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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- - - --- Act of 1934
For the quarterly period ended May 4, 1996, or
Transition report pursuant to Section 13 or 15(d) of the Securities
- - - --- Exchange Act of 1934
For the transition period from ________ to ________.
Commission file number 1-12814
COLE NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 34-1453189
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
5915 Landerbrook Drive
Mayfield Heights, Ohio 44124
(Address of principal executive offices) (Zip code)
(216) 449-4100
(Registrant's telephone number, including area code)
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 was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X YES NO
--- ---
As of May 28, 1996, 10,490,356 shares of the registrant's Class A common stock
were outstanding.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MAY 4, 1996
INDEX
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<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of May 4, 1996 and
February 3, 1996................................................... 1
Consolidated Statements of Income for the 13 weeks ended
May 4, 1996 and April 29, 1995..................................... 2
Consolidated Statements of Cash Flows for the 13 weeks
ended May 4, 1996 and April 29, 1995............................... 3
Notes to Financial Statements...................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 5 - 6
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 7
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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<CAPTION>
May 4, February 3,
Assets 1996 1996
- - - ------ --------- ---------
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Current assets:
Cash and temporary cash investments $ 12,626 $ 29,260
Accounts receivable 21,289 18,589
Inventories 88,404 84,794
Prepaid expenses and other 5,057 5,892
Deferred income tax benefits 10,675 10,675
--------- ---------
Total current assets 138,051 149,210
Property and equipment, at cost 158,411 157,050
Less-accumulated depreciation and
amortization (92,212) (90,909)
--------- ---------
Total property and equipment, net 66,199 66,141
Other assets 5,551 5,070
Cost in excess of net assets of purchased
businesses, net 80,871 81,163
--------- ---------
Total assets $ 290,672 $ 301,584
========= =========
Liabilities and Stockholders' Equity
- - - ------------------------------------
Current liabilities:
Current portion of long-term debt $ 712 $ 705
Accounts payable 22,493 29,273
Accrued interest 1,943 7,050
Accrued liabilities 57,192 53,933
Accrued income taxes 2,698 5,976
--------- ---------
Total current liabilities 85,038 96,937
Long-term debt, net of discount 181,860 181,903
Deferred income taxes and other 5,579 5,611
Stockholders' equity:
Common stock 10 10
Paid-in capital 99,942 99,827
Notes receivable - stock option exercise (1,150) (1,117)
Accumulated deficit (80,607) (81,587)
--------- ---------
Total stockholders' equity 18,195 17,133
--------- ---------
Total liabilities and stockholders'
equity $ 290,672 $ 301,584
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------
May 4, April 29,
1996 1995
-------- ---------
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Net sales $142,890 $ 125,254
Costs and expenses:
Cost of goods sold 44,500 38,724
Operating expenses 87,352 77,468
Depreciation and amortization 4,235 3,827
-------- ---------
Total costs and expenses 136,087 120,019
-------- ---------
Income from operations 6,803 5,235
Interest expense, net 5,052 5,284
-------- ---------
Income (loss) before income taxes 1,751 (49)
Income tax provision (benefit) 771 (22)
-------- ---------
Net income (loss) $ 980 $ (27)
======== =========
Earnings per share $ .09 $ .00
======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------
May 4, April 29,
1996 1995
-------- --------
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Cash flows from operating activities:
Net income (loss) $ 980 $ (27)
Adjustments to reconcile net income
(loss) to net cash used by operations:
Depreciation and amortization 4,235 3,827
Non-cash interest expense 106 100
Change in assets and liabilities:
Increase in accounts receivable,
prepaid expenses and other assets (2,079) (4,073)
Decrease (increase) in inventories (3,610) 908
Increase (decrease) in accounts payable
and accrued liabilities (3,842) 1,602
Decrease in accrued interest (5,107) (5,243)
Decrease in accrued income taxes (3,278) (3,207)
-------- --------
Net cash used by operating activities (12,595) (6,113)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (221) --
Proceeds from exercise of stock options 82 --
-------- --------
Net cash used by financing activities (139) --
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (3,406) (4,584)
Other, net (494) (844)
-------- --------
Net cash used by investing activities (3,900) (5,428)
-------- --------
Cash and temporary cash investments:
Net decrease during the period (16,634) (11,541)
Balance, beginning of the period 29,260 19,730
-------- --------
Balance, end of the period $ 12,626 $ 8,189
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Cole
National Corporation (CNC), its wholly owned subsidiaries, including Cole
National Group, Inc. (CNG), and CNG's wholly owned subsidiaries (collectively,
the "Company"). All significant intercompany transactions have been eliminated
in consolidation.
The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures herein are adequate to make the information not
misleading. These statements should be read in conjunction with the Company's
consolidated financial statements for the fiscal year ended February 3, 1996.
In the opinion of management, the accompanying financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's financial position as of May 4, 1996 and the
results of operations and cash flows for the 13 weeks ended May 4, 1996 and
April 29, 1995.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at May 4, 1996 and April 29,
1995 were valued at the lower of first-in, first-out (FIFO) cost or market.
Cash Flows
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $4,095,000 and $10,323,000, respectively, for the 13 weeks
ended May 4, 1996, and $3,186,000 and $10,627,000, respectively, for the 13
weeks ended April 29, 1995.
Earnings Per Share
Earnings per share for the 13 weeks ended May 4, 1996 and April 29, 1995
have been calculated based on 10,435,423 and 10,405,119, respectively, weighted
average number of common shares outstanding.
(2) ASSET IMPAIRMENT
During the first quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of". Adoption of SFAS
No. 121 had no material impact on the Company's results of operations, financial
position or cash flows.
(3) SEASONALITY
The Company's business is seasonal with approximately 30% of its sales and
approximately 50% of its income from operations generated in the fourth fiscal
quarter, which contains the important Christmas retailing season. Therefore,
earnings or losses for a particular interim period are not necessarily
indicative of full year results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of certain factors affecting the
Company's results of operations for the 13 week periods ended May 4, 1996 and
April 29, 1995 (the Company's first quarter) and its liquidity and capital
resources. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this filing and the
Company's audited financial statements for the fiscal year ended February 3,
1996 included in its annual report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
For example, the fiscal year ended February 3, 1996 is referred to as "fiscal
1995."
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1996 increased 14.1% to
$142.9 million from $125.3 million for the same period of fiscal 1995. The
increase in sales was due to a comparable store sales increase of 7.6%, the
opening of additional Cole Gift and Cole Vision units and a shift in the
Company's fiscal calendar. Comparable store sales increased primarily as a
result of strong sales at Cole Vision due to successful eyewear promotions and
growth in the managed vision care program, along with the roll-out of
monogrammed softgoods and introduction of new merchandise at Cole Gift. At May
4, 1996, the Company operated 2,308 specialty service retail units compared to
2,249 at April 29, 1995. Also, sales increased approximately $3.5 million as
Cole Gift benefited from a week of Mother's Day sales that were shifted into
the quarter this year.
Gross profit increased to $98.4 million in the first 13 weeks of fiscal
1996 from $86.5 million for the same period a year ago. First quarter gross
margins in fiscal 1996 and fiscal 1995 were 68.9% and 69.1%, respectively. The
decrease of 0.2% in the first quarter gross margin percentage was due to
clearance sales in connection with the closing of 85 low volume Cole Gift Center
departments at host stores during the first quarter of fiscal 1996 that more
than offset other improvements in gross margin.
Operating expenses increased 12.8% to $87.4 million in the first
quarter of fiscal 1996 from $77.5 million for the first quarter last year due
primarily to higher payroll costs, store occupancy expenses and advertising
expenditures. Payroll costs increased because of more retail units open in 1996
and additional payroll to support the increased sales. Store occupancy expenses
increased primarily as a result of higher percentage rents caused by increased
comparable store sales, more retail units open in 1996 and the increased number
of Things Remembered personalization superstores. Advertising expenditures for
the optical promotions were increased to encourage continued sales growth above
last year's successful promotions. Depreciation and amortization expense of $4.2
million in fiscal 1996 was $0.4 million more than fiscal 1995 reflecting an
increase in capital expenditures beginning in the latter part of fiscal 1993.
Income from operations increased 30.0% or $1.6 million to $6.8 million
in the first quarter of fiscal 1996 primarily because of strong sales at Cole
Vision and the reduction of operating expenses as a percentage of sales, due in
part to the performance of Cole Gift which benefited from the aforementioned
shift in Mother's Day sales.
Net interest expense decreased $0.2 million to $5.1 million in the
first quarter of fiscal 1996 primarily because of the retirement of $5.0 million
of Senior Notes in November 1995, the elimination of working capital borrowings
and increased interest income from an increase in temporary cash investments.
An income tax provision or benefit was recorded in the first quarter of
both fiscal 1996 and fiscal 1995 using the Company's estimated annual effective
tax rate of 44%.
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Net income increased to $1.0 million for the first quarter of fiscal
1996 from approximately break-even for the first quarter of fiscal 1995. The
increase was due to the improvement in income from operations and the decrease
in net interest expense.
The Company's business is seasonal with approximately 30% of its sales
and approximately 50% of its income from operations occurring in the fourth
fiscal quarter because of the importance of gift sales during the Christmas
retailing season. Therefore, results of operations for interim periods are not
necessarily indicative of full year results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is funds provided from
operations of its operating subsidiaries. In addition, the Company's operating
subsidiaries have available to them working capital commitments of $50.0 million
under the Revolving Credit Facility, reduced by commitments under letters of
credit.
There were no working capital borrowings during the first quarter of
fiscal 1996. The maximum amount outstanding during the first quarter of fiscal
1995 was $3.5 million.
Operations for the first quarter used cash of $12.6 million in fiscal
1996 compared to $6.1 million of cash usage in fiscal 1995. The increase in cash
used by operations resulted primarily from the timing of inventory
disbursements.
Cash used by investing activities included capital additions of $3.4
million and $4.6 million for the 13 weeks of fiscal 1996 and fiscal 1995,
respectively. The majority of capital additions were for store fixtures,
equipment and leasehold improvements for new stores and the remodeling of
existing stores.
The Company believes that funds provided from operations along with
funds available under the Revolving Credit Facility will provide adequate
sources of liquidity to allow the Company's operating subsidiaries to continue
to expand the number of stores.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly
period ended May 4, 1996.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLE NATIONAL CORPORATION
By: /s/ Wayne L. Mosley
--------------------------------------
Wayne L. Mosley
Vice President and Controller
(Duly Authorized Officer and Principal
Accounting Officer)
Date: June 12, 1996
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COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED MAY 4, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Pagination By
Sequence
Exhibit Numbering
Number Description System
- - - ------- ----------- -------------
<S> <C> <C>
27 Financial Data Schedule 10
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-03-1996
<PERIOD-END> MAY-04-1996
<CASH> 12,626
<SECURITIES> 0
<RECEIVABLES> 21,289
<ALLOWANCES> 0
<INVENTORY> 88,404
<CURRENT-ASSETS> 138,051
<PP&E> 158,411
<DEPRECIATION> 92,212
<TOTAL-ASSETS> 290,672
<CURRENT-LIABILITIES> 85,038
<BONDS> 181,860
<COMMON> 10
0
0
<OTHER-SE> 18,185
<TOTAL-LIABILITY-AND-EQUITY> 290,672
<SALES> 142,890
<TOTAL-REVENUES> 142,890
<CGS> 44,500
<TOTAL-COSTS> 136,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,052
<INCOME-PRETAX> 1,751
<INCOME-TAX> 771
<INCOME-CONTINUING> 980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 980
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
