,000 Fiscal 2000 cash activity -- (3,000) (3,000) (6,000) -------- ------- -------- --------- ~~William~~Balance P.as ~~Trimarco~~of ~~0/68,124~~August ~~0/277~~27,~~946~~ ~~Randall~~2000 D.-- ~~Fretz~~15,000 ~~0/120~~24,000 ~~0/460~~39,~~800~~000 ~~Stephen~~2001 E.reversal ~~McKenzie~~of ~~0/65~~excess provision -- (15,000) ~~0/262~~(14,~~200~~000) R.(29,000) ~~Bradley~~-------- ~~Goodson~~------- ~~0/60~~-------- --------- Balance as of August 26, 2001 $ -- $ -- $ 10,000 ~~0/244~~$ 10,~~800~~000 ======== ======= ======== =========

F-21 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

~~SHARES~~Severance ~~OWNED~~and ~~TOTAL~~other ~~CLASS~~Write-off Aof ~~CLASS~~termination BOther ~~VOTING~~CLOSURE ~~COMMON~~OF ~~STOCK~~OPERATIONS ~~COMMON~~IN ~~STOCK~~GREECE: ~~POWER~~goodwill ~~NUMBER~~benefits ~~PERCENT~~exit ~~NUMBER~~costs ~~PERCENT~~Total ~~PERCENT~~------------ ----------- ----------- ------------ 1998 Provision $333,000 $79,000 $104,000 $516,000 Non-cash 333,000 -- -- 333,000 ---------- ---------- ~~Craig~~----------- A.----------- ~~Ponzio.......................~~Cash ~~204~~-- 79,000 ~~54.5%~~104,000 16183,~~626~~000 Fiscal 1998 cash activity -- -- -- -- ---------- ---------- ----------- ----------- Balance as of August 30, 1998 -- 79,000 ~~100%~~104,000 ~~99.9%~~183,000 ~~June~~1999 R.provision ~~Ponzio........................~~-- ~~204~~-- 129,000 ~~54.5%~~129,000 16Fiscal 1999 cash activity -- (70,~~626~~000) (129,000) ~~100%~~(199,000) ~~99.~~---------- ---------- ----------- ----------- Balance as of August 29, 1999 -- 9%,000 ~~All~~104,000 ~~executive~~113,000 ~~officers~~Fiscal ~~and~~2000 ~~directors~~cash asactivity a-- ~~Group~~-- (74,000) ~~persons~~(4,000)~~................~~ ~~374~~---------- ---------- ----------- ----------- Balance as of August 27, 2000 -- 9,000 100%,000 16109,~~626~~000 Fiscal 2001 cash activity -- (9,000) ~~100%~~(6,000) ~~100%~~(15,000) ---------- ---------- ----------- ----------- Balance as of August 26, 2001 $ -- $ -- $ 94,000 $ 94,000 ========== ========== =========== ===========

~~BALANCE~~Severance ATand ~~CHARGED~~other TOCLOSURE ~~BALANCE~~OF ~~BEGINNING~~U.S. ~~COSTS~~DUPLICATE ~~AND~~FACILITIES: ATtermination ~~END~~benefits OFOther ~~YEAR~~exit ~~EXPENSES~~costs DEDUCTIONS*Total OTHER**-------------------- OF---------------- ~~YEAR~~----------- ~~For~~1998 ~~the~~Provision ~~fiscal~~$ ~~year~~234,000 ~~ended:~~$ ~~August~~42,000 30$ 276,000 ~~1998:~~Non-cash ~~Allowance~~-- ~~for~~-- ~~doubtful~~-- ~~accounts~~----------- $5----------- ----------- Cash 234,~~378~~000 42,000 $3276,~~756~~000 Fiscal 1998 cash activity -- (42,000) $3(42,~~444~~000) ----------- ----------- ----------- Balance as of August 30, 1998 234,000 $-- ~~169~~234,000 $51999 provision -- 117,~~859~~000 117,000 ~~August~~Fiscal 291999 cash activity (145,000) ~~1999:~~(108,000) ~~Allowance~~(253,000) ~~for~~----------- ~~doubtful~~----------- ~~accounts~~----------- $5Balance as of August 29,~~859~~ 1999 89,000 $19,~~643~~000 98,000 $22000 provision (54,~~329~~000) 54,000 $-- 17Fiscal 2000 cash activity (15,000) $5(54,~~190,~~000) ~~August 27~~(69,000) 2000: ~~Allowance~~reversal ~~for~~of ~~doubtful~~excess ~~accounts~~provision $5(20,~~190,~~000) $2(9,~~045,~~000) $1(29,~~952,~~000) ----------- ----------- ----------- Balance as of August 27, 2000 $ -- $~~5,283,000~~ -- $ -- =========== =========== ===========

~~Signatures~~Severance ~~Title~~Write-down ~~Date~~of and other Lease CLOSURE OF THE UNITED KINGDOM PLASTIC MOULDING property and termination termination and MANUFACTURING OPERATIONS: equipment benefits other exit costs Total ------------- ----------- ---------------- ~~/s/~~----------- ~~Craig~~1998 A.Provision ~~Ponzio....................Chairman~~$ of775,000 ~~the~~$ ~~Board~~230,000 ~~President~~$ ~~November~~465,000 27$ 1,470,000 ~~2000~~Non-cash 775,000 -- -- 775,000 ---------- ----------- ~~Craig~~----------- A.----------- ~~Ponzio~~Cash ~~and~~-- ~~Chief~~230,000 ~~Executive~~465,000 ~~Officer~~695,000 ~~(principal~~Fiscal ~~executive~~1998 ~~officer)~~cash ~~/s/R.~~activity ~~Bradley~~-- ~~Goodson..................Chief~~(216,000) ~~Financial~~-- ~~Officer November 27~~(216,000) ~~2000~~---------- ----------- ----------- R.----------- ~~Bradley~~Balance ~~Goodson~~as ~~(principal~~of ~~financial~~August ~~and~~30, ~~accounting~~1998 ~~officer)~~-- ~~/s/~~14,000 ~~June~~465,000 R.479,000 ~~Ponzio....................~~Fiscal ~~Director~~1999 ~~November~~cash 27activity -- (14,000) ~~2000~~(440,000) (454,000) ---------- ----------- ~~June~~----------- R.----------- ~~Ponzio~~Balance ~~/s/~~as D.of ~~Garry~~August ~~Fehrman...................Director~~29, ~~November~~1999 27-- -- 25,000 25,000 2000 reversal of excess provision -- -- (25,000) (25,000) ---------- ----------- D.----------- ~~Garry~~----------- ~~Fehrman~~Balance as of August 27, 2000 $ -- $ -- $ -- $ -- ========== =========== =========== ===========

F-22 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DISPOSITION OF ERIJKO BELGIUM In August 2000, the Company sold its Erijko Belgium operations for cash proceeds of $23,000. This decision was based on management's decision to focus its energies and resources, both financial and managerial, on operations with a greater potential for return. In the opinion of management, the disposition of Erijko Belgium will not have a material impact on the future operations or financial position of the Company. No material gain or loss was recorded as a result of this sale. DISPOSITION OF BRIO In June 2000, the Company sold its Brio operations, located in France, which is a manufacturer and supplier of readymade frames and framing supplies to large "Do-It-Yourself" stores in Europe. This decision was based on management's decision to focus its energies and resources, both financial and managerial, on the European custom picture framing market. The transaction was concluded on May 31, 2000, resulting in cash proceeds of $13,979,000. The Company recorded a net gain on the sale of the Brio operations of $3,927,000. The sales agreement required Brio to maintain a minimum level of working capital through the closing date as supported by a closing balance sheet audit. As such, the preliminary estimated gain is subject to adjustment pending the final results of the audit. In addition, the sale agreement requires the Company to repurchase any receivables and inventory on hand at the date of sale which remain uncollected or unsold six and twelve months, respectively, after the closing date of the transaction. As of August 26, 2001, the net working capital, inventory and receivable issues related to the disposition of Brio have not been resolved. Management expects a final agreement to be reached by the end of the second quarter of fiscal 2002. The Company believes it has adequately reserved for this contingency. Brio's nine-month sales and operating income for fiscal 2000 were approximately $16,141,000 and $863,000, respectively. In the opinion of management, the disposition of Brio will not have a material impact on the future operations or financial position of the Company. DISPOSITION OF MERSCH ENTITIES In January 2000, Albecca made a decision to dispose of its investment in its Mersch entities, a manufacturer and supplier of readymade frames to large European discount stores, located in Germany and France. This decision was based on management's continued initiative to focus its energies and resources, both financial and managerial, on the European custom picture framing market. On January 31, 2000, Albecca finalized the sale of its Mersch entities for cash proceeds of $16,278,000. Approximately $12,459,000 of the proceeds was used to repay long-term liabilities retained by the Company. The loss on the disposition of the Mersch entities was $2,972,000. In addition, the sale agreements required the Mersch entities to maintain a minimum level of working capital through the closing date as supported by a closing balance sheet audit, which has not yet been agreed to by the respective parties. The Company recorded its best estimate of the net working capital shortfall, based upon preliminary results of the closing balance sheet audit, as part of the total $2,972,000 loss on the sale. Management expects a final agreement on the net working capital issue to be reached by the end of the second quarter of fiscal 2002. The Mersch entities' five month sales and operating income for fiscal 2000 were $10,046,000 and $42,000, respectively. In the opinion of management, the disposition of the Mersch entities will not have a material impact on the future operations or financial position of the Company. SALE OF OPERATIONS IN SOUTH AFRICA In July 1999, Albecca sold its investment in its operations in South Africa for cash of $164,000 and a non-interest bearing note of $493,000 due in three equal annual payments concluding in fiscal 2002. Management determined that its resources, both financial and managerial, would be more effectively invested in operations with a greater potential return. The loss on the sale of the operations in South Africa was approximately $4,136,000. The eleven-month sales and operating income for fiscal 1999 related to the South Africa operations were approximately $8,758,000 and $401,000, respectively. In the opinion of management, the sale of the South African operations will not have a material impact on the future operations or financial position of the Company. F-23 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Revenue and net operating results from the activities that will not be continued are not significant to the overall operations of the Company. 12. INFREQUENT ITEMS DEFERRED COMPENSATION During fiscal 2000, the Company finalized certain employee bonuses related to fiscal 1999. Accordingly, the Company decreased its estimate of accrued bonuses to the amount actually paid. As a result, the Company reversed previously provided reserves recorded during fiscal 1999 of $.5 million. These amounts were reflected as a reduction of operating expenses in the Company's fiscal 2000 consolidated statement of operations. EMPLOYER BENEFIT PLAN In January 2000, the Company replaced it self-funded medical employer benefit plan with a similar plan that was fully insured by third party insurers. In May 2000, the Company settled open obligations under the terminated plan in a favorable manner. As a result, during fiscal 2000, $.7 million was reversed relating to previously provided reserves recorded in prior periods. This amount was reflected as a reduction of operating expenses in the Company's fiscal 2000 consolidated statement of operations. IMPAIRMENT OF GOODWILL In October 1997, the Company acquired Robert F. deCastro, Inc. ("deCastro") a distributor of products in the pre-framed art and custom framing markets. Subsequent to the acquisition, the demand in the markets for the deCastro product line dramatically decreased or ceased. As a result, in 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 fiscal 2000, the Company adjusted the carrying value of deCastro's unamortized goodwill to its estimated fair value of $192,000, resulting in a non-cash impairment charge of $4,997,000. The estimated fair value of goodwill was based on anticipated future cash flows discounted at a rate commensurate with the risk involved. 13. GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS These condensed consolidating financial statements reflect Albecca 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. F-24 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

F-25 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

F-26 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (IN THOUSANDS)

F-27 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (IN THOUSANDS)

F-28 ALBECCA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS - (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (IN THOUSANDS)

F-29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In August 2001, Mr. Ponzio stepped down from his position as President and Chief Executive Officer of Albecca. Mr. Stephen McKenzie, formerly Senior Vice President of Marketing, was promoted to the positions of President and Chief Executive Officer. Mr. Ponzio will continue in his role as Chairman of Albecca and as a member of the design team. In November 2001, Mr. Randall Fretz resigned his position as President, U.S., which he had held since January 1999. The executive managers previously reporting to Mr. Fretz will report to Mr. McKenzie. The following table sets forth the names, ages and principal positions of Albecca's executive officers and directors:

Craig A. Ponzio has served as Albecca's Chairman of the Board and as a director since 1981. Mr. Ponzio had served as Albecca's President and Chief Executive Officer from 1981 to August 2001. He has been actively involved with Albecca since 1973 and acquired the Company in 1981. Mr. Ponzio oversees the development and execution of the Company's overall strategy and is also involved in the design process for the Company's products. June R. Ponzio has served as Albecca's Vice Chairman of the Board and a Director since May 1998. She served as Corporate Secretary from October 1993 until May 1998. Mrs. Ponzio joined Albecca in 1992. D. Garry Fehrman has served as a Director since May 1999. Mr. Fehrman is retired. He previously served as President, Chief Executive Officer and Chairman of the Board of Atlantech International, Atlanta, Georgia, from 1983 to 2001. Prior to Atlantech International, Mr. Fehrman held various executive positions at Gulf Canada Limited and Ontario Hydro. Stephen E. McKenzie was named Albecca's President and Chief Executive Officer in August 2001. Mr. McKenzie had served as Albecca's Senior Vice President, Marketing since September 1998 and from September 1995 served as its Vice President, Marketing. Mr. McKenzie joined Albecca in 1991. William P. Trimarco has served as Albecca's President, International since January 1999. Mr. Trimarco had served as Albecca's President, U.S. Operations from July 1997 to December 1998, and as its Senior Vice President, U.S. Operations from 1995 to 1997. Mr. Trimarco joined Albecca in 1982. R. Bradley Goodson has served as Albecca's Senior Vice President, Finance since August 2001; as Vice President, Finance, Chief Financial Officer and Treasurer since May 2000, and as Secretary since May 1998. He previously held the positions of Vice President Finance, International and Vice President, Business Development. Mr. Goodson joined Albecca in 1994 and was employed by Arthur Andersen LLP from 1983 to 1994. 18 Craig Ponzio and June Ponzio are married. There are no other family relationships among Albecca's directors and executive officers. BOARD OF DIRECTORS The Bylaws provide that the size of the Board of Directors shall be determined by the Board of Directors or by the shareholders of Albecca. The size of the Board of Directors is currently fixed at three members, two of whom are members of Albecca's management. Directors of Albecca are generally elected at the annual meeting of shareholders, and are elected or appointed to serve until they resign or are removed, or until their successors are elected and have qualified. Directors who are also members of management are not separately compensated as Directors. Mr. Fehrman's annual compensation is $16,000 per year plus additional compensation for meetings in excess of four per year. During fiscal 2001, Mr. Fehrman received $26,000. Expenses incurred for attendance at board meetings are also reimbursed. In November 2000, Mr. Fehrman was granted 1,000 options on Albecca Inc.'s Class A common stock under the Larson-Juhl 1998 Stock Option Plan. ITEM 11. EXECUTIVE COMPENSATION The following table summarizes the compensation paid or accrued for services rendered to Albecca by Albecca's Chief Executive Officer and the four most highly compensated other executive officers (or former officers) whose total annual salary and bonus exceeded $100,000 during the year ended August 26, 2001. SUMMARY COMPENSATION TABLE

--------------- (1) The amount of bonus earned for the fiscal year ended August 26, 2001 has not been allocated or fully allocated to the individual through the date hereof. (2) This amount represents interest accrued on the value of the deferred compensation balance due this individual that was incurred during fiscal 2001. Of this amount, $173,368 was paid during fiscal 2001; the remaining balance is accrued but not yet paid. (3) This amount represents interest accrued on the value of the deferred compensation balance due this individual during fiscal 2000 and paid during fiscal 2001. (4) Represents amounts accrued in prior years, the payment terms of which were amended during fiscal 2000, such that this amount will be paid through fiscal 2009. (5) Represents shares subject to options granted in a previous fiscal year, the exercise price of which was repriced in fiscal 2000. SEC regulations require the Company to disclose the number of shares subject to previously granted options and repriced in a fiscal year as if new options for such number of shares were granted in such fiscal year. 19 (6) In November 2001 Mr. Fretz resigned his position as President, U.S., and as of that date is no longer employed by the Company. AGGREGATED OPTION/STOCK APPRECIATION RIGHT EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION/STOCK APPRECIATION RIGHT VALUES

(1) Due to Mr. Fretz's resignation from the Company in November 2001, these SAR's have been forfeited. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Craig A. Ponzio is the sole member of the Compensation Committee of the Company's Board of Directors. Mr. Ponzio is the Chairman of the Board of Albecca and was its President and Chief Executive Officer until August 2001. Albecca leases its corporate headquarters in Norcross, Georgia from L-J Properties Inc., a company owned 80% by Mr. Ponzio. The lease commenced in August 1991 and terminates in August 2009. Albecca currently pays L-J Properties $768,000 per year in rent, with certain annual increases determined by a formula set forth therein. Albecca believes that the lease with L-J Properties is on terms at least as favorable to Albecca as those obtainable from unaffiliated third parties. In August 2001, the Company purchased the Evergreen, Colorado design center building from Mr. Ponzio for $800,000. Albecca believes the purchase price represented the fair market value of the property at the date of sale. Prior to the purchase, the Company leased this facility from Mr. Ponzio at an annual rental rate of approximately $50,000 per year from January 2000 to the purchase date. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The authorized capital stock of Albecca consists of 250,000,000 shares of Class A Common Stock, $0.01 par value per share, 100,000,000 shares of Class B Common Stock, $0.01 par value per share, and 50,000,000 shares of preferred stock, $0.01 par value per share. The following table sets forth certain information regarding the beneficial ownership of Albecca's two classes of common stock as of the date of this report with respect to each person who owns beneficially more than 5% of the common stock and all executive officers and directors of Albecca as a group. Except as otherwise indicated, the persons or entities listed below have sole voting and investment power with respect to such shares. Each share of Class B Common Stock is convertible at the option of the holder into one share of Class A Common Stock. The number of shares of Class A Common Stock and percentages contained under this heading do not account for these conversion rights. Holders of Class A Common Stock are entitled to one vote per share. Holders of Class B Common Stock are entitled to 10 votes per share.

The address for Craig A. Ponzio and June R. Ponzio is 3900 Steve Reynolds Boulevard, Norcross, Georgia 30093. All shares of common stock attributable to Mrs. Ponzio are owned of record by her husband, Mr. Ponzio. Mrs. Ponzio disclaims beneficial ownership of such shares. 20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Albecca leases its corporate headquarters in Norcross, Georgia from L-J Properties Inc., a company owned 80% by Mr. Ponzio and 10% by each of Messrs. Trimarco, and McKenzie. The lease commenced in August 1991 and terminates in August 2009. Albecca currently pays L-J Properties $768,000 per year in rent, with certain annual increases determined by a formula set forth therein. Albecca believes that the lease with L-J Properties is on terms at least as favorable to Albecca as those obtainable from unaffiliated third parties. In August 2001, the Company purchased the Evergreen, Colorado design center building from Mr. Ponzio for $800,000. Albecca believes the purchase price represented the fair market value of the property at the date of sale. Prior to the purchase, the Company leased this facility from Mr. Ponzio at an annual rental rate of approximately $50,000 per year from January 2000 to the purchase date. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K a. 1. Financial Statements included in Part II of this report: Consolidated Balance Sheets as of August 27, 2000 and August 26, 2001. Consolidated Statements of Operations for each of the three years ended August 29, 1999, August 27, 2000 and August 26, 2001. Consolidated Statements of Shareholder's Deficit for each of the three years ended August 29, 1999, August 27, 2000 and August 26, 2001. Consolidated Statements of Cash Flows for each of the three years ended August 29, 1999, August 27, 2000 and August 26, 2001. 2. Financial Statement Schedules included in this report: Schedule II - Valuation and Qualifying Accounts. 3. Exhibits:

b. Reports on Form 8-K: None 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To Albecca Inc.: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of ALBECCA INC. (a Georgia corporation) included therein and have issued our report thereon dated October 19, 2001. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. This schedule is the responsibility of Albecca's management and presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Atlanta, Georgia October 19, 2001 23 SCHEDULE II ALBECCA VALUATION AND QUALIFYING ACCOUNTS

---------- * Principally charges for which reserves were provided, net of recoveries. ** Acquired through acquisition of businesses. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized. Albecca Inc. November 26, 2001 By: /s/ Stephen E. McKenzie ------------------------------ ---------------------------------------- Date Stephen E. McKenzie President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen E. McKenzie his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report (Form 10-K) and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchanges Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

25 EXHIBIT INDEX

c. Reports on Form 8-K: None 26

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