<PAGE> 1
===============================================================================
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 August 3, 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 August 26, 1996, 11,941,506 shares of the registrant's Class A common
stock were outstanding.
===============================================================================
<PAGE> 2
COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED AUGUST 3, 1996
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 3, 1996 and
February 3, 1996.......................................... 1
Consolidated Statements of Income for the 13 weeks ended
August 3, 1996 and July 29, 1995 and the 26 weeks ended
August 3, 1996 and July 29, 1995.......................... 2
Consolidated Statements of Cash Flows for the 26 weeks
ended August 3, 1996 and July 29, 1995 ................... 3
Notes to Financial Statements............................. 4 - 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 6 - 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....... 8
Item 6. Exhibits and Reports on Form 8-K.......................... 8
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
August 3, February 3,
Assets 1996 1996
- ------ -------- -----------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 46,088 $ 29,260
Accounts receivable 18,964 18,589
Inventories 84,164 84,794
Prepaid expenses and other 6,154 5,892
Deferred income tax benefits 10,675 10,675
--------- ---------
Total current assets 166,045 149,210
Property and equipment, at cost 162,828 157,050
Less-accumulated depreciation and
amortization (94,601) (90,909)
--------- ---------
Total property and equipment, net 68,227 66,141
Other assets 7,277 5,070
Cost in excess of net assets of purchased
businesses, net 80,178 81,163
--------- ---------
Total assets $ 321,727 $ 301,584
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 794 $ 705
Accounts payable 25,238 29,273
Accrued interest 6,413 7,050
Accrued liabilities 61,544 53,933
Accrued income taxes 5,810 5,976
--------- ---------
Total current liabilities 99,799 96,937
Long-term debt, net of discount 167,193 181,903
Deferred income taxes and other 5,561 5,611
Stockholders' equity:
Common stock 12 10
Paid-in capital 126,348 99,827
Notes receivable - stock option exercise (1,074) (1,117)
Accumulated deficit (76,112) (81,587)
--------- ---------
Total stockholders' equity 49,174 17,133
--------- ---------
Total liabilities and stockholders'
equity $ 321,727 $ 301,584
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-1-
<PAGE> 4
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
------------------------- --------------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ 153,465 $138,099 $ 296,355 $263,353
Costs and expenses:
Cost of goods sold 47,400 43,341 91,900 82,065
Operating expenses 87,799 78,865 175,151 156,333
Depreciation and amortization 4,294 3,851 8,529 7,678
--------- -------- --------- --------
Total costs and expenses 139,493 126,057 275,580 246,076
--------- -------- --------- --------
Income from operations 13,972 12,042 20,775 17,277
Interest expense, net 4,729 5,316 9,781 10,600
--------- -------- --------- --------
Income before income taxes
and extraordinary item 9,243 6,726 10,994 6,677
Income tax provision 4,066 2,960 4,837 2,938
--------- -------- --------- --------
Income before extraordinary item 5,177 3,766 6,157 3,739
Extraordinary loss on early
extinguishment of debt (682) -- (682) --
--------- -------- --------- --------
Net income $ 4,495 $ 3,766 $ 5,475 $ 3,739
========= ======== ========= ========
Income per common share:
Income before extraordinary item $ .47 $ .36 $ .57 $ .36
Extraordinary loss (.06) -- (.06) --
--------- -------- --------- --------
Net income $ .41 $ .36 $ .51 $ .36
========= ======== ========= ========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
-2-
<PAGE> 5
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
-----------------------
August 3, July 29,
1996 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,475 $ 3,739
Adjustments to reconcile net income
to net cash provided by operations:
Extraordinary loss on early extinguishment of debt 682 --
Depreciation and amortization 8,529 7,678
Non-cash interest expense 214 203
Change in assets and liabilities:
Increase in accounts receivable,
prepaid expenses and other assets (790) (5,101)
Decrease in inventories 630 7,597
Increase (decrease) in accounts payable
and accrued liabilities 3,237 (4,518)
Decrease in accrued interest (637) (20)
Increase (decrease) in accrued income taxes 327 (914)
-------- --------
Net cash provided by operating activities 17,667 8,664
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (16,457) --
Repayment of stock option notes receivable 93 --
Proceeds from public offering, net 26,202 --
Proceeds from exercise of stock options 271 29
-------- --------
Net cash provided by financing activities 10,109 29
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (9,650) (8,495)
Acquisition of business -- (800)
Other, net (1,298) (990)
-------- --------
Net cash used by investing activities (10,948) (10,285)
-------- --------
Cash and temporary cash investments:
Net increase (decrease) during the period 16,828 (1,592)
Balance, beginning of the period 29,260 19,730
-------- --------
Balance, end of the period $ 46,088 $ 18,138
======== ========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
-3-
<PAGE> 6
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 August 3, 1996 and the
results of operations for the 13 and 26 weeks ended August 3, 1996 and July 29,
1995, and cash flows for the 26 weeks ended August 3, 1996 and July 29, 1995.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at August 3, 1996 and July
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 $4,556,000 and $11,073,000, respectively, for the 26 weeks
ended August 3, 1996, and $3,852,000 and $10,759,000, respectively, for the 26
weeks ended July 29, 1995.
Earnings Per Share
Earnings per share for the 13 weeks ended August 3, 1996 and July 29, 1995
have been calculated based on 11,002,262 and 10,408,642, respectively, weighted
average number of common shares outstanding.
Earnings per share for the 26 weeks ended August 3, 1996 and July 29, 1995
have been calculated based on 10,718,843 and 10,406,880, respectively, weighted
average number of common shares outstanding.
(2) PUBLIC OFFERING
During the quarter ended August 3, 1996, the Company completed a public
offering of 1,437,500 shares of Class A Common Stock, par value $.001, at a
price of $19.25 per share. The total net proceeds from the offering were $26.2
million. A portion of the proceeds was used to purchase $15.1 million of the
Company's 11.25% CNG Notes, plus accrued interest thereon. The Company recorded
an extraordinary loss of $0.7 million, net of an income tax benefit of $0.5
million, representing the payment of premiums, the write-off of unamortized
discount and other costs associated with purchasing the debt.
(3) 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.
-4-
<PAGE> 7
4) 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.
-5-
<PAGE> 8
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 and 26 week periods ended August
3, 1996 and July 29, 1995 (the Company's second quarter and first six months,
respectively) 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 second quarter of fiscal 1996 increased 11.1% to
$153.5 million from $138.1 million for the same period last year. Net sales for
the first six months of fiscal 1996 increased 12.5% to $296.4 million from
$263.4 million for the same period a year ago. The increases in consolidated
sales for the second quarter and first six months of fiscal 1996 were due to
comparable store sales increases of 8.2% and 7.9%, respectively, and to the
opening of additional Cole Gift and Cole Vision units. Comparable store sales
increased primarily as a result of successful eyewear promotions and growth in
the managed vision care program at Cole Vision, along with the roll-out of
monogrammed softgoods and introduction of new merchandise at Cole Gift. At
August 3, 1996, the Company operated 2,321 specialty service retail units
compared to 2,287 at July 29, 1995.
Gross profit increased to $106.1 million in the second quarter of
fiscal 1996 from $94.8 million for the same period last year. Second quarter
gross margins in fiscal 1996 and fiscal 1995 were 69.1% and 68.6%, respectively.
For the first six months, gross profit increased to $204.5 million in fiscal
1996 from $181.3 million for the same period a year ago. Gross margins for the
first six months in fiscal 1996 and fiscal 1995 were 69.0% and 68.8%,
respectively. The increases in gross margin percentages were the result of lower
product costs and a higher level of personalization in the sales mix at Things
Remembered.
Operating expenses increased 11.3% to $87.8 million in the second
quarter of fiscal 1996 from $78.9 million for the second quarter last year. For
the first six months of fiscal 1996, operating expenses increased 12.0% to
$175.2 million from $156.3 million for the same period in fiscal 1995. Operating
expense increases for both periods compared to last year were primarily due to
higher advertising expenditures, payroll costs and store occupancy expenses.
Advertising expenditures at Cole Vision were increased for optical promotions to
encourage continued sales growth above last year's successful promotions.
Payroll costs increased because of more retail units open in 1996 and additional
payroll to support increased sales. Store occupancy expenses increased primarily
as a result of more retail units, higher percentage rents caused by increased
comparable store sales and the increased number of Things Remembered
personalization superstores. Fiscal 1996 depreciation and amortization expense
of $4.3 million in the second quarter and $8.5 million in the first six months
was $0.4 and $0.9 million more, respectively, than the same periods in fiscal
1995 reflecting an increase in capital expenditures beginning in the latter part
of fiscal 1993.
Income from operations increased 16.0% in the second quarter of fiscal
1996 to $14.0 million and increased 20.2% to $20.8 million in the first six
months primarily because of strong sales at Cole Vision and Things Remembered.
Net interest expense decreased $0.6 million to $4.7 million in the
second quarter of fiscal 1996 and decreased $0.8 million to $9.8 million in the
first six months. The decrease for both the quarter and the six months was
primarily due to the retirement of $5.0 million of Senior Notes in November
1995, the purchase of $15.1 million of Senior Notes in the second quarter of
fiscal 1996, the elimination of working capital borrowings and increased
interest income from an increase in temporary cash investments.
-6-
<PAGE> 9
Income tax provisions were recorded in the second quarter and first six
months of fiscal 1996 and fiscal 1995 using the Company's estimated annual
effective tax rate of 44%.
Net income for the second quarter increased to $4.5 million in 1996
from $3.8 million for the second quarter of 1995. For the first six months of
fiscal 1996, net income increased to $5.5 million from $3.7 million for that
same period last year. For both the second quarter and first six months of
fiscal 1996, increases were due to the improvement in income from operations and
the decrease in net interest expense. A $0.7 million extraordinary loss, net of
an income tax benefit of $0.5 million, was recorded in the second quarter of
fiscal 1996 in connection with the early extinguishment of debt, representing
the payment of premiums, the writeoff of unamortized discount and other costs
associated with purchasing the debt. See Liquidity and Capital Resources.
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. 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 six months of
fiscal 1996. The maximum amount outstanding during the first six months of
fiscal 1995 was $3.5 million.
During the second quarter of fiscal 1996, the Company completed a
public offering of 1,437,500 shares of its Class A Common Stock at an offering
price of $19.25 per share. The net proceeds from the offering were $26.2
million. A portion of the net proceeds was used to purchase in the open market
$15.1 million of the Company's 11.25% Senior Notes plus accrued interest
thereon. This will result in a reduction of interest expense of $1.7 million
annually.
Operations for the first six months provided cash of $17.7 million in
fiscal 1996 compared to $8.7 million provided in 1995. The increase in cash
provided by operations resulted from an increase in net income and favorable
changes in accounts receivable, prepaid expenses, accounts payable and accrued
liabilities. These favorable changes were partially offset by unfavorable
changes in inventory in fiscal 1996 as compared to fiscal 1995.
Cash used by investing activities included net capital additions of
$9.7 million and $8.5 million for the first six months of fiscal 1996 and fiscal
1995, respectively. The majority of the 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.
-7-
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On June 6, 1996, the Company held its annual meeting of stockholders.
At that meeting, the stockholders elected six directors to serve until the next
annual meeting of a stockholders, approved the 1996 Management Stock Option
Plan, approved the Management Incentive Bonus Program, and confirmed the
appointment of Arthur Andersen LLP as independent auditors of the Company for
the fiscal year ending February 1, 1997.
Of the total eligible votes of 10,443,220, stockholders cast votes of
9,506,079 or 91.0%, of the total eligible votes. The votes cast for the
aforementioned matters were as follows:
1) Election of Directors
<TABLE>
<CAPTION>
For Withheld Abstain
--------- -------- -------
<S> <C> <C> <C>
Jeffrey A. Cole 9,168,697 337,382 0
Timothy F. Finley 9,182,597 323,482 0
Irwin W. Gold 9,178,597 327,482 0
Peter V. Handal 9,182,597 323,482 0
Charles A. Ratner 9,171,197 334,882 0
Brian B. Smith 9,171,697 334,382 0
2) 1996 Management Stock Option Plan
For Withheld Abstain
--------- -------- -------
Approval of Plan 6,345,502 1,483,632 131,449
3) Management Incentive Bonus Program
For Withheld Abstain
--------- -------- -------
Approval of Program 8,859,174 642,068 4,837
4) Confirmation of Independent Auditors
For Withheld Abstain
--------- -------- -------
Arthur Andersen LLP 9,499,624 3,190 3,265
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibit is 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 August 3, 1996.
-8-
<PAGE> 11
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: September 13, 1996
-9-
<PAGE> 12
COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED AUGUST 3, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Pagination By
Sequence
Exhibit Numbering
Number Description System
- ------- ----------- -------------
<S> <C> <C>
27 Financial Data Schedule 11
</TABLE>
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATE-
MENT 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> 6-MOS
<FISCAL-YEAR-END> FEB-1-1997
<PERIOD-START> FEB-4-1996
<PERIOD-END> AUG-3-1996
<CASH> 46,088
<SECURITIES> 0
<RECEIVABLES> 18,964
<ALLOWANCES> 0
<INVENTORY> 84,164
<CURRENT-ASSETS> 166,045
<PP&E> 162,828
<DEPRECIATION> 94,601
<TOTAL-ASSETS> 321,727
<CURRENT-LIABILITIES> 99,799
<BONDS> 167,193
<COMMON> 12
0
0
<OTHER-SE> 49,162
<TOTAL-LIABILITY-AND-EQUITY> 321,727
<SALES> 296,355
<TOTAL-REVENUES> 296,355
<CGS> 91,900
<TOTAL-COSTS> 275,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,781
<INCOME-PRETAX> 10,994
<INCOME-TAX> 4,837
<INCOME-CONTINUING> 6,157
<DISCONTINUED> 0
<EXTRAORDINARY> (682)
<CHANGES> 0
<NET-INCOME> 5,475
<EPS-PRIMARY> .51
<EPS-DILUTED> 0
</TABLE>
