<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1,
1997, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO __________.
COMMISSION FILE NUMBER 1-12814
COLE NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1453189
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5915 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(440)449-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
X YES NO
--- ---
AS OF NOVEMBER 25, 1997, 14,734,436 SHARES OF THE REGISTRANT'S CLASS A COMMON
STOCK WERE OUTSTANDING.
================================================================================
<PAGE> 2
- --------------------------------------------------------------------------------
COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED NOVEMBER 1, 1997
INDEX
<TABLE>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF NOVEMBER 1, 1997 AND FEBRUARY 1,
1997 ..................................................................... 1
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 13 WEEKS ENDED
NOVEMBER 1, 1997 AND NOVEMBER 2, 1996 AND FOR THE 39 WEEKS ENDED
NOVEMBER 1, 1997 AND NOVEMBER 2, 1996..................................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 39 WEEKS ENDED NOVEMBER
1, 1997 AND NOVEMBER 2, 1996.............................................. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 4 - 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 7 - 10
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 11
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
November 1, February 1,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments $ 34,088 $ 73,141
Accounts receivable, less allowance for doubtful
accounts of $3,404 in 1997 and $3,068 in 1996 51,438 39,660
Current portion of notes receivable 5,263 6,060
Inventories 162,263 119,236
Prepaid expenses and other 14,419 7,378
Deferred income tax benefits 29,780 24,948
--------- ---------
Total current assets 297,251 270,423
Property and equipment, at cost 240,909 216,575
Less-accumulated depreciation and amortization (118,636) (100,918)
--------- ---------
Total property and equipment, net 122,273 115,657
Other assets:
Notes receivable, excluding current portion 27,721 27,951
Deferred income taxes and other 51,936 29,504
Intangible assets, net 153,513 139,308
--------- ---------
Total assets $ 652,694 $ 582,843
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,533 $ 1,336
Accounts payable 69,468 62,379
Accrued interest 7,431 9,630
Accrued liabilities 110,932 123,263
Accrued income taxes 4,854 21,970
--------- ---------
Total current liabilities 194,218 218,578
Long-term debt, net of discount and current portion 292,199 317,547
Other long-term liabilities 27,273 27,000
Stockholders' equity:
Common stock 15 12
Paid-in capital 250,594 131,238
Foreign currency translation adjustment (1,093) (606)
Notes receivable - stock option exercise (927) (1,024)
Accumulated deficit (109,585) (109,902)
--------- ---------
Total stockholders' equity 139,004 19,718
--------- ---------
Total liabilities and stockholders' equity $ 652,694 $ 582,843
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
-1-
<PAGE> 4
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
----------------------- -------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 262,907 $ 146,702 $ 767,380 $ 443,057
Costs and expenses:
Cost of goods sold 90,134 44,773 261,256 136,673
Operating expenses 152,153 91,024 436,743 266,175
Depreciation and amortization 8,136 4,420 23,288 12,949
Business integration charge 1,100 - 1,100 -
--------- --------- --------- ---------
Total costs and expenses 251,523 140,217 722,387 415,797
--------- --------- --------- ---------
Income from operations 11,384 6,485 44,993 27,260
Interest expense, net 6,660 4,390 23,064 14,171
--------- --------- --------- ---------
Income before income taxes and
extraordinary item 4,724 2,095 21,929 13,089
Income tax provision 2,030 922 9,429 5,759
--------- --------- --------- ---------
Income before extraordinary item 2,694 1,173 12,500 7,330
Extraordinary loss on early
extinguishment of debt (12,183) - (12,183) (682)
--------- --------- --------- ---------
Net income (loss) $ (9,489) $ 1,173 $ 317 $ 6,648
========= ========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
-2-
<PAGE> 5
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
39 Weeks Ended
----------------------------
November 1, November 2,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 317 $ 6,648
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Extraordinary loss on early extinguishment of debt 12,183 682
Depreciation and amortization 23,288 12,949
Non-cash interest 206 322
Change in assets and liabilities:
Increase in accounts and notes receivable,
prepaid expenses and other assets (14,180) (1,771)
Increase in inventories (38,748) (18,984)
Increase (decrease) in accounts payable, accrued
liabilities and other liabilities (10,038) 16,705
Decrease in accrued interest (2,199) (5,303)
Decrease in accrued income taxes (9,911) (879)
--------- ---------
Net cash provided (used) by operating
activities (39,082) 10,369
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (170,354) (16,778)
Proceeds from long-term debt 125,000 -
Payment of deferred financing fees (2,896) -
Proceeds from exercise of stock options and warrants 2,836 348
Proceeds from public stock offering, net 115,888 26,202
Other, net (130) 92
--------- ---------
Net cash provided by financing activities 70,344 9,864
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (19,984) (15,719)
Systems development costs (13,186) (2,140)
Acquisition of business (27,705) -
Investment in Pearle Trust B.V (2,684) -
Other, net (6,756) (145)
--------- ---------
Net cash used by investing activities (70,315) (18,004)
--------- ---------
Cash and temporary cash investments:
Net increase (decrease) during the period (39,053) 2,229
Balance, beginning of the period 73,141 29,260
--------- ---------
Balance, end of the period $ 34,088 $ 31,489
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-3-
<PAGE> 6
COLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Cole
National Corporation (CNC), its wholly owned subsidiaries, including Cole
National Group, Inc. (CNG), and CNG's wholly owned subsidiaries (collectively,
the "Company"). All significant intercompany transactions have been eliminated
in consolidation.
The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures herein are adequate to make the information not
misleading. These statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto for the fiscal year ended
February 1, 1997.
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 November 1, 1997 and
the results of operations for the 13 and 39 weeks ended November 1, 1997 and
November 2, 1996, and cash flows for the 39 weeks ended November 1, 1997 and
November 2, 1996.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at November 1, 1997 and
November 2, 1996 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 $19,406,000 and $27,147,000, respectively, for the
39 weeks ended November 1, 1997, and $6,684,000 and $20,975,000, respectively,
for the 39 weeks ended November 2, 1996.
Earnings Per Share
In the fourth quarter of fiscal 1997 the Company will adopt Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under
SFAS No. 128, the Company's basic earnings per share and diluted earnings per
share will be presented on the face of the income statement. The basic earnings
per share will be determined using only the weighted average number of
outstanding shares during the period. The computation for diluted earnings per
share will include common stock equivalents and will not differ materially from
current accounting requirements.
-4-
<PAGE> 7
Due to the change in accounting required by SFAS No. 128, the Company
has provided the following to illustrate its earnings per share calculation
under current accounting, as well as under SFAS No. 128:
<TABLE>
<CAPTION>
13 Weeks 39 Weeks
------------------------- ------------------------
Nov. 1, Nov. 2, Nov. 1, Nov. 2,
1997 1996 1997 1996
--------- -------- -------- --------
SFAS NO. 128:
<S> <C> <C> <C> <C>
Basic -
Income before extraordinary item: $ 0.18 $ 0.10 $ 0.96 $ 0.66
Extraordinary loss (0.82) - (0.94) (0.06)
--------- -------- -------- --------
Net income (loss) $ (0.64) $ 0.10 $ 0.02 $ 0.60
Weighted Average Shares Outstanding (in 000's) 14,728 11,944 13,062 11,127
Diluted -
Income before extraordinary item: $ 0.18 $ 0.10 $ 0.92 $ 0.65
Extraordinary loss (loss) (0.80) - (0.90) (0.06)
--------- -------- -------- --------
Net income (loss) $ (0.62) $ 0.10 $ 0.02 $ 0.59
Weighted Average Shares and
Common Stock Equivalents
Outstanding (in 000's) 15,259 12,173 13,568 11,304
CURRENT ACCOUNTING:
Primary and fully diluted -
Income before extraordinary item: $ 0.18 $ 0.10 $ 0.92 $ 0.66
Extraordinary loss (0.80) - (0.90) (0.06)
--------- -------- -------- --------
Net income (loss) $ (0.62) $ 0.10 $ 0.02 $ 0.60
Weighted Average Shares and
Common Stock Equivalents
Outstanding (in 000's) 15,259 11,944 13,568 11,127
</TABLE>
Reclassifications
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
(2) STOCK OFFERING
On July 18, 1997, the Company completed a public offering of 2,587,500
shares of its Class A Common Stock, the net proceeds of which were approximately
$116 million.
(3) STOCK WARRANT EXERCISES
During the 39 weeks ended November 1, 1997, warrants to purchase 90,389
shares of the Company's Class A Common Stock were exercised at a price of
$24.70. Proceeds from the warrant exercise were approximately $2.2 million.
-5-
<PAGE> 8
(4) SEASONALITY
The Company's business historically has been seasonal with
approximately 30% of its revenues 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. Although the Pearle
acquisition will moderate the seasonality of the Company, the Company's business
will remain seasonal due to relatively lower levels of optical product sales
during the Christmas holiday season. Therefore, results of operations for
interim periods are not necessarily indicative of full year results.
(5) LONG-TERM DEBT
On August 15, 1997, CNG announced a tender offer to purchase up to all
of its $165.8 million 11-1/4% Senior Notes (the 11-1/4% Senior Notes) due 2001
at a price of $1,105.61 per $1,000 of principal, plus accrued interest. The
tender offer expired on September 12, 1997, at which time a total of $151.3
million principal amount of the 11-1/4% Senior Notes were tendered, leaving
$14.5 million outstanding.
As a result of the tender offer, in the third quarter of fiscal 1997
the Company recorded an extraordinary charge of $19.7 million ($12.2 million net
of tax), representing the tender premium, the write-off of the related
unamortized debt discount and other costs associated with redeeming the debt.
On August 22, 1997, CNG issued $125.0 million of 8-5/8% Senior
Subordinated Notes (the 8-5/8% Senior Subordinated Notes) due 2007. Proceeds
from this debt issuance of approximately $121.5 million, along with cash on
hand, were used to fund the above-described tender offer.
(6) ACQUISITION OF BUSINESS
On August 5, 1997, the Company acquired all of the issued and
outstanding common stock of American Vision Centers, Inc. (AVC), the ninth
largest retail optical chain in the United States, for an aggregate purchase
price of approximately $28.9 million, including debt assumed.
The acquisition was accounted for under the purchase method of
accounting. The results of AVC's operations have been included in the
consolidated financial statements since the date of acquisition.
During the third quarter of fiscal 1997, the Company recorded a $1.1
million pre-tax ($0.6 million net of tax) business integration charge associated
with the AVC acquisition. Such charge included costs incurred related to the
integration and consolidation of AVC into the Company's operations. The Company
anticipates an after-tax charge relating to AVC in the range of $3 to $4 million
will be taken in the fourth quarter of fiscal 1997.
-6-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of certain factors affecting the
Company's results of operations for the 13 week and 39 week periods ended
November 1, 1997 and November 2, 1996 (the Company's third quarter and first
nine months, respectively) and its liquidity and capital resources. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this filing and the Company's
audited financial statements for the fiscal year ended February 1, 1997 included
in its annual report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
For example, the fiscal year ended February 1, 1997 is referred to as "fiscal
1996."
RESULTS OF OPERATIONS
Net revenue for the third quarter of fiscal 1997 increased 79.2% to
$262.9 million from $146.7 million for the same period in fiscal 1996. Net
revenue for the first nine months of fiscal 1997 increased 73.2% to $767.4
million from $443.1 million for the same period in fiscal 1996. The increases in
revenue were primarily attributable to the acquisitions of Pearle and Sears
Optical of Canada in November 1996 and AVC in August 1997, which accounted for
$97.1 and $264.3 million of the increases for the third quarter and first nine
months, respectively. The Company's consolidated comparable store sales
increased 2.3% and 3.5% in the third quarter and first nine months of fiscal
1997, respectively. A third quarter comparable store sales increase of 3.8% at
Cole Vision was primarily a result of successful eyewear promotions and growth
in managed vision care sales. Third quarter comparable store sales decreased
0.2% at Cole Gift, an improvement from the 2.9% decline in the first six months.
The net revenue increase was also attributable to the Company's classification
of capitation and other fees associated with its growing managed vision care
business as revenue. Until the first quarter of fiscal 1997, such fees were
netted with operating expenses in the Company's financial statements. The
opening of additional Cole Gift and Cole Vision units also contributed to the
third quarter revenue increase. At November 1, 1997, the Company had 3,306
specialty service retail locations, including 400 franchised locations, compared
to 2,357 at November 2, 1996.
Gross profit increased to $172.8 million in the third quarter of fiscal
1997 from $101.9 million in the same period last year. The gross profit increase
was primarily attributable to the acquired businesses and classification of
managed vision care fees as revenue. Gross margins for the third quarters of
fiscal 1997 and fiscal 1996 were 65.7% and 69.5%, respectively. For the first
nine months, gross profit increased to $506.1 million from $306.4 million for
the same period a year ago. Gross margins for the first nine months in fiscal
1997 and fiscal 1996 were 66.0% and 69.2%, respectively. The lower gross margin
percentages in fiscal 1997 resulted primarily from the addition of Pearle which
operates at a lower gross margin than the Company has historically experienced
due to the higher costs of in-store laboratories and lower margin wholesale
sales to franchised stores. This was partially offset by revenue generated by
Pearle's franchise royalties and fees, interest income on Pearle's franchise
notes
-7-
<PAGE> 10
receivable and the managed vision care fees, each of which has no
corresponding cost of goods sold. The lower gross margin percentages also
resulted from the impact of clearance and other promotions at both Cole Gift and
Cole Vision during the third quarter of 1997.
Operating expenses increased 67.2% to $152.2 million in the third
quarter of fiscal 1997 from $91.0 million in fiscal 1996, but as a percentage of
revenue, decreased to 57.9% in fiscal 1997 from 62.0% in fiscal 1996. For the
first nine months of fiscal 1997, operating expenses increased 64.1% to $436.7
million from $266.2 million for the same period last year. As a percentage of
revenue, operating expenses for the first nine months decreased to 56.9% in
fiscal 1997 from 60.1% in fiscal 1996. The leverage improvement for the third
quarter and first nine months was primarily a result of the addition of Pearle,
which has lower operating expenses as a percentage of revenue than the rest of
the Company, along with leverage gains achieved by Cole Vision's comparable
store sales increase. Fiscal 1997 depreciation and amortization expense of $8.1
million in the third quarter and $23.3 million in the first nine months was $3.7
and $10.3 million more, respectively, than the same periods in fiscal 1996
reflecting the addition of acquired businesses and an increase in capital
expenditures. The third quarter and first nine months of fiscal 1997 also
included a $1.1 million ($0.6 million net of tax) business integration charge
related to the operations of AVC.
Income from operations increased 75.5% to $11.4 million for the third
quarter of fiscal 1997 and increased 65.1% to $45.0 million for the first nine
months as a result of the factors described above.
Net interest expense increased $2.3 million over the third quarter of
fiscal 1996 to $6.7 million and increased $8.9 million over the first nine
months of fiscal 1996 to $23.1 million. The increase was primarily attributable
to the additional interest on $150.0 million of 9-7/8% Senior Subordinated Notes
(the 9-7/8% Senior Subordinated Notes) due 2006 issued in November 1996 in
connection with financing the Pearle acquisition and $125.0 million of 8-5/8%
Senior Subordinated Notes issued in August 1997, partially offset by a decrease
in interest expense due to the purchase and subsequent retirement of $15.1
million of 11-1/4% Senior Notes in the second quarter of fiscal 1996 and the
purchase and retirement of $151.3 million of 11-1/4% Senior Notes in conjunction
with a tender offer in September 1997. The issuance of the 8-5/8% Senior
Subordinated Notes combined with the redemption of the 11-1/4% Senior Notes is
expected to reduce future interest expense by approximately $7.9 million
annually.
An income tax provision was recorded in the first nine months of fiscal
1997 and fiscal 1996 using the Company's estimated annual effective tax rate of
43% and 44%, respectively.
Income before extraordinary item increased to $2.7 million for the
third quarter of fiscal 1997 from $1.2 million for the same period in fiscal
1996. For the first nine months of fiscal 1997, income before extraordinary item
increased to $12.5 million from $7.3 million for that period last year. The
increases were due to improvement in income from operations offset, in part, by
the increase in net interest expense. A $12.2 million extraordinary loss, net of
an income tax benefit of $7.5 million, was recorded in the third quarter of
fiscal 1997 in connection with the early extinguishment of debt. The loss
represented tender premium, write-off of related unamortized debt discount and
other costs
-8-
<PAGE> 11
associated with redemption of the 11-1/4% Senior Notes. A similar charge for
$0.7 million, net of an income tax benefit of $0.5 million, was recorded in
the second quarter of fiscal 1996.
The Company's business historically has been seasonal with
approximately 30% of its revenue 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. Although the Pearle
acquisition will moderate the seasonality of the Company, the Company's business
will remain seasonal due to relatively lower levels of optical product sales
during the Christmas holiday season. Therefore, results of operations for
interim periods are not necessarily indicative of full year results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is funds provided from
operations of its operating subsidiaries. In addition, the Company's operating
subsidiaries have available to them working capital commitments of $75.0 million
under their Credit Facility, reduced by commitments under letters of credit.
There were no working capital borrowings outstanding during the first
nine months of fiscal 1997 and fiscal 1996.
On August 5, 1997, the Company purchased, for an aggregate purchase
price of approximately $28.9 million, including debt assumed, all of the issued
and outstanding common stock of AVC. AVC consisted of 79 company-owned and 85
franchised optical retail stores. The acquisition was accounted for under the
purchase method of accounting. The results of AVC's operations have been
included in the consolidated financial statements since the date of acquisition.
The purchase price was allocated to the assets acquired and liabilities assumed
based upon a preliminary estimate of their relative values at the closing date
resulting in an excess of purchase price over net assets acquired of $17.5
million. The Company anticipates that most of the AVC retail stores will be
converted to the Pearle format and that an after-tax business integration charge
relating to AVC in the range of $3.0 to $4.0 million will be taken in the
fourth quarter of fiscal 1997. For its most recent fiscal year ended December
31, 1996, AVC reported annual net revenue of $52.5 million.
During the second quarter of fiscal 1997, the Company completed a
public offering of 2,587,500 shares of its Class A Common Stock, the net
proceeds of which were approximately $116 million. In August 1997, CNG issued
$125.0 million of 8-5/8% Senior Subordinated Notes due 2007, the net proceeds
of which were approximately $121.5 million. CNG also commenced a tender offer
which expired on September 12, 1997, to purchase up to all of its $165.8 million
outstanding 11-1/4% Senior Notes at $1,105.61 per $1,000 principal amount, plus
accrued interest thereon using the net proceeds of the 8-5/8% Senior
Subordinated Notes issuance and cash on hand. A total of $151.3 million of
11-1/4% Senior Notes were tendered resulting in the extraordinary charge
discussed above. The Company intends to use the remaining net proceeds from the
two offerings for general corporate purposes including reducing outstanding
indebtedness and financing possible future acquisitions.
The Company recently announced that its Board of Directors has
authorized the repurchase from time to time of up to 500,000 shares of common
stock, or approximately 3.5% of the Company's outstanding shares, through open
market or
-9-
<PAGE> 12
block transactions. It is expected that the shares purchased will be used in
part to offset dilution from stock options and in connection with other
benefit plans and that purchases will be funded by internally generated
funds.
Operations for the first nine months used $39.1 million of cash in
fiscal 1997 compared to $10.4 million of cash provided from operations for the
first nine months in fiscal 1996. The increase in cash used by operations was
primarily attributable to the payment of $15.0 million of taxes due on the sale
of Pearle's European operation, increased accounts receivable related to third
party optical sales, increased payments related to inventory disbursements, and
payment of certain business integration and other non-recurring charges accrued
in fiscal 1996, partially offset by an increase in net income and higher
depreciation and amortization expense.
Cash used by investing activities included capital additions of $20.0
million and $15.7 million for the first nine months of fiscal 1997 and fiscal
1996, respectively. The majority of capital expenditures were for store
fixtures, equipment and leasehold improvements for new stores and the remodeling
of existing stores. In addition, expenditures for systems development costs
increased to $13.2 million in the first nine months of fiscal 1997 from $2.1
million for the same period last year, reflecting an increase in activity to
complete the Company's new systems implementation. Acquisition of AVC and
additional investment in Pearle Trust B.V. totaled $30.4 million in fiscal 1997.
Expenditures of $6.6 million were also incurred in the first nine months of
fiscal 1997 in connection with the construction of Cole Gift's new warehouse and
distribution facility. This facility, which became operational in the third
quarter of fiscal 1997, will most likely be financed through a sale and
lease-back transaction in the fourth quarter of fiscal 1997.
The Company believes that funds provided from operations along with
funds available under the Credit Facility will provide adequate sources of
liquidity to allow the Company's operating subsidiaries to meet their operating
needs to fund planned levels of capital expenditures and to continue to expand
the number of stores.
FORWARD-LOOKING INFORMATION
Certain sections of this Form 10-Q contain 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.
The Company operates in a highly competitive environment, and its
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 risks associated with the integration of acquired operations,
the Company's ability to select and stock merchandise attractive to customers,
the level of future promotional activity, the number and location of company
stores, economic and weather factors affecting consumer spending, operating
factors, including manufacturing quality of optical and engraved goods,
affecting customer satisfaction, the Company's relationships with host stores
and franchisees, the mix of goods sold, pricing and other competitive factors,
and the seasonality of the Company's business, as well as actual determination
made with respect to the after tax charge relating to the AVC integration and
factors affecting the availability and price of the Company's shares.
-10-
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
4.1 Second Supplemental Indenture dated September 15, 1997,
between Cole National Group, Inc. and Norwest Bank Minnesota,
National Association, as Trustee, relating to the 11-1/4%
Senior Notes Due 2001, incorporated by reference to Exhibit
4.7 of Cole National Group, Inc.'s Registration Statement on
Form S-1, Amendment No. 3, filed with the Commission on
December 5, 1997 (Registration No. 333-34963).
10.1 Form of Cole National Corporation 401(k) Savings Plan,
incorporated by reference to Exhibit 4.1 of Cole National
Corporation's Registration Statement on Form S-8, filed with
the Commission on November 20, 1997 (Registration No.
333-40609).
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly
period ended November 1, 1997.
-11-
<PAGE> 14
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLE NATIONAL CORPORATION
By: /s/ Wayne L. Mosley
--------------------------------------
Wayne L. Mosley
Vice President and Controller
(Duly Authorized Officer and Principal
Accounting Officer)
Date: December 10, 1997
-12-
<PAGE> 15
COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED NOVEMBER 1, 1997
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
4.1 Second Supplemental Indenture dated September 15, 1997, between
Cole National Group, Inc. and Norwest Bank Minnesota, National
Association, as Trustee, relating to the 11-1/4% Senior Notes Due
2001, incorporated by reference to Exhibit 4.7 of Cole National
Group, Inc.'s Registration Statement on Form S-1, Amendment No. 3,
filed with the Commission on December 5, 1997 (Registration No.
333-34963).
10.1 Form of Cole National Corporation 401(k) Savings Plan,
incorporated by reference to Exhibit 4.1 of Cole National
Corporation's Registration Statement on Form S-8, filed with the
Commission on November 20, 1997 (Registration No. 333-40609).
27 Financial Data Schedule
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> NOV-01-1997
<CASH> 34,088
<SECURITIES> 0
<RECEIVABLES> 60,105
<ALLOWANCES> 3,404
<INVENTORY> 162,263
<CURRENT-ASSETS> 297,251
<PP&E> 240,909
<DEPRECIATION> 118,636
<TOTAL-ASSETS> 652,694
<CURRENT-LIABILITIES> 194,218
<BONDS> 292,199
0
0
<COMMON> 15
<OTHER-SE> 138,989
<TOTAL-LIABILITY-AND-EQUITY> 652,694
<SALES> 767,380
<TOTAL-REVENUES> 767,380
<CGS> 261,256
<TOTAL-COSTS> 722,387
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,064
<INCOME-PRETAX> 21,929
<INCOME-TAX> 9,429
<INCOME-CONTINUING> 12,500
<DISCONTINUED> 0
<EXTRAORDINARY> (12,183)
<CHANGES> 0
<NET-INCOME> 317
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
