<PAGE> 1
Filed Pursuant To Rule 424(b)(4)
Registration No. 333-5875
1,250,000 SHARES
[LOGO] COLE NATIONAL CORPORATION
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, par value $.001 per share,
offered hereby are being offered by Cole National Corporation, a Delaware
corporation (the "Company"). The Class A Common Stock ("Common Stock") is the
only class of common stock outstanding and each share of Common Stock is
entitled to one vote per share. The shares of Common Stock offered hereby are
listed on the New York Stock Exchange under the symbol "CNJ." On June 26, 1996,
the last reported sale price of the Common Stock on the New York Stock Exchange
Composite Tape was $20.125 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THE PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES
OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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Per Share............................... $19.25 $.90 $18.35
- -------------------------------------------------------------------------------------------
Total(3)................................ $24,062,500 $1,125,000 $22,937,500
===========================================================================================
<FN>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Does not include expenses payable by the Company estimated at $175,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 187,500 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$27,671,875, $1,293,750 and $26,378,125, respectively. See "Underwriting."
</TABLE>
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The shares of Common Stock are offered by the Underwriters, subject to
receipt and acceptance of the shares by them. The Underwriters reserve the right
to reject any order in whole or in part. It is expected that delivery of the
shares of Common Stock will be made against payment therefor at the offices of
McDonald & Company Securities, Inc. or through the facilities of the Depository
Trust Company on or about July 1, 1996.
<TABLE>
<S> <C>
MCDONALD & COMPANY SMITH BARNEY INC.
SECURITIES, INC.
</TABLE>
The date of this Prospectus is June 26, 1996.
<PAGE> 2
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Such reports, proxy statements and other information can
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at Seven World Trade Center 13th Floor, New York, New
York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may be obtained at prescribed rates by writing the SEC,
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. The
SEC maintains a Web site, located at http://www.sec.gov., that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the SEC.
The Company has filed with the SEC a registration statement (the
"Registration Statement," which term shall include any amendments thereto) on
Form S-3 under the Securities Act of 1933 (the "Securities Act"), with respect
to the shares of Common Stock offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which are omitted in accordance with the
rules and regulations of the SEC, and to which reference is hereby made. For
further information, reference is hereby made to the Registration Statement and
the exhibits and schedules thereto.
Unless the context otherwise requires, references herein to the "Company"
include the Company and its direct and indirect subsidiaries.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the SEC
pursuant to the Exchange Act are incorporated by reference in this Prospectus
and shall be deemed to be a part hereof:
1. The Company's Annual Report on Form 10-K for the year ended
February 3, 1996 (File No. 1-12814).
2. The description of the Company's Common Stock set forth in the
Company's Registration Statement on Form 8-A filed February 14, 1994, as
amended April 6, 1994.
3. The description of the Company's Stockholders' Rights Plan set
forth in the Company's Registration Statement on Form 8-A filed September
7, 1995.
4. The Company's Quarterly Report on Form 10-Q for the quarterly
period ended May 4, 1996 (File No. 1-12814).
All documents filed by the Company with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the termination of the Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from their respective dates
of filing. Any statement contained herein or in any document incorporated or
deemed to be incorporated shall be deemed to be modified or superseded for all
purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any subsequently filed document which also is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Certain of the documents incorporated by reference contain forward-looking
statements. All forward-looking statements involve risk and uncertainty. Actual
results may be materially affected by a variety of factors, some of which may be
beyond the control of the Company. See "Risk Factors."
THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON WRITTEN OR ORAL REQUEST
OF SUCH PERSON, A COPY OF ANY AND ALL OF THE INFORMATION THAT HAS BEEN
INCORPORATED BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS TO THE
INFORMATION THAT ARE INCORPORATED BY REFERENCE UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS
INCORPORATES). REQUESTS SHOULD BE DIRECTED TO JOHN F. DOWNIE, SECRETARY, COLE
NATIONAL CORPORATION, AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICES, 5915
LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124, TELEPHONE NUMBER (216)
449-4100. PERSONS REQUESTING COPIES OF EXHIBITS TO SUCH DOCUMENTS THAT WERE NOT
SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS WILL BE CHARGED THE
COSTS OF REPRODUCTION AND MAILING.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 3
SUMMARY
THE COMPANY
Cole National Corporation (the "Company") is a leading national specialty
service retailer operating over 2,300 retail locations in 49 states. The
Company's businesses are conducted through two operating units, Cole Vision
Corporation ("Cole Vision") and Cole Gift. The Company differentiates itself
from other specialty retailers by providing value-added services at the point of
sale at all of its retail locations. The Company seeks to ensure a high level of
customer satisfaction by offering a "total satisfaction" guaranty on all its
products and services.
COLE VISION
Cole Vision, which generated approximately 53% of the Company's net sales
in the year ended February 3, 1996 ("fiscal 1995"), is the largest retailer of
eyewear products and optometric services in the United States in terms of number
of locations. As of May 4, 1996, Cole Vision operated 1,022 locations, including
957 leased locations within Sears, Montgomery Ward and other host stores and 63
freestanding stores operated under the name "Sears Optical." Cole Vision also
offers comprehensive eyecare benefits to major employers and health care
providers through its managed vision care program. Cole Vision's product line
includes a broad selection of prescription eyeglasses, contact lenses and
accessories at all of its locations. In 944 Cole Vision locations, a doctor of
optometry provides eye examination services on the premises. Cole Vision strives
to provide its customers with exceptional patient care and value by combining
the personal service typically associated with a private doctor of optometry
with the broad product selection and cost benefits of a large optical chain.
Each of Cole Vision's optical departments is computer linked to Cole Vision's
five centralized manufacturing laboratories, enabling it to provide next day
delivery on most eyewear when requested by its customers. Cole Vision believes
that its central processing laboratories enable it to manufacture products of a
more consistent quality, at a lower per unit cost and with lower capital and
inventory investments, than optical superstores that utilize in-store
laboratories.
COLE GIFT
Cole Gift, which generated approximately 47% of the Company's net sales in
fiscal 1995, is comprised of personalization gift stores, operated by Things
Remembered, Inc. ("Things Remembered") and Cole Gift Centers, Inc. ("CGC"),
offering "while you shop" gift engraving, key duplicating, glass etching and
monogramming, as well as related merchandise. As of May 4, 1996, Things
Remembered operated 782 retail locations in enclosed shopping malls, while CGC
operated 504 leased locations in Sears and other host stores. Cole Gift offers a
successful combination of retail and service formats that no other company is
employing on a national scale. Things Remembered and CGC each offers a wide
assortment of engravable gift items, including Cross and Parker writing
instruments and clocks by Bulova and Seiko, at prices generally ranging from $10
to $75. Cole Gift achieves operational efficiencies and reduces costs through a
computerized carousel system at its central distribution facility and computer
engravers at many of its stores.
OPERATING RESULTS
The Company has operated each of its specialty service retailing businesses
for over 25 years. Over this period, the Company has refined its retailing
formats to produce a strong record of growing sales and operating income. In
fiscal 1995, comparable store sales increased 3.4% and operating income rose
7.0% over prior year levels. During the first quarter ended May 4, 1996,
comparable store sales increased 7.6% and operating income rose 30.0% over the
same period in fiscal 1995. Since 1983, combined sales of Cole Vision and Cole
Gift grew at a compound annual rate of 8.8%, reaching $577.1 million in fiscal
1995. During the same period, operating income grew at a compound annual rate of
13.4%, to $46.0 million in fiscal 1995. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 1,250,000 shares(1)
Common Stock to be outstanding after the Offering... 11,747,227 shares (2)
NYSE symbol......................................... CNJ
<FN>
(1) Does not include up to 187,500 shares of Common Stock to be sold if the
Underwriters' over-allotment option granted by the Company is exercised in
full. See "Underwriting."
(2) Excludes 1,343,404 shares issuable upon the exercise of stock options and
173,675 shares issuable upon exercise of warrants held by various investors
outstanding as of June 10, 1996.
</TABLE>
3
<PAGE> 4
USE OF PROCEEDS
The Company intends to use the net proceeds from the Offering for general
corporate purposes which may include repurchasing 11.25% Senior Notes due 2001
(the "CNG Notes") issued by Cole National Group, Inc., a wholly owned subsidiary
of the Company ("CNG"), or financing acquisitions as they may arise. To the
extent the Company repurchases CNG Notes at a premium, such repurchases would
result in a charge to earnings which, if material, would be accounted for as an
extraordinary charge to earnings.
SELECTED FINANCIAL DATA
Set forth below are selected financial data of the Company for fiscal years
1991 through 1995 which have been derived from the Company's audited
consolidated financial statements for those years. Also set forth below are
selected summary financial data of the Company for the 13 weeks ended April 29,
1995 and May 4, 1996, which have been derived from unaudited financial
statements for those periods. 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." Fiscal 1995 consisted of a 53-week period; all
other fiscal years presented consisted of 52-week periods. The information
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
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FISCAL YEAR ENDED 13 WEEKS ENDED
---------------------------------------------------------------- ---------------------
FEB. 1, JAN. 30, JAN. 29, JAN. 28, FEB. 3, APRIL 29, MAY 4,
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ---------- ---------- ---------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales......................... $ 426,453 $ 428,066 $472,888 $528,049 $577,091 $125,254 $142,890
Gross profit...................... 305,582 304,012 331,936 363,326 394,157 86,530 98,390
Operating expenses................ 247,562 258,534 281,188 305,470 332,471 77,468 87,352
Depreciation and amortization..... 13,701 13,581 13,516 14,892 15,730 3,827 4,235
----------- ----------- ---------- ---------- ---------- --------- ---------
Income from operations............ 44,319 31,897 37,232 42,964 45,956 5,235 6,803
Interest expense, net............. 52,635 22,262 21,799 23,216 21,388 5,284 5,052
Income tax provision (benefit).... 3,073 4,165 2,361 (4,909) 10,810 (22) 771
----------- ----------- ---------- ---------- ---------- --------- ---------
Income (loss) from continuing
operations...................... $ (11,389) $ 5,470 $ 13,072 $ 24,657 $ 13,758 $ (27) $ 980
========== ========== ========== ========== ========== ======== ========
Earnings per share (a)............ $ 1.09 $ 2.47 $ 2.62 $ 1.32 $ .00 $ .09
Weighted average shares
outstanding (000's) (a)......... 5,004 5,283 9,395 10,415 10,405 10,435
Supplementary earnings
per share (a)................... $ .55 $ 1.28 $ 2.47 $ 1.32 $ .00 $ .09
NUMBER OF UNITS (AT END OF PERIOD):
Things Remembered................. 697 717 737 760 778 759 782
CGC............................... 598 594 586 589 587 587 504
Cole Vision....................... 751 769 774 938 1,013 903 1,022
----------- ----------- ---------- ---------- ---------- --------- ---------
Total....................... 2,046 2,080 2,097 2,287 2,378 2,249 2,308
========== ========== ========== ========== ========== ======== ========
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets...................... $ 237,302 $ 225,861 $257,944 $283,319 $301,584 $276,498 $290,672
Long-term debt(b)................. 513,388 255,610 238,299 184,388 181,903 184,442 181,860
Stockholders' equity (deficit).... (420,150) (123,957) (75,070) 3,306 17,133 3,279 18,195
<FN>
(a) Earnings per share and weighted average shares outstanding for fiscal 1991
have been omitted due to the significant effects of an exchange of debt for
equity and related modifications of debt and conversions of equity
securities that occurred in 1992. Supplementary earnings per share have been
calculated as if the public offering in fiscal 1993 of CNG Notes and the
initial public offering in fiscal 1994 of the Common Stock ("IPO") had
occurred on February 2, 1992. See the consolidated financial statements and
notes thereto included elsewhere in this Prospectus.
(b) Includes redeemable preferred stock in fiscal 1991.
</TABLE>
4
<PAGE> 5
RISK FACTORS
Prospective investors in the Common Stock should consider carefully the
following factors, in addition to the other information contained in this
Prospectus, prior to making an investment in the Common Stock.
LEVERAGE
The Company owns its operating businesses through CNG, a wholly owned
subsidiary. Although the Company itself has no outstanding indebtedness (other
than capital leases), CNG remains highly leveraged and its debt service
requirements will be substantial. As of May 4, 1996, the Company had
consolidated long-term debt of $181.9 million and stockholders' equity of $18.2
million.
The Company currently expects that CNG and its subsidiaries will be able to
service the principal obligations on their indebtedness out of cash flow from
operations. Excluding $0.5 million of indebtedness outstanding under Industrial
Revenue Bonds and $0.8 million of capital lease obligations, the remainder of
CNG's long-term debt does not require any principal payments until October 1,
2001. The ability of CNG and its subsidiaries to satisfy their obligations will
be primarily dependent upon the future financial and operating performance of
the subsidiaries and upon the Company's and CNG's ability to renew or refinance
borrowings or to raise additional equity capital. Each of these alternatives is
dependent upon financial, business and other general economic factors affecting
the subsidiaries and the retailing business in particular, many of which are
beyond the control of the Company and its subsidiaries. If CNG and its
subsidiaries are unable to generate sufficient cash flow to meet their debt
service obligations, they will have to pursue one or more alternatives, such as
reducing or delaying capital expenditures, refinancing debt, or selling assets.
There can be no assurance that any such alternatives could be accomplished on
satisfactory terms. While the Company believes that cash flow from operations
along with funds available under the Revolving Credit Facility will provide
adequate sources of long-term liquidity, a significant drop in operating cash
flows resulting from economic conditions, competition or other uncertainties
beyond the Company's control would increase the need for refinancing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Upon the occurrence of a "change of control" of the Company, each holder of
the CNG Notes would have the right to require the repurchase of all or any part
of such holder's CNG Notes at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon. A "change of
control" would occur if a single purchaser or purchasers acting together as a
"group" (as defined under the Exchange Act) acquires (through individual market
purchases, negotiated transactions, this Offering or otherwise) 50% or more of
the total voting power of the voting stock of the Company on a fully diluted
basis. If such an event does occur, there can be no assurance that the Company
would have the ability to finance the repurchase of CNG Notes that are tendered
to it.
COMPETITION
The Company operates in highly competitive businesses. Cole Vision competes
with other optical companies and private optometrists and opticians. Cole Gift
competes generally with other retailers that sell gift items. Many of the
Company's competitors have greater financial resources than the Company.
SEASONALITY
The Company's business is seasonal with approximately 30% of the Company's
sales and approximately 50% of its operating earnings occurring in the fourth
fiscal quarter.
RELATIONSHIPS WITH HOST STORES
The CGC and Cole Vision locations are operated under the names of their
respective host stores under leases or licenses, from such host stores, that are
terminable upon 60-90 days' notice. The Company has enjoyed excellent
relationships with its major host stores for over 40 years and has never had a
lease terminated, other than in connection with a store closing, relocation or
major remodeling. Although the
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Company currently has an excellent relationship with its major host stores,
there can be no assurance that a major host store will not in the future
terminate its relationship with the Company, including the use of the host
store's name, in accordance with the terms and conditions of the lease or
license between such host store and the Company. There would be a material
adverse effect on the Company's financial position and results of operations if
a major host store were to terminate its relationship with the Company.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company currently intends to retain earnings to support its growth
strategy and does not anticipate paying dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including the
Company's financial condition, operating results, current and anticipated cash
needs and plans for expansion. The operations of the Company are and are
expected to be conducted through its direct and indirect subsidiaries. The
covenants in certain debt instruments to which CNG or its subsidiaries are a
party restrict the ability of CNG and its subsidiaries to make distributions to
the Company to enable the Company to pay dividends. The amount of dividends that
may be paid under each of these agreements is based in part on the operating
results of the Company's subsidiaries, and there can be no assurance as to the
amount or frequency of dividends that can be paid to the Company in future
years. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and
By-Laws and of the Delaware General Corporation Law could have the effect of
deterring hostile takeovers or delaying or preventing changes in control or
management of the Company. In addition, the Company has adopted a stockholders'
rights plan that includes certain provisions which could have similar
anti-takeover effects. Any one of, or a combination of, the above anti-takeover
provisions could discourage a third party from attempting to acquire control of
the Company.
SHARES ELIGIBLE FOR FUTURE SALE
The shares of Common Stock offered hereby will be freely transferable by
persons who are not affiliates of the Company without restriction or further
registration under the Securities Act. Virtually all of the Common Stock, other
than shares held by affiliates of the Company, are freely tradable. Shares of
Common Stock held by affiliates of the Company are subject to limitations on the
volume that may be sold other than sales pursuant to a registration statement
under the Securities Act or an applicable exemption from registration
thereunder, including sales pursuant to Rule 144 promulgated thereunder. The
Company and the executive officers and Directors of the Company have agreed
that, for a period of 120 days after the execution of the Underwriting
Agreement, they will not, without the prior written consent of McDonald &
Company Securities, Inc., offer, sell, contract to sell or otherwise dispose of
any unrestricted shares of Common Stock, other equity securities of the Company
or other securities convertible into or exercisable or exchangeable for any
shares of Common Stock or grant options to purchase any shares of Common Stock,
except in certain limited circumstances. The sale or issuance or the potential
for sale or issuance of such shares could have an adverse impact on the market
price of the Common Stock.
POSSIBLE VOLATILITY OF STOCK PRICE
The public offering price per share of Common Stock has been determined by
negotiations among the Company and representatives of the Underwriters based in
part on the trading price of the Common Stock on the New York Stock Exchange and
may not be indicative of the price at which the Common Stock will trade after
completion of the Offering. In addition, the stock market has from time to time
experienced extreme price and volume volatility. These fluctuations may be
unrelated to the operating performance of particular companies whose shares are
traded. Market fluctuations may adversely affect the market price of the Common
Stock. The market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors,
and there can be no assurance that the market
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<PAGE> 7
price of the Common Stock will not decline below the price at which the shares
of Common Stock are sold. See "Underwriting."
OTHER FACTORS AFFECTING FUTURE PERFORMANCE
The Company's future liquidity, financial condition and operating results
may be materially affected by a variety of factors, some of which may be beyond
the control of the Company, including the Company's ability to select and stock
merchandise attractive to customers, general economic cycles affecting consumer
spending, weather factors affecting retail operations, its quality controls in
optical manufacturing and engraving, operating factors affecting customer
satisfaction, the mix of goods sold, pricing and other competitive factors, and
the seasonality of the Company's businesses.
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<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following contains forward-looking statements. Forward-looking
statements are made based upon management's expectations and beliefs concerning
future events impacting the Company. All forward-looking statements involve risk
and uncertainty. Actual results may be materially affected by a variety of
factors, some of which may be beyond the control of the Company. See "Risk
Factors."
RESULTS OF OPERATIONS
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." Fiscal 1995 consisted of a 53-week period. Fiscal 1994 and fiscal 1993
consisted of 52-week periods. The following is a discussion of the results of
the Company's operations for the three fiscal years ended February 3, 1996 and
for the 13 week periods ended May 4, 1996 and April 29, 1995.
13 WEEKS ENDED MAY 4, 1996 COMPARED TO 13 WEEKS ENDED APRIL 29, 1995
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
CNG 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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<PAGE> 9
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.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased 9.3% to $577.1 million in fiscal 1995 from $528.0
million in fiscal 1994. The increase in consolidated sales was due to a
comparable store sales increase of 3.4%, sales for the 53rd week of
approximately $9.3 million and additional Things Remembered and Cole Vision
units open in fiscal 1995. Comparable store sales increased primarily as a
result of successful eyewear promotions and growth in the managed vision care
program at Cole Vision and expanded gift and softgoods merchandise at Things
Remembered locations. Fourth quarter comparable store sales were even with last
year as the retail industry in general experienced a very difficult Christmas
season and severe weather conditions in many major markets. At February 3, 1996,
the Company operated 2,378 specialty service retail locations versus 2,287 at
the end of the prior year. The net increase in retail units includes the
acquisition by Cole Vision on May 21, 1995, of 59 optical departments located in
BJ's Wholesale Club stores and the sale of the Company's 39 Sunspot fashion
sunglass kiosks as of April 29, 1995.
Gross profit increased to $394.2 million in fiscal 1995 from $363.3 million
in fiscal 1994. Gross margins for fiscal 1995 and fiscal 1994 were 68.3% and
68.8%, respectively. The decrease in gross margin percentage was primarily due
to an increase in the sales of lower margin optical products, including
disposable contact lenses, and a lower mix of higher margin merchandise,
primarily keys, at Cole Gift Centers. Gross margin in the fourth quarter of
fiscal 1995, however, improved to 67.1% from 66.9% in fiscal 1994, benefitting
from fiscal 1994 and 1995 investments aimed at increasing optical laboratory
capacity and production efficiency and from reduced material costs for
spectacles. The Company expects the fourth quarter gross margin trend to
continue into fiscal 1996.
Operating expenses increased 8.8% to $332.5 million in fiscal 1995 from
$305.5 million the prior year. As a percentage of sales, operating expenses
decreased to 57.6% in fiscal 1995 from 57.8% in fiscal 1994. Operating expenses
increased primarily because of higher payroll costs, store occupancy expenses
and advertising expense due, in part, to the 53rd week. The higher payroll costs
were also the result of more retail units in fiscal 1995 and additional payroll
to support the higher level of sales. Partially offsetting the payroll increases
were savings from outsourcing the Company's data processing operations in fiscal
1995. Store occupancy expense increased because of the increased number of
retail units and higher percentage rents due to increased comparable store
sales. Advertising costs increased primarily as a result of additional efforts
to support eyewear promotions. Also included in operating expenses in fiscal
1995 was a $0.2 million provision for the closing of approximately 90 low volume
leased key and gift departments in the first quarter of fiscal 1996. The
closings are expected to improve the Company's operating results during the
first nine months of the fiscal year. Fiscal 1995 depreciation and amortization
expense of $15.7 million was $0.8 million more than fiscal 1994 reflecting an
increase in capital expenditures that began in the latter part of fiscal 1993.
Income from operations increased 7.0% to $46.0 million in fiscal 1995 from
$43.0 million the prior year. The increase was primarily attributable to the
increased sales. The lower gross margin percentage was partially offset by
improved leveraging of operating expenses.
Net interest expense for fiscal 1995 of $21.4 million was $1.8 million less
than that of the prior year. This decrease was primarily due to retirement of
debt in connection with the Company's IPO on April 18, 1994 and the retirement
of $5.0 million of its CNG Notes in November 1995, along with higher interest
income. See "-- Liquidity and Capital Resources" below and Notes 2 and 3 of the
Notes to Consolidated Financial Statements for further discussion of the IPO and
the purchase of the notes.
9
<PAGE> 10
The income tax provision of $10.8 million for fiscal 1995 represents an
effective tax rate of 44.0%. This rate reflects the significant impact of
non-deductible amortization of goodwill. The income tax benefit of $4.9 million
in fiscal 1994 included the effects of utilizing all of the Company's net
operating loss carryforwards and the reversal of a valuation allowance on net
deferred tax assets in the fourth quarter. A more complete discussion of income
taxes is included in Note 7 of Notes to Consolidated Financial Statements.
Net income in fiscal 1994 of $23.7 million included a loss on early
extinguishment of debt of $0.9 million to reflect the payment of premiums, the
write-off of unamortized debt discount and other costs associated with retiring
the debt in connection with the IPO.
FISCAL 1994 COMPARED TO FISCAL 1993
Net sales increased 11.7% to $528.0 million in fiscal 1994 from $472.9
million in fiscal 1993. The increase in consolidated sales was due to a
comparable store sales increase of 5.5% and additional Things Remembered and
Cole Vision units opened in fiscal 1994. Comparable store sales increased
primarily as a result of successful eyeglass promotions and growth in managed
vision care sales at Cole Vision, which continued to take advantage of the
general improvement within the optical industry. Comparable store sales gains
from increased gift and greeting card sales at Cole Gift Center locations were
offset for the most part by soft fourth quarter sales at Things Remembered which
experienced the general sales weakness that affected many enclosed mall
retailers during the Christmas selling season. At January 28, 1995, the Company
operated 2,287 specialty service retail locations versus 2,097 at the end of the
prior year. The net increase in retail units includes the acquisition by Cole
Vision of 107 optical departments located in Montgomery Ward stores as of
January 30, 1994.
Gross profit increased to $363.3 million in fiscal 1994 from $331.9 million
in fiscal 1993. Gross margins for fiscal 1994 and fiscal 1993 were 68.8% and
70.2%, respectively. The decrease in gross margin percentage was primarily
attributable to Cole Vision as the optical promotions delivered lower average
retails and encouraged the sale of higher cost products, combined with an
increased mix of lower margin contact lenses.
Operating expenses increased 8.6% to $305.5 million in fiscal 1994 from
$281.2 million the prior year. As a percentage of sales, operating expenses
decreased to 57.8% in fiscal 1994 from 59.5% in fiscal 1993. Operating expenses
increased primarily due to higher payroll costs and store occupancy expenses
partially offset by a reduction in advertising expense. The higher payroll costs
were due to more retail units in fiscal 1994 and additional payroll to support
the higher level of sales, offset in part by lower benefits and incentive
compensation costs. Store occupancy expense increased because of the increased
number of retail units and higher percentage rents caused by increased
comparable store sales. Advertising expenditures were reduced this year
primarily because of a television advertising test at Things Remembered during
the prior year's Christmas retail season and advertising efficiencies at Cole
Vision. Fiscal 1994 depreciation and amortization expense of $14.9 million was
$1.4 million more than fiscal 1993 reflecting an increase in capital
expenditures beginning in the latter part of fiscal 1993 and the acquisition of
the Montgomery Ward optical departments.
Income from operations increased 15.4% to $43.0 million in fiscal 1994 from
$37.2 million the prior year. The increase was primarily attributable to the
increased comparable store sales. The lower gross margin percentage was more
than offset by improved leveraging of operating expenses which resulted from the
lower payroll costs and advertising expenditures as a percentage of sales.
Net interest expense for fiscal 1994 of $23.2 million was $1.4 million more
than that of the prior year. This increase was primarily a result of the higher
effective interest rates on outstanding debt following completion of the
offering of CNG Notes on September 30, 1993. Partially offsetting this was a
reduction in interest expense resulting from the early extinguishment of debt in
connection with the Company's IPO. See "-- Liquidity and Capital Resources"
below and Notes 2 and 3 of the Notes to Consolidated Financial Statements for
further discussion of the IPO and the CNG Note issuance.
The income tax benefit of $4.9 million in fiscal 1994 includes the effects
of utilizing all of the Company's net operating loss carryforwards and the
reversal of a valuation allowance on net deferred tax assets in the fourth
quarter. The income tax provision of $2.4 million for fiscal 1993 consisted of
only state income taxes.
10
<PAGE> 11
Net income in fiscal 1994 included a loss on early extinguishment of debt
of $0.9 million and, in fiscal 1993, included a gain on extinguishment of debt
of $35.8 million related to the issuance of the CNG Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is funds provided from operations
of its operating subsidiaries. In addition, CNG's principal operating
subsidiaries have available to them working capital commitments of $50.0 million
under a revolving credit facility with a group of lenders led by Fleet Capital
Corporation (the "Revolving Credit Facility"), reduced by commitments under
letters of credit. There were no working capital borrowings during the first
quarter of fiscal 1996 and the maximum amount outstanding during the first
quarter of fiscal 1995 was $3.5 million. There were no working capital
borrowings outstanding as of February 3, 1996 and the maximum amount outstanding
during fiscal 1995 and fiscal 1994 was $3.5 million and $13.0 million,
respectively. The Revolving Credit Facility contains covenants restricting the
ability of the Company's operating subsidiaries to, among other things, pay
dividends or make other restricted payments to CNG or the Company. The Revolving
Credit Facility permits CNG's subsidiaries to pay dividends to CNG to the extent
necessary to permit it to (i) pay all interest and principal on the CNG Notes
when due, (ii) satisfy its obligations under a tax allocation agreement and to
pay other tax payments, and (iii) meet other direct expenses, provided that the
amount distributed annually to CNG to satisfy such other direct expenses does
not exceed $15.0 million plus .25% of the net annual sales of the borrowers
under the Revolving Credit Facility.
At May 4, 1996, the Company had outstanding $180.9 million of CNG Notes.
The CNG Notes are unsecured and mature October 1, 2001 with no earlier scheduled
redemption or sinking fund payment. The CNG Notes bear interest at a rate of
11.25% per annum, payable semi-annually on each April 1 and October 1. The
indenture pursuant to which the CNG Notes were issued contains certain optional
and mandatory redemption features and other financial covenants, including
restrictions on the ability of CNG to pay dividends or make other restricted
payments to the Company. The indenture permits dividend payments to the Company
of one-half of CNG's consolidated net income, provided that no default or event
of default has occurred under the indenture and that CNG has met a specified
fixed charge coverage ratio test. The indenture also permits payments to the
Company for certain tax obligations and for administrative expenses of the
Company not to exceed .25% of net sales. See Note 3 of Notes to Consolidated
Financial Statements.
On April 18, 1994, the Company completed an initial public offering of five
million shares of its Common Stock at an initial offering price to the public of
$12.00 per share. The net proceeds of $54.5 million were used to extinguish all
$50.0 million of the Company's 13% Senior Notes and $4.0 million of the CNG
Notes.
On November 8, 1995, the Company purchased on the open market and retired
$5.0 million of the CNG Notes. This will result in a reduction of future
interest expense of $0.6 million annually.
The Company has no significant principal payment obligations under any of
its outstanding indebtedness until the CNG Notes mature in 2001. The ability of
the Company and its subsidiaries to satisfy that obligation will be primarily
dependent upon future financial and operating performance of the subsidiaries
and upon the Company's and CNG's ability to renew or refinance borrowings or to
raise additional equity capital.
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 balances at February 3, 1996 were $29.3 million compared to $19.7
million at January 28, 1995. Operations generated net cash of $36.5 million in
fiscal 1995, $15.6 million in fiscal 1994 and $33.3 million in fiscal 1993. The
$20.9 million increase in cash provided by operations in fiscal 1995 compared to
fiscal 1994 was primarily due to a $2.5 million reduction in inventory, despite
a 9.3% increase in sales, compared to an $8.7 million increase in inventory the
prior year. Also, income from operations in fiscal 1995 was higher by $3.0
million and interest expense was lower by $1.8 million than in fiscal 1994. The
$17.7 million decrease in cash provided from operations in fiscal 1994 compared
to fiscal 1993 was primarily the result of the following: a $5.7 million
increase in fiscal 1994 income from operations offset by a $4.9 million decrease
in noncash
11
<PAGE> 12
interest expense and a decrease in accrued liabilities in fiscal 1994 compared
to the substantial increase in accrued liabilities that occurred in fiscal 1993
(primarily accrued interest and incentive compensation).
Net capital additions were $3.4 million and $4.6 million for the 13 weeks
of fiscal 1996 and fiscal 1995, respectively, and were $19.8 million, $18.5
million and $13.1 million in fiscal 1995, 1994 and 1993, respectively. In
addition, the Company used $0.8 million for the purchase of the BJ's Wholesale
Club optical departments in fiscal 1995, $4.7 million for the purchase of the
Montgomery Ward optical departments in fiscal 1994 and $3.2 million for the
acquisition of a mail order contact lens business in fiscal 1993. The majority
of the capital additions were for store fixtures, equipment and leasehold
improvements for new stores and the remodeling of existing stores. During part
of fiscal 1993, the Company operated under restrictions on capital expenditures
imposed by its former bank credit agreements, which limited the Company's
ability to expand its operations. Without these limitations, the Company has
increased the level of capital expenditures. For the balance of fiscal 1996, the
Company expects to continue to expand the number of stores as well as remodel
and relocate stores. The Company currently estimates capital expenditures in
fiscal 1996 will exceed $20.0 million. The Company believes that funds provided
from operations along with funds available under the Revolving Credit Facility
will provide adequate sources of long-term liquidity to allow the Company's
operating subsidiaries to continue to expand the number of stores.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the Company's
directors and executive officers, who also hold comparable positions at CNG.
<TABLE>
<CAPTION>
YEARS OF SERVICE
NAME AGE WITH COMPANY POSITION
- ------------------ --- ---------------- ------------------------------------------
<S> <C> <C> <C>
Jeffrey A. Cole 55 27 Chairman, Chief Executive Officer,
Chief Financial Officer and Director
Brian B. Smith 43 14 President, Chief Operating Officer and
Director
Joseph Gaglioti 50 15 Vice President and Treasurer
Wayne L. Mosley 42 10 Vice President and Controller
Timothy F. Finley 52 4 Director
Irwin N. Gold 39 4 Director
Peter V. Handal 53 4 Director
Charles A. Ratner 54 1 Director
</TABLE>
12
<PAGE> 13
UNDERWRITING
In the Underwriting Agreement, the Underwriters, represented by McDonald &
Company Securities, Inc. and Smith Barney Inc. (the "Representatives"), have
agreed, severally, subject to the terms and conditions therein set forth, to
purchase from the Company, and the Company has agreed to sell to them, the
number of shares of Common Stock totalling 1,250,000 shares, set forth opposite
their respective names below. The Underwriters are committed to take and pay for
all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- -------------------------------------------------------------------------------- ---------
<S> <C>
McDonald & Company Securities, Inc.............................................. 370,000
Smith Barney Inc................................................................ 370,000
Alex. Brown & Sons Incorporated................................................. 60,000
Bear, Stearns & Co. Inc......................................................... 60,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................. 60,000
CIBC Wood Gundy Securities Corp................................................. 30,000
Cowen & Company................................................................. 30,000
Crowell, Weeden & Co............................................................ 30,000
J.C. Bradford & Co.............................................................. 30,000
Morgan Keegan & Company, Inc.................................................... 30,000
Piper Jaffray, Inc.............................................................. 30,000
Rauscher Pierce Refsnes, Inc.................................................... 30,000
Raymond James & Associates, Inc................................................. 30,000
Robert W. Baird & Co., Incorporated............................................. 30,000
Sutro & Co. Inc................................................................. 30,000
The Robinson-Humphrey Company, Inc.............................................. 30,000
---------
Total.................................................................... 1,250,000
==========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus. The Underwriters may allow
to certain selected dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") a discount not exceeding $.50 per share,
and the Underwriters may allow, and such selected dealers may re-allow, a
discount not exceeding $.10 per share to other dealers who are members of the
NASD. After this Offering, the public offering price and the discount to dealers
may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 187,500 shares of Common Stock at the public offering price, less the
underwriting discount, as set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the Common Stock that the Underwriters have agreed to purchase. To the extent
that the Underwriters exercise such option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase the same percentage
of the option shares as the number of shares to be purchased and offered by that
Underwriter in the table above bears to the total.
The Company has agreed to indemnify the Underwriters against certain
liabilities which may be incurred in connection with the Offering, including
liabilities under the Securities Act of 1933 or to contribute to payments that
the Underwriters may be required to make.
The Company and its directors and executive officers have agreed not to
sell, transfer or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for shares of Common
Stock without the consent of McDonald & Company Securities, Inc. for a period of
120 days from the date of this Prospectus, except for awards of management stock
options or issuances of shares upon the exercise of outstanding warrants or
stock options or pursuant to other employee benefit plans.
13
<PAGE> 14
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Jones, Day, Reavis & Pogue, Cleveland, Ohio. Certain legal matters
will be passed upon for the Underwriters by Calfee, Halter & Griswold,
Cleveland, Ohio.
EXPERTS
The audited consolidated financial statements and financial statement
schedule included and incorporated by reference in this Prospectus and elsewhere
in the Registration Statement to the extent and for the periods indicated in
their reports have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
14
<PAGE> 15
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets at May 4, 1996 and February 3, 1996................... F-2
Consolidated Statements of Income for the 13 weeks ended May 4, 1996 and April 29,
1995........................................................................... F-3
Consolidated Statements of Cash Flows for the 13 weeks ended May 4, 1996 and April
29, 1995....................................................................... F-4
Notes to Consolidated Financial Statements........................................ F-5
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.......................................... F-6
Consolidated Balance Sheets at February 3, 1996 and January 28, 1995.............. F-7
Consolidated Statements of Income for the 53 weeks ended February 3, 1996 and 52
weeks ended January 28, 1995 and January 29, 1994.............................. F-8
Consolidated Statements of Stockholders' Equity for the 53 weeks ended February 3,
1996 and 52 weeks ended January 28, 1995 and January 29, 1994.................. F-9
Consolidated Statements of Cash Flows for the 53 weeks ended February 3, 1996 and
52 weeks ended January 28, 1995 and January 29, 1994........................... F-10
Notes to Consolidated Financial Statements........................................ F-11
</TABLE>
F-1
<PAGE> 16
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 4, FEBRUARY 3,
1996 1996
-------- -----------
<S> <C> <C>
ASSETS
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.
F-2
<PAGE> 17
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
-------- ----------
<S> <C> <C>
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.
F-3
<PAGE> 18
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
-------- ----------
<S> <C> <C>
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.
F-4
<PAGE> 19
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.
F-5
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS OF COLE NATIONAL CORPORATION:
We have audited the accompanying consolidated balance sheets of Cole
National Corporation (a Delaware corporation) and Subsidiaries (the Company) as
of February 3, 1996 and January 28, 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended February 3, 1996. 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 conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cole
National Corporation and Subsidiaries as of February 3, 1996 and January 28,
1995 and the results of their operations and their cash flows for each of the
three years in the period ended February 3, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 19, 1996.
F-6
<PAGE> 21
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 3, JANUARY 28,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments............................. $ 29,260 $ 19,730
Accounts receivable............................................. 18,589 17,701
Inventories..................................................... 84,794 87,246
Prepaid expenses and other...................................... 5,892 3,590
Deferred income tax benefits.................................... 10,675 13,301
----------- -----------
Total current assets.................................... 149,210 141,568
Property and equipment, at cost................................... 157,050 140,301
Less -- accumulated depreciation and amortization............... (90,909) (84,284)
----------- -----------
Total property and equipment, net....................... 66,141 56,017
Other assets...................................................... 5,070 2,926
Cost in excess of net assets of purchased businesses, net......... 81,163 82,808
----------- -----------
Total assets............................................ $ 301,584 $ 283,319
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 705 $ 169
Accounts payable................................................ 29,273 25,141
Accrued interest................................................ 7,050 6,935
Accrued liabilities............................................. 53,933 55,067
Accrued income taxes............................................ 5,976 4,644
----------- -----------
Total current liabilities............................... 96,937 91,956
Long-term debt, net of discount................................... 181,903 184,388
Deferred income taxes and other................................... 5,611 3,669
Stockholders' equity:
Preferred stock................................................. -- --
Common stock.................................................... 10 10
Paid-in capital................................................. 99,827 99,749
Notes receivable-stock option exercise.......................... (1,117) (1,108)
Accumulated deficit............................................. (81,587) (95,345)
----------- -----------
Total stockholders' equity.............................. 17,133 3,306
----------- -----------
Total liabilities and stockholders' equity.............. $ 301,584 $ 283,319
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-7
<PAGE> 22
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $ 577,091 $ 528,049 $ 472,888
Costs and expenses:
Cost of goods sold................................ 182,934 164,723 140,952
Operating expenses................................ 332,471 305,470 281,188
Depreciation and amortization..................... 15,730 14,892 13,516
----------- ----------- -----------
Total costs and expenses.................. 531,135 485,085 435,656
----------- ----------- -----------
Income from operations.............................. 45,956 42,964 37,232
Interest expense, net............................... 21,388 23,216 21,799
----------- ----------- -----------
Income before income taxes and extraordinary item... 24,568 19,748 15,433
Income tax provision (benefit)...................... 10,810 (4,909) 2,361
----------- ----------- -----------
Income before extraordinary item.................... 13,758 24,657 13,072
Extraordinary gain (loss) on early extinguishment of
debt.............................................. -- (917) 35,815
----------- ----------- -----------
Net income.......................................... $ 13,758 $ 23,740 $ 48,887
========== ========== ==========
Earnings (loss) per common share:
Income before extraordinary item.................. $ 1.32 $ 2.62 $ 2.47
Extraordinary gain (loss)......................... -- (.10) 6.78
----------- ----------- -----------
Net income........................................ $ 1.32 $ 2.52 $ 9.25
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-8
<PAGE> 23
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE TOTAL
COMMON PAID-IN STOCK OPTION ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL EXERCISE DEFICIT EQUITY
------ ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 30, 1993.......... $ 5 $44,010 $ -- $(167,972) $(123,957)
------ ------- ------------ ----------- -------------
Net income....................... -- -- -- 48,887 48,887
Exercise of stock options........ -- 1,130 (1,130) -- --
------ ------- ------------ ----------- -------------
Balance, January 29, 1994.......... 5 45,140 (1,130) (119,085) (75,070)
------ ------- ------------ ----------- -------------
Net income....................... -- -- -- 23,740 23,740
Proceeds from initial public
offering...................... 5 54,535 -- -- 54,540
Exercise of stock options........ -- 74 -- -- 74
Repayment of notes receivable.... -- -- 22 -- 22
------ ------- ------------ ----------- -------------
Balance, January 28, 1995.......... 10 99,749 (1,108) (95,345) 3,306
------ ------- ------------ ----------- -------------
Net income....................... -- -- -- 13,758 13,758
Exercise of stock options........ -- 78 (9) -- 69
------ ------- ------------ ----------- -------------
Balance, February 3, 1996.......... $ 10 $99,827 $ (1,117) $ (81,587) $ 17,133
======== ======= ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
<PAGE> 24
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
FEBRUARY 3, JANUARY 28, JANUARY 29,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 13,758 $ 23,740 $ 48,887
Adjustments to reconcile net income to net cash
provided by operations:
Extraordinary (gain) loss on early
extinguishment of debt....................... -- 917 (35,815)
Depreciation and amortization.................. 15,730 14,892 13,516
Non-cash interest expense...................... 454 469 5,343
Deferred income taxes.......................... 4,495 (10,153) --
Change in assets and liabilities:
Increase in accounts receivable, prepaid
expenses and other assets................. (4,905) (4,610) (2,541)
Decrease (increase) in inventories........... 2,452 (8,723) (12,264)
Increase (decrease) in accounts payable and
accrued liabilities....................... 3,095 (1,252) 7,529
Increase (decrease) in accrued interest...... 115 (2,451) 8,304
Increase in accrued income taxes............. 1,332 2,807 355
----------- ----------- -----------
Net cash provided by operating
activities.............................. 36,526 15,636 33,314
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt....................... (5,406) (56,859) (188,206)
Payment of deferred financing fees................ -- (100) (1,251)
Proceeds from initial public offering, net........ -- 54,540 --
Proceeds from long-term debt...................... -- -- 187,557
Other............................................. 69 96 --
----------- ----------- -----------
Net cash used by financing activities..... (5,337) (2,323) (1,900)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment, net.......... (19,832) (18,527) (13,074)
Acquisitions of businesses........................ (800) (4,675) (3,220)
Other, net........................................ (1,027) (1,285) (560)
----------- ----------- -----------
Net cash used by investing activities..... (21,659) (24,487) (16,854)
----------- ----------- -----------
Cash and temporary cash investments:
Net increase (decrease) during the period......... 9,530 (11,174) 14,560
Balance, beginning of the period.................. 19,730 30,904 16,344
----------- ----------- -----------
Balance, end of the period........................ $ 29,260 $ 19,730 $ 30,904
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-10
<PAGE> 25
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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 Company is a national specialty service retailer operating in both host
and non-host environments. The Company's primary lines of business are
personalized gifts and eyewear products, both of which are about equal in size
based on sales. The Company sells its products nationally through over 2,300
retail locations in 49 states, and differentiates itself from other specialty
retailers by providing value-added services at the point of sale at all of its
retail locations. The Company considers its operations to be in one business
segment.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
Fiscal year 1995 consisted of 53 weeks, and fiscal years 1994 and 1993 each
consisted of 52 weeks.
Inventories
The Company's inventories are valued at the lower of first-in, first-out
(FIFO) cost or market.
Property and Depreciation
The Company's policy is to provide depreciation using the straight-line
method over a period which is sufficient to amortize the cost of the asset
during its useful life.
The estimated useful lives for depreciation purposes are:
<TABLE>
<S> <C>
Buildings and improvements...................................... 5 to 40 years
Equipment....................................................... 3 to 10 years
Furniture and fixtures.......................................... 2 to 10 years
Leasehold improvements.......................................... 2 to 20 years
</TABLE>
Property and equipment, at cost, consist of the following as of February 3,
1996 and January 28, 1995 (000's omitted):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land and buildings.............................................. $ 3,615 $ 4,989
Furniture, fixtures and equipment............................... 116,968 104,061
Leasehold improvements.......................................... 36,467 31,251
-------- --------
Total property and equipment.................................... $157,050 $140,301
======== ========
</TABLE>
Store Opening Expenses
Store opening expenses are charged to operations in the year the store is
opened, which is generally the year the expense is incurred.
F-11
<PAGE> 26
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Other Assets
Cost in excess of net assets of purchased businesses is being amortized on
a straight-line basis over 40 years and is presented net of accumulated
amortization of $29,640,000 and $26,880,000, at February 3, 1996 and January 28,
1995, respectively. Management, which regularly evaluates its accounting for
goodwill, considering such factors as historical profitability, current
operating profits and cash flows, believes that the asset is realizable and the
amortization period is appropriate.
Financing costs incurred in connection with obtaining long-term debt are
capitalized and amortized over the life of the related debt using the effective
interest method.
Cash Flows
For purposes of reporting cash flows, the Company considers all temporary
cash investments, which have original maturities of three months or less, to be
cash equivalents. The carrying value of cash equivalents approximates fair value
because of the short maturity of such instruments.
Net cash flows from operating activities reflect cash payments for income
taxes and interest as follows (000's omitted):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income taxes........................................... $ 4,265 $ 2,249 $ 2,685
Interest............................................... $21,580 $24,662 $ 8,530
</TABLE>
During 1995, non-cash financing activities included incurring $3,192,000 in
capital lease obligations.
Capital Stock
At February 3, 1996 and January 28, 1995, there were 10,430,185 and
10,405,119, respectively, shares of common stock, par value $.001 per share (the
Common Stock), outstanding. During 1995, all outstanding shares of Class B and
Class C common stock were exchanged or converted in accordance with their terms
on a share-for-share basis into Class A common stock issued by the Company. All
shares of Class B and Class C common stock were cancelled. At February 3, 1996,
there were 24,000,000 and 1,000,000 authorized shares of Class A common stock
and undesignated preferred stock, respectively.
Earnings Per Share
Earnings per share for 1995, 1994 and 1993 have been calculated based on
10,415,047; 9,395,319 and 5,282,577, respectively, weighted average number of
common shares outstanding. The impact of stock options and warrants has not been
included in the calculation of earnings per share as the effect of their
exercise is not material or is antidilutive.
Stock-Based Compensation
In 1996 the Company will adopt Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation." This standard
establishes a fair value method for accounting for stock-based compensation
plans either through recognition or disclosure. The Company intends to adopt
this standard by disclosing the pro forma net income and earnings per share
amounts assuming the fair value method was adopted on January 29, 1995. The
adoption of this standard will not impact the Company's results of operations,
financial position or cash flows.
F-12
<PAGE> 27
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Asset Impairment
In the first quarter of 1996 the Company will adopt SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This standard requires the Company to evaluate the
recoverability of long-lived assets based on expected future cash flows. The
adoption of this standard is not expected to have a material impact on the
Company's results of operations, financial position or cash flows.
(2) INITIAL PUBLIC OFFERING
On April 18, 1994, the Company completed an initial public offering (IPO)
of five million shares of Common Stock at a price to the public of $12.00 per
share. Net proceeds from the IPO were $54.5 million and were used to retire
outstanding debt (see Note 3).
(3) LONG-TERM DEBT
Long-term debt at February 3, 1996 and January 28, 1995 is summarized as
follows (000's omitted):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
7.5% obligation in connection with Industrial Revenue
Bonds...................................................... $ 506 $ 675
11.25% senior notes:
Face value 181,000 186,000
Unamortized discount....................................... (1,834) (2,118)
-------- --------
Total 11.25% senior notes.......................... 179,166 183,882
Capital lease obligations.................................... 2,936 --
-------- --------
182,608 184,557
Less current portion......................................... (705) (169)
-------- --------
Net long-term debt................................. $181,903 $184,388
======== ========
</TABLE>
On September 30, 1993, CNG completed a public offering of $190.0 million of
11.25% Senior Notes (the CNG Notes). Proceeds of $187.6 million were used to
repay $126.0 million of bank loans, plus accrued interest thereon, and $59.9
million of Senior Subordinated Notes including accrued interest. The Company
recorded a net gain of $35.8 million (with no related income tax effect) on
extinguishment of this debt in fiscal 1993.
The CNG Notes are unsecured and mature October 1, 2001 with no earlier
scheduled redemption or sinking fund payments. The CNG Notes bear interest at a
rate of 11.25% per annum, payable semi-annually on each April 1 and October 1.
The indenture pursuant to which the CNG Notes were issued restricts dividend
payments to CNC to 50% of CNG's net income after October 31, 1993, plus amounts
due to CNC under a tax sharing agreement and for administrative expenses of CNC
not to exceed .25% of the Company's net sales. The indenture also contains
certain optional and mandatory redemption features and other financial
covenants.
Concurrent with the issuance and sale of the CNG Notes, CNC also exchanged
the remaining $50.0 million of Senior Subordinated Notes for new 13% Senior
Notes due 2002. Interest was payable semi-annually and was paid in additional
13% Senior Notes.
Proceeds from the Company's IPO were used to retire $4.0 million of the CNG
Notes and all $50.0 million of the 13% Senior Notes during the first quarter of
fiscal 1994. The Company recorded an extraordinary loss of $.9 million
representing the payment of premiums, the write-off of unamortized discount and
other costs associated with retiring this debt. The loss is net of an income tax
benefit of $.5 million.
F-13
<PAGE> 28
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The agreement in connection with the Industrial Revenue Bonds provides for
repayment of the obligation in annual installments of $168,750. The Industrial
Revenue Bonds are secured by office and distribution facilities with a net book
value of $1,781,000 at February 3, 1996.
Annual aggregate principal payments due on long-term debt, excluding
capital leases, are $168,750 in each of the years 1996 through 1998 with no
payments due in 1999 or 2000.
At February 3, 1996, the fair value of the Company's long-term debt was
approximately $185.3 million compared to a carrying value of $182.6 million. The
fair value was estimated primarily by using quoted market prices.
(4) REVOLVING CREDIT FACILITY
The principal operating subsidiaries of CNG entered into a Revolving Credit
Facility which provides for working capital borrowings, including letters of
credit, of up to $50 million through December 31, 1998. Effective September 1,
1995, the working capital facility was amended such that borrowings bear
interest, at the borrower's option, at the Prime Rate plus .25% or the
Eurodollar Rate plus 2.5% per annum. The Company pays a commitment fee of .375%
per annum on the total unused portion of the facility.
The maximum amounts of short-term borrowings outstanding during 1995 and
1994 were $3.5 million and $13.0 million, respectively. No amounts were
outstanding as of February 3, 1996 or January 28, 1995.
The Revolving Credit Facility restricts dividend payments to CNG to amounts
needed to pay interest and principal on the CNG Notes and certain amounts
relating to taxes, along with up to $15.0 million plus .25% of the Company's net
sales annually for other direct expenses of CNG or CNC. The Revolving Credit
Facility also contains covenants which, among other things, require CNG to
maintain certain financial ratios and specified levels of working capital, net
worth and earnings, and limit the amount of capital expenditures.
(5) STOCK OPTIONS AND WARRANTS
The Company had stock options outstanding at February 3, 1996 under the
1992 Management Stock Option Plan (the 1992 Plan), the 1993 Management Stock
Option Plan (the 1993 Plan), the 1993 Option Agreements granting options to
non-employee Directors (the 1993 Option Agreements) and the 1994 non-qualified
Stock Option Plan for non-employee Directors (the 1994 Plan). The Company is
authorized to issue to key employees up to 555,556 and 600,000 shares of Common
Stock under the 1992 Plan and the 1993 Plan, respectively. The Company is also
authorized to issue to non-employee Directors of the Company up to 22,500 and
100,000 shares of Common Stock under the 1993 Option Agreements and the 1994
Plan, respectively. Options generally become exercisable over a three or a
four-year period from the date of grant and expire ten years from the date of
grant.
F-14
<PAGE> 29
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following summarizes the activity under the stock option plans and
agreements:
<TABLE>
<CAPTION>
SHARES
UNDER OPTION PRICE RANGE
------------ ---------------
<S> <C> <C>
Outstanding at January 30, 1993.................................. 600,556 $3.00
Granted........................................................ 617,750 3.00 - 27.00
Exercised...................................................... (376,634) 3.00
Cancelled...................................................... (27,750) 3.00 - 27.00
------------ ---------------
Outstanding at January 29, 1994.................................. 813,922 3.00 - 27.00
Granted........................................................ 5,000 12.63
Exercised...................................................... (24,775) 3.00
Cancelled...................................................... (125,593) 3.00 - 27.00
------------ ---------------
Outstanding at January 28, 1995.................................. 668,554 3.00 - 27.00
Granted........................................................ 123,100 9.75 - 13.69
Exercised...................................................... (25,066) 3.00 - 10.00
Cancelled...................................................... (17,291) 3.00 - 27.00
------------ ---------------
Outstanding at February 3, 1996.................................. 749,297 $3.00 - $13.69
==========
Exercisable at February 3, 1996.................................. 385,646 $3.00 - $12.63
==========
</TABLE>
At February 3, 1996, there were 17,284 shares available for future grant
under the 1992 and 1993 Plans and 98,500 shares available for future grant under
the 1994 Plan.
During 1994, the Company offered holders of options granted under the 1993
Plan the opportunity to exchange a portion of their existing vested and unvested
stock options for a reduced number of new options under the 1993 Plan with
adjusted exercise prices and vesting schedules. The result was to reduce the
aggregate number of options outstanding under the 1993 Plan, to extend the
vesting schedule for the repriced options from four years to five years and to
reduce the maximum exercise price from $27.00 per share to $12.25 per share.
Payment for some of the options exercised between 1993 and 1995 has been
made by executing promissory notes, of which $1,117,000 were outstanding at
February 3, 1996. The promissory notes are secured by the shares of common stock
acquired and payable five years from the date of exercise at interest rates
ranging from 5.33% to 5.92%.
In January 1996, the Board of Directors adopted the 1996 Management Stock
Option Plan (the 1996 Plan). Under the 1996 Plan, the Company is authorized to
issue to key employees up to 884,000 shares of Common Stock. Subsequent to year
end, options for 663,000 shares were granted at $10.81 per share. These options
become exercisable over a five-year period, subject to accelerated vesting based
on the price of the Common Stock reaching certain specified levels, and expire
ten years from the date of grant.
At February 3, 1996, there were warrants to purchase 173,675 shares of
Common Stock outstanding. Of these, warrants to purchase 2,625 shares are
exercisable at $1.00 per share and expire in 2000. Warrants to purchase 92,107
shares are exercisable at $24.70 per share and expire on March 6, 1997. Warrants
to purchase 78,943 shares are exercisable at $49.40 per share and expire on
March 6, 1999.
F-15
<PAGE> 30
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) STOCKHOLDERS' EQUITY
In August 1995, the Company's Board of Directors approved a Stockholders'
Rights Plan. The Rights Plan provides for the distribution of one Right for each
outstanding share of the Company's Common Stock held of record as of the close
of business on September 1, 1995 or that thereafter become outstanding prior to
the earlier of the final expiration date of the Rights or the first date upon
which the Rights become exercisable. Each Right entitles the registered holder
to purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, without par value, at a price of $40.00, subject
to adjustment. The Rights are not exercisable until ten days after a person or
group buys or announces a tender offer for 15% or more of the Company's Common
Stock, unless such date is extended as provided in the Rights Plan. In the event
the Rights become exercisable, Rights that are beneficially owned by all other
persons would be adjusted and such holders would thereafter have the right to
receive, upon exercise thereof at the then current exercise price of the Right,
that number of shares of Common Stock (or, under certain circumstances, an
economically equivalent security or securities of the Company) having a market
value of two times the exercise price of the Right. The Rights will expire on
August 31, 2005, unless extended or unless the Rights are earlier redeemed by
the Company in whole, but not in part, at a price of $0.01 per Right, or
exchanged.
(7) INCOME TAXES
Income tax expense for fiscal 1995, 1994 and 1993 is detailed below (000's
omitted):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Currently payable --
Federal....................................................... $ 4,518 $ 3,228 $ --
State and local............................................... 1,797 2,016 2,361
-------- -------- --------
6,315 5,244 2,361
-------- -------- --------
Deferred --
Federal....................................................... 3,361 (766) --
Utilization of net operating loss carryforwards............... 1,134 4,859 --
Change in valuation allowance................................. -- (14,246) --
-------- -------- --------
4,495 (10,153) --
-------- -------- --------
Income tax provision (benefit)................................ $ 10,810 $ (4,909) $ 2,361
======== ======== ========
</TABLE>
At February 3, 1996, the Company has minimum tax credits in the amount of
approximately $2.0 million that can be carried forward indefinitely.
The income tax expense reflected in the accompanying consolidated
statements of income differs from the federal statutory rate as follows (000's
omitted):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Tax provision at statutory rate................................. $ 8,599 $ 6,912 $ 5,401
Tax effect of --
State income taxes, net of federal tax benefit................ 1,168 1,310 1,534
Amortization of cost in excess of net assets of purchased
businesses................................................. 900 901 901
Benefit of net operating loss carryforward.................... -- -- (5,585)
Change in valuation allowance................................. -- (14,246) --
Other, net.................................................... 143 214 110
-------- -------- --------
Tax provision (benefit).................................. $ 10,810 $ (4,909) $ 2,361
======== ======== ========
</TABLE>
F-16
<PAGE> 31
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and deferred tax liabilities at
February 3, 1996 and January 28, 1995 are as follows (000's omitted):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Employee benefit accruals............................................... $ 3,375 $ 3,883
Other non-deductible accruals........................................... 3,959 4,315
State and local taxes................................................... 1,108 981
Tax credit and net operating loss carryforwards......................... 1,990 4,693
Other................................................................... 1,252 712
------- -------
Total deferred tax assets....................................... 11,684 14,584
------- -------
Deferred tax liabilities:
Depreciation and amortization........................................... (5,225) (3,763)
Other................................................................... (836) (668)
------- -------
Total deferred tax liabilities.................................. (6,061) (4,431)
------- -------
Net deferred taxes........................................................ $ 5,623 $10,153
======= =======
</TABLE>
(8) RETIREMENT PLANS
The Company maintains a noncontributory defined benefit pension plan (the
Retirement Plan) that covers employees who have met eligibility service
requirements and are not members of certain collective bargaining units. The
Retirement Plan calls for benefits to be paid to eligible employees at
retirement based primarily upon years of service with the Company and their
compensation levels near retirement.
The Company's policy is to fund amounts necessary to keep the Retirement
Plan in full force and effect, in accordance with the Internal Revenue Code and
the Employee Retirement Income Security Act of 1974. Actuarial present values of
benefit obligations are determined using the projected unit credit method.
Pension expense for fiscal 1995, 1994 and 1993 includes the following
components (000's omitted):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.................. $ 528 $ 581 $ 620
Interest cost on the projected benefit obligation.................. 1,369 1,292 1,275
Less:
Return on plan assets --
Actual........................................................ (1,138) 178 (452)
Deferred...................................................... 11 (1,294) (640)
------- ------- -------
(1,127) (1,116) (1,092)
Amortization of transition asset over 17.9 years................. (179) (179) (179)
------- ------- -------
Net pension expense...................................... $ 591 $ 578 $ 624
======= ======= =======
</TABLE>
F-17
<PAGE> 32
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following sets forth the funded status of the Retirement Plan at
December 31, 1995 and 1994 based upon the actuarial present values of benefit
obligations (000's omitted):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Accumulated benefit obligations:
Vested.................................................................. $17,147 $14,550
Nonvested............................................................... 291 218
------- -------
Total........................................................... $17,438 $14,768
======= =======
Projected benefit obligation for service rendered to date................. $19,030 $15,842
Fair value of plan assets, primarily money market and equity mutual
funds................................................................... 13,849 12,052
------- -------
Plan assets less than projected benefit obligation........................ (5,181) (3,790)
Unrecognized prior service cost........................................... 168 197
Net unrecognized loss..................................................... 2,983 947
Unamortized transition asset.............................................. (1,595) (1,774)
------- -------
Pension liability included in accrued liabilities............... $(3,625) $(4,420)
======= =======
</TABLE>
The weighted average discount rate used to measure the projected benefit
obligation was 7.75% in 1995 and 8.50% in 1994. For both years, the rate of
increase in future compensation levels was 5.0% and the expected long-term rate
of return on plan assets was 9.5%.
During fiscal 1993, the Company established a defined contribution plan,
including features under Section 401(k) of the Internal Revenue Code, which will
provide retirement benefits to its employees. Eligible employees may contribute
up to 15% of their compensation to the plan. There is no mandatory matching of
employee contributions by the Company, but discretionary matches of $164,000,
$164,000 and $100,000 were recorded for 1995, 1994 and 1993, respectively.
During fiscal 1994, the Company established two Supplemental Executive
Retirement Plans which will provide for the payment of retirement benefits to
participating executives supplementing amounts payable under the Company's
Retirement Plan. The first plan is an excess benefit plan designed to replace
benefits that would otherwise have been payable under the Retirement Plan but
that were limited as a result of certain tax law changes. The second plan is a
defined contribution plan under which participants will receive an annual credit
based on a percentage of base salary, subject to vesting requirements. Expense
for these plans for fiscal 1995 and 1994 was $447,000 and $413,000,
respectively.
(9) COMMITMENTS
The Company leases a substantial portion of its facilities including
laboratories, office and warehouse space, and retail store locations. These
leases have initial terms of up to 10 years and typically do not provide for
renewal options. In most leases covering retail store locations, additional
rents are payable based on store sales. In addition, the Company operates
departments in various host stores paying occupancy costs solely as a percentage
of sales under agreements containing short-term cancellation clauses. Generally,
the Company is required to pay taxes and normal expenses of operating the
premises for laboratory, office, warehouse and
F-18
<PAGE> 33
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
retail store leases; the host stores pay these expenses for departments operated
on a percentage-of-sales basis. The following amounts represent rental expense
for fiscal 1995, 1994 and 1993 (000's omitted):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Occupancy costs based on sales....................... $50,218 $47,198 $41,329
All other rental expense............................. 32,697 30,003 27,940
Sublease rental income............................... (1,510) (1,455) (1,197)
------- ------- -------
$81,405 $75,746 $68,072
======= ======= =======
</TABLE>
During 1995, the Company entered into leases for equipment which have been
accounted for as capital leases. At February 3, 1996, property under capital
leases consisted of $3,192,000 in equipment with accumulated amortization of
$37,000.
At February 3, 1996, future minimum lease payments for all leases, and the
present value of future minimum lease payments for capital leases are as follows
(000's omitted):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996................................................... $ 675 $ 30,053
1997................................................... 698 26,727
1998................................................... 698 23,537
1999................................................... 785 19,678
2000................................................... 610 15,308
2001 and Thereafter.................................... -- 36,621
------- ---------
Total future minimum lease payments.................... 3,466 $151,924
=========
Amount representing interest........................... (530)
-------
Present value of future minimum lease payments......... $2,936
======
</TABLE>
Effective March 25, 1995, CNG entered into an agreement with a third party
for the management and operation of the Company's data processing center. The
agreement expires in March 2005 and may be terminated by the Company upon six
months' notice and payment of certain fees for termination.
The agreement provides for minimum payments as follows (000's omitted):
<TABLE>
<S> <C>
1996......................................... $ 6,448
1997......................................... 5,674
1998......................................... 5,020
1999......................................... 6,442
2000......................................... 6,829
Thereafter................................... 21,307
-------
$51,720
=======
</TABLE>
F-19
<PAGE> 34
COLE NATIONAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
The Company has made several acquisitions, each of which has been accounted
for as a purchase. In May 1995, the Company acquired the assets of 59 optical
departments located in BJ's Wholesale Clubs for a purchase price of $1.1
million. In January 1994, the Company acquired the assets of 107 leased optical
departments within Montgomery Ward stores for a purchase price of $4.7 million.
In September 1993, the Company acquired the operating assets from and assumed
certain liabilities of Contact Lens Supply, Inc., a mail order distributor of
contact lenses, for a purchase price of $3.2 million.
In April 1995, the Company sold its 39 Sunspot fashion sunglass kiosks. No
gain or loss was recognized on this transaction.
(11) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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 selling season.
The following is a summary of quarterly financial data for the 53 weeks
ended February 3, 1996 and the 52 weeks ended January 28, 1995. The fourth
quarter of fiscal 1995 consisted of 14 weeks; all other quarters consisted of 13
weeks (000's omitted except per share amounts).
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
APRIL 29, JULY 29, OCTOBER 28, FEBRUARY 3,
1995 1995 1995 1996
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... $125,254 $138,099 $ 138,646 $ 175,092
Gross margin....................... 86,530 94,758 95,465 117,404
Net income (loss).................. (27) 3,766 229 9,790
Earnings per share................. .00 .36 .02 .94
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
APRIL 30, JULY 30, OCTOBER 29, JANUARY 28,
1994 1994 1994 1995
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... $115,680 $129,738 $ 123,688 $ 158,943
Gross margin....................... 81,047 90,369 85,579 106,331
Income (loss) before extraordinary
items............................ (1,147) 5,303 (880) 21,381
Net income (loss).................. (2,557) 5,303 (880) 21,874
Earnings (loss) per share:
Income (loss) before
extraordinary items........... (.18) .51 (.08) 2.06
Net income (loss)................ (.40) .51 (.08) 2.11
</TABLE>
F-20
<PAGE> 35
===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY OTHER THAN THE
SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information................... 2
Incorporation of Certain
Documents by Reference................ 2
Summary................................. 3
The Company........................... 3
The Offering.......................... 3
Use of Proceeds....................... 4
Selected Financial Data............... 4
Risk Factors............................ 5
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 8
Management.............................. 12
Underwriting............................ 13
Legal Matters........................... 14
Experts................................. 14
Index to Financial Statements........... F-1
</TABLE>
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1,250,000 SHARES
[LOGO]
COLE NATIONAL CORPORATION
CLASS A COMMON STOCK
------------------------
PROSPECTUS
------------------------
MCDONALD & COMPANY
SECURITIES, INC.
SMITH BARNEY INC.
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