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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 3, 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)
(216)449-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. X YES NO
--- ---
AS OF MAY 27, 1997, 12,125,408 SHARES OF THE REGISTRANT'S CLASS A COMMON STOCK
WERE OUTSTANDING.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MAY 3, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MAY 3, 1997 AND FEBRUARY 1, 1997 ....... 1
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 13 WEEKS ENDED MAY 3,
1997 AND MAY 4, 1996...................................................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 13 WEEKS ENDED MAY 3,
1997 AND MAY 4, 1996...................................................... 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 6 - 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 9
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
May 3, February 1,
1997 1997
---------- -----------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and temporary cash investments $ 20,205 $ 73,141
Accounts receivable, less allowance for doubtful
accounts of $1,632 in 1997 and $3,068 in 1996 41,845 39,660
Current portion of notes receivable 5,106 6,060
Inventories 127,456 119,236
Prepaid expenses and other 8,658 7,378
Deferred income tax benefits 24,948 24,948
--------- ---------
Total current assets 228,218 270,423
Property and equipment, at cost 223,596 216,575
Less-accumulated depreciation and amortization (107,611) (100,918)
--------- ---------
Total property and equipment, net 115,985 115,657
Other assets:
Notes receivable, excluding current portion 25,507 27,951
Deferred income taxes and other 36,534 29,504
Intangible assets, net 138,237 139,308
--------- ---------
Total assets $ 544,481 $ 582,843
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,330 $ 1,336
Accounts payable 44,791 62,379
Accrued interest 8,706 9,630
Accrued liabilities 116,095 123,263
Accrued income taxes 6,093 21,970
--------- ---------
Total current liabilities 177,015 218,578
Long-term debt, net of discount and current portion 317,328 317,547
Other long-term liabilities 26,956 27,000
Stockholders' equity:
Common stock 12 12
Paid-in capital 132,714 131,238
Foreign currency translation adjustment (1,066) (606)
Notes receivable - stock option exercise (1,024) (1,024)
Accumulated deficit (107,454) (109,902)
--------- ---------
Total stockholders' equity 23,182 19,718
--------- ---------
Total liabilities and stockholders' equity $ 544,481 $ 582,843
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 Weeks Ended
-------------------------
May 3, May 4,
1997 1996
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<S> <C> <C>
Net revenue $249,530 $142,890
Costs and expenses:
Cost of goods sold 85,770 44,500
Operating expenses 143,343 87,352
Depreciation and amortization 7,815 4,235
-------- --------
Total costs and expenses 236,928 136,087
-------- --------
Income from operations 12,602 6,803
Interest expense, net 8,231 5,052
-------- --------
Income before income taxes 4,371 1,751
Income tax provision 1,923 771
-------- --------
Net income $ 2,448 $ 980
======== ========
Earnings per share $ .20 $ .09
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------
May 3, May 4,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,448 $ 980
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization 7,815 4,235
Non-cash interest 96 106
Change in assets and liabilities:
Increase in accounts and notes receivable,
prepaid expenses and other assets (1,564) (2,079)
Increase in inventories (8,220) (3,610)
Decrease in accounts payable, accrued liabilities
and other liabilities (22,767) (3,842)
Decrease in accrued interest (924) (5,107)
Decrease in accrued income taxes (15,877) (3,278)
-------- --------
Net cash used by operating activities (38,993) (12,595)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (296) (221)
Proceeds from exercise of stock options and warrants 841 82
Other (152) --
-------- --------
Net cash provided (used) by financing activities 393 (139)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (7,048) (3,406)
Systems development costs (2,543) (349)
Other, net (4,745) (145)
-------- --------
Net cash used by investing activities (14,336) (3,900)
-------- --------
Cash and temporary cash investments:
Net decrease during the period (52,936) (16,634)
Balance, beginning of the period 73,141 29,260
-------- --------
Balance, end of the period $ 20,205 $ 12,626
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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COLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Cole National
Corporation (CNC), its wholly owned subsidiaries, including Cole National Group,
Inc. (CNG), and CNG's wholly owned subsidiaries (collectively, the "Company").
All significant intercompany transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures herein are adequate to make the information not
misleading. These statements should be read in conjunction with the Company's
consolidated financial statements for the fiscal year ended February 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 May 3, 1997 and the
results of operations and cash flows for the 13 weeks ended May 3, 1997 and May
4, 1996.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at May 3, 1997 and May 4,
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 $17,967,126 and $9,553,000, respectively, for the 13 weeks
ended May 3, 1997, and $4,095,000 and $10,323,000, respectively, for the 13
weeks ended May 4, 1996.
Earnings Per Share
Earnings per share for the 13 weeks ended May 3, 1997 and May 4, 1996 have
been calculated based on 12,019,488 and 10,435,423, respectively, weighted
average number of common shares outstanding. The impact of common stock
equivalents is not material to first quarter results.
In the fourth quarter of fiscal 1997 the Company will adopt Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". Under SFAS
128, the Company's basic earnings per share and fully 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 fully diluted earnings per share
will include common stock equivalents and will not differ materially from
current accounting requirements. For the quarter ended May 3, 1997, the number
of shares used to compute basic earnings per share is the same as the weighted
average number of shares used to compute primary earnings per share (shown
above).
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(2) SEASONALITY
The Company's business historically has been 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. Although the Pearle Acquisition will moderate the
seasonality of the Company due to relatively lower levels of optical product
sales during the Christmas holiday season, the Company's business will remain
seasonal. Therefore, results of operations for interim periods are not
necessarily indicative of full year results.
(3) RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of certain factors affecting the Company's
results of operations for the 13 week periods ended May 3, 1997 and May 4, 1996
(the Company's first quarter) and its liquidity and capital resources. This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this filing and the Company's
audited financial statements for the fiscal year ended February 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 first quarter of fiscal 1997 increased 75% to $249.5
million from $142.9 million for the same period in fiscal 1996. The increase was
primarily attributable to the acquisitions of Pearle and Sears Optical of Canada
in November 1996, which accounted for $85.5 million of the increase. For the
quarter, the Company's consolidated comparable store sales increased 5.4% in
fiscal 1997 and 7.6% in fiscal 1996. A strong comparable store sales increase of
10.9% at Cole Vision was primarily a result of successful eyewear promotions and
growth in managed vision care sales. Comparable store sales decreased 3.7% at
Cole Gift which was negatively impacted by the lower levels of mall traffic and
unseasonably bad weather in the early spring. In the first quarter of fiscal
1997, the Company began classifying capitation and other fees associated with
its growing managed vision care business as revenue, which previously had been
netted with operating expenses. The opening of additional Cole Gift and Cole
Vision units also contributed to the first quarter revenue increase. At May 3,
1997, the Company had 3,119 specialty service retail locations, including 327
franchised locations, compared to 2,308 at May 4, 1996.
Gross profit increased to $163.8 million in the first quarter of fiscal
1997 from $98.4 million in the same period last year. The gross profit increase
was primarily attributable to the addition of Pearle, increased revenue at Cole
Vision and the classification of managed vision care fees as revenue. Gross
margins for the first quarter of fiscal 1997 and fiscal 1996 were 65.6% and
68.9%, respectively. The lower gross margin percentage resulted primarily from
the addition of Pearle which has 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 receivable and the managed vision care fees, each of
which has no corresponding cost of goods sold.
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<PAGE> 9
Operating expenses increased 64.1% to $143.3 million in the first quarter
of fiscal 1997 from $87.4 million in fiscal 1996, but as a percentage of
revenue, operating expenses decreased to 57.4% in fiscal 1997 from 61.1% in
fiscal 1996. The leverage improvement 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 $7.8 million was $3.6 million more than fiscal 1996 reflecting the
addition of Pearle and an increase in capital expenditures.
Income from operations increased 85.2% to $12.6 million for the first
quarter of fiscal 1997 from $6.8 million for the same period a year ago,
primarily the result of the Pearle acquisition and strong sales growth at Cole
Vision, offset in part by softer sales performance at Cole Gift.
Net interest expense increased $3.2 million over the first quarter of
fiscal 1996 to $8.2 million. The increase was primarily attributable to the
additional interest on $150.0 million of Notes issued in connection with
financing the Pearle acquisition, partially offset by a decrease in interest
expense due to the purchase and subsequent retirement of $15.1 million of Senior
Notes in the second quarter of fiscal 1996.
An income tax provision was recorded in the first quarter of both fiscal
1997 and fiscal 1996 using the Company's estimated annual effective tax rate of
44%.
Net income increased to $2.4 million for the first quarter of fiscal 1997
from $1.0 million for the first quarter of fiscal 1996. The increase was due to
improvement in income from operations offset, in part, by the increase in net
interest expense.
The Company's business historically has been 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. Although the Pearle Acquisition will moderate the
seasonality of the Company due to relatively lower levels of optical product
sales during the Christmas holiday season, the Company's business will remain
seasonal. 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 quarter of fiscal 1997
and fiscal 1996.
-7-
<PAGE> 10
Operations for the first quarter used $39.0 million of cash in fiscal 1997
compared to $12.6 million 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 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 $7.0
million and $3.4 million for the first quarter 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. Expenditures of $4.4 million were also incurred in the first
quarter of fiscal 1997 in connection with the construction of Cole Gift's new
warehouse and distribution facility. This facility, which the Company expects
will be fully operational in the third quarter of fiscal 1997, will most likely
be financed through a sale and lease-back transaction or through conventional
secured real estate financing.
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 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 Pearle, the Company's ability
to select and stock merchandise attractive to customers, 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.
-8-
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly
period ended May 3, 1997.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLE NATIONAL CORPORATION
By: /s/ Wayne L. Mosley
-----------------------------------------
Wayne L. Mosley
Vice President and Controller
(Duly Authorized Officer and Principal
Accounting Officer)
Date: June 13, 1997
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COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED MAY 3, 1997
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 20,205
<SECURITIES> 0
<RECEIVABLES> 48,583
<ALLOWANCES> 1,632
<INVENTORY> 127,456
<CURRENT-ASSETS> 228,218
<PP&E> 223,596
<DEPRECIATION> 107,611
<TOTAL-ASSETS> 544,481
<CURRENT-LIABILITIES> 177,015
<BONDS> 317,328
<COMMON> 12
0
0
<OTHER-SE> 23,170
<TOTAL-LIABILITY-AND-EQUITY> 544,481
<SALES> 249,530
<TOTAL-REVENUES> 249,530
<CGS> 85,770
<TOTAL-COSTS> 236,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,231
<INCOME-PRETAX> 4,371
<INCOME-TAX> 1,923
<INCOME-CONTINUING> 2,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,448
<EPS-PRIMARY> .20
<EPS-DILUTED> 0
</TABLE>
