<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 October 31,
1998, 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 19, 1998, 14,710,410 shares of the registrant's common stock were
outstanding.
================================================================================
<PAGE> 2
- --------------------------------------------------------------------------------
COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED OCTOBER 31, 1998
INDEX
<TABLE>
<CAPTION> Page No.
PART I. FINANCIAL INFORMATION
<S> <C> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1998
and January 31, 1998............................................... 1
Consolidated Statements of Operations for the 13 and 39
weeks ended October 31, 1998 and November 1, 1997.................. 2
Consolidated Statements of Cash Flows for
the 39 weeks ended October 31, 1998 and
November 1, 1997................................................... 3
Notes to Consolidated Financial Statements......................... 4 - 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 7 - 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 12
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and temporary cash investments $ 19,293 $ 68,053
Accounts receivable, less allowance for doubtful accounts
of $6,898 in 1998 and $5,377 in 1997 53,887 52,030
Current portion of notes receivable 3,365 4,177
Refundable income taxes - 9,520
Inventories 151,802 119,970
Prepaid expenses and other 8,688 9,195
Deferred income tax benefits 22,335 21,534
---------- ----------
Total current assets 259,370 284,479
Property and equipment, at cost 266,447 242,966
Less-accumulated depreciation and amortization (127,156) (115,162)
---------- ----------
Total property and equipment, net 139,291 127,804
Other assets:
Notes receivable, excluding current portion 35,059 25,783
Deferred income taxes and other 69,022 54,241
Intangible assets, net 160,403 159,077
---------- ----------
Total assets $ 663,145 $ 651,384
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 1,471 $ 16,027
Accounts payable 77,794 71,867
Accrued interest 1,838 6,615
Accrued liabilities 108,702 115,838
Accrued income taxes 10,470 957
---------- ----------
Total current liabilities 200,275 211,304
Long-term debt, net of discount and current portion 276,393 277,401
Other long-term liabilities 30,664 30,664
Stockholders' equity 155,813 132,015
---------- ----------
Total liabilities and stockholders' equity $ 663,145 $ 651,384
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
1
<PAGE> 4
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------------------- --------------------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue $ 256,654 $ 252,744 $ 796,093 $ 734,593
Costs and expenses:
Cost of goods sold 84,910 86,512 264,331 250,086
Operating expenses 151,790 144,795 455,829 414,341
Depreciation and amortization 8,655 7,788 25,144 22,274
Business integration charge -- 1,100 -- 1,100
--------- --------- --------- ---------
Total costs and expenses 245,355 240,195 745,304 687,801
--------- --------- --------- ---------
Operating income 11,299 12,549 50,789 46,792
Other expense (income):
Interest expense 6,852 6,942 20,637 23,866
Interest and other income (6,743) (592) (8,008) (1,839)
--------- --------- --------- ---------
Total other expense (income) 109 6,350 12,629 22,027
--------- --------- --------- ---------
Income from continuing operations before
income taxes and extraordinary item 11,190 6,199 38,160 24,765
Income tax provision 2,128 2,664 13,186 10,648
--------- --------- --------- ---------
Income from continuing operations
before extraordinary items 9,062 3,535 24,974 14,117
Operating loss from discontinued
operations, net of income taxes -- (841) -- (1,617)
--------- --------- --------- ---------
Income before extraordinary item 9,062 2,694 24,974 12,500
Extraordinary loss on early extinguishment of debt -- (12,183) -- (12,183)
--------- --------- --------- ---------
Net income (loss) $ 9,062 $ (9,489) $ 24,974 $ 317
========= ========= ========= =========
Earnings (loss) per common share:
Basic-
Income from continuing operations $ 0.61 $ 0.24 $ 1.69 $ 1.08
Loss from discontinued operations -- (0.05) -- (0.12)
Extraordinary loss -- (0.83) -- (0.94)
--------- --------- --------- ---------
Net income (loss) $ 0.61 $ (0.64) $ 1.69 $ 0.02
========= ========= ========= =========
Diluted-
Income from continuing operations $ 0.60 $ 0.23 $ 1.64 $ 1.04
Loss from discontinued operations -- (0.05) -- (0.12)
Extraordinary loss -- (0.80) -- (0.90)
--------- --------- --------- ---------
Net income (loss) $ 0.60 $ (0.62) $ 1.64 $ 0.02
========= ========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated statements.
2
<PAGE> 5
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------------
October 31, November 1,
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,974 $ 317
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Extraordinary loss on early extinguishment of debt -- 12,183
Depreciation and amortization 25,144 22,274
Non-cash interest and other (953) 206
Change in assets and liabilities:
Decrease (increase) in accounts and notes
receivable, prepaid expenses and other assets 316 (14,429)
Increase in inventories (30,947) (33,655)
Decrease in accounts payable, accrued liabilities
and other liabilities (5,784) (16,730)
Decrease in accrued interest (4,777) (2,199)
Increase (decrease) in accrued, refundable and
deferred income taxes 18,232 (9,911)
-------- ---------
Net cash provided (used) by operating activities 26,205 (41,944)
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment, net (30,171) (25,347)
Systems development costs (12,417) (11,590)
Investment in Pearle Europe (10,296) (2,684)
Repayment of Pearle Europe loan 3,144 --
Acquisitions of businesses, net of cash acquired (6,848) (27,705)
Other, net 195 (127)
-------- ---------
Net cash used by investing activities (56,393) (67,453)
-------- ---------
Cash flows from financing activities:
Repayment of long-term debt (15,676) (170,354)
Proceeds from long-term debt -- 125,000
Payment of deferred financing fees -- (2,896)
Proceeds from public stock offering, net -- 115,888
Purchase of treasury stock (4,595) --
Proceeds from exercise of stock options and warrants 1,945 2,836
Other, net (246) (130)
-------- ---------
Net cash provided (used) by financing activities (18,572) 70,344
-------- ---------
Cash and temporary cash investments:
Net decrease during the period (48,760) (39,053)
Balance, beginning of the period 68,053 73,141
-------- ---------
Balance, end of the period $ 19,293 $ 34,088
======== =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated 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. Prior year financial statements have been restated to reflect the
discontinued operations of Cole Gift Centers, Inc. ("CGC") chain of personalized
gift and greeting card departments located in host stores.
Results for interim periods are not necessarily indicative of the results
to be expected for the full year. These statements should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
in the Company's annual report on Form 10-K for the fiscal year ended January
31, 1998.
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 October 31, 1998 and the
results of operations for the 13 and 39 weeks ended October 31, 1998 and
November 1, 1997, and cashflows for the 39 weeks ended October 31, 1998 and
November 1, 1997.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories.
Cash Flows
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $1,643,000 and $24,627,000, respectively, for the 39 weeks
ended October 31, 1998, and $19,406,000 and $27,147,000, respectively, for the
39 weeks ended November 1, 1997.
4
<PAGE> 7
Earnings Per Share
Earnings per share for the 13 and 39 weeks ended October 31, 1998 and
November 1, 1997 have been calculated based on the following weighted
average number of common shares and equivalents outstanding:
<TABLE>
<CAPTION>
13 Weeks 39 Weeks
------------------------------------ ------------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------ ---------- ------------ -----------
<S> <C> <C> <C> <C>
Basic 14,788,958 14,728,170 14,808,549 13,061,503
Diluted 15,100,447 15,259,075 15,240,685 13,568,055
</TABLE>
(2) INVESTMENT IN PEARLE EUROPE B.V.
In February 1998, the Company repaid a $3.2 million note payable to a
subsidiary of Pearle Europe and invested an additional $7.2 million in the form
of 8% shareholder loans to Pearle Europe in connection with Pearle Europe's
acquisition of optical operations in Germany and Austria.
In June 1998, Pearle Europe repaid to the Company a shareholder loan,
including interest thereon, in the amount of $3.7 million.
(3) NEW ACCOUNTING PRONOUNCEMENT
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement requires that the Company report the change in its equity during a
period from non-owner sources. For the 13 and 39 weeks ended October 31, 1998
and November 1, 1997, components of other comprehensive income (loss) relate to
foreign currency translation adjustments related to the Company's Canadian
operations and investment in Pearle Europe. Total comprehensive income is as
follows (000's omitted):
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
--------------------------- -------------------------
Oct. 31, Nov. 1, Oct. 31, Nov. 1,
1998 1997 1998 1997
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ 9,062 $(9,489) $24,974 $ 317
Other comprehensive income (loss) 1,199 422 1,196 (487)
------- ------- ------- -----
Total comprehensive income (loss) $10,261 $(9,067) $26,170 $(170)
======= ======= ======= =====
</TABLE>
(4) OTHER INCOME
The 1998 third quarter results include the recognition of $6.0 million of
income from cash received in a nontaxable settlement of certain contingencies
related to several claims against and indemnifications from the former owner of
Pearle (the "Pearle Settlement"). In connection with the Pearle Settlement
agreement, the Company assumed secondary liability for approximately $10.0
million of loans to certain franchisees held by a third party. The Company
is contingently liable should any of these franchisees default, and also for
prepayment penalties of up to $1.1 million. The Company has established reserves
for potential losses on the loans, which mature through 2001. The Pearle
Settlement also included a release of the former owner of Pearle from certain
future non-tax claims related to Pearle.
5
<PAGE> 8
(5) BUSINESS INTEGRATION CHARGE
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 American Vision Centers, Inc. ("AVC") acquisition. Such charge included
costs incurred related to the integration and consolidation of AVC into the
Company's operations.
(6) RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
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 continuing operations for the 13 and 39 week periods ended October
31, 1998 and November 1, 1997 (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 January 31, 1998 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 January 31, 1998 is referred to as "fiscal
1997."
RESULTS OF OPERATIONS
Net revenue for the third quarter of fiscal 1998 increased 1.5% to $256.7
million from $252.7 million for the same period in fiscal 1997. Net revenue for
the first nine months of fiscal 1998 increased 8.4% to $796.1 million from
$734.6 million for the same period in fiscal 1997. The increases in revenue were
primarily attributable to the inclusion in fiscal 1998 of additional Cole
Optical units, including the American Vision Centers, Inc. ("AVC") stores
acquired in August 1997, consolidated comparable store sales increases of 1.2%
for the third quarter and 2.8% for the first nine months of fiscal 1998, and the
growth of managed vision care fees. At Cole Optical, third quarter comparable
store sales increased 1.1% at Cole Vision and decreased 3.1% at Pearle. For the
first nine months, comparable store sales increased 3.2% at Cole Vision and
decreased 0.7% at Pearle. The Pearle comparable store sales have been impacted
by a weaker than expected reception to new marketing and merchandising programs,
as well as the increased competitive pressures in the optical business and what
the Company perceives may be a general softening in the retail optical market.
At Things Remembered, the comparable store sales increases of 7.1% and 6.7% for
the third quarter and first nine months, respectively, reflected increased sales
of additional personalization and new products. At October 31, 1998, the Company
had 2,882 specialty service retail locations, including 406 franchised
locations, compared to 2,860 at November 1, 1997.
Gross profit increased 3.3% to $171.7 million in the third quarter of
fiscal 1998 from $166.2 million in the same period last year. For the first nine
months of fiscal 1998, gross profit increased 9.8% to $531.8 million from $484.5
million in the same period a year ago. The gross profit increases were primarily
attributable to the increased revenue at both Cole Optical and Things
Remembered. Gross margins for the third quarter of fiscal 1998 and fiscal 1997
were 66.9% and 65.8%, respectively. For the first nine months of fiscal 1998 and
fiscal 1997, gross margins were 66.8% and 66.0%, respectively. Gross margins
were favorably impacted by the production efficiencies and lower contact lens
costs at Cole Optical and increased personalization sales at Things Remembered.
Operating expenses increased 4.8% to $151.8 million in the third quarter of
fiscal 1998 from $144.8 million in fiscal 1997, and as a percentage of revenue,
operating expenses increased to 59.1% in fiscal 1998 from 57.3% in fiscal 1997.
For the first nine months of fiscal 1998, operating expenses increased 10.0% to
$455.8 million from $414.3 million in fiscal 1997, and as a percentage of
revenue, operating expenses increased to 57.3% in fiscal 1998 from 56.4% in
7
<PAGE> 10
fiscal 1997. The leverage loss for the third quarter and nine months was
primarily attributable to the sales performance at Pearle and increased expenses
related to managed vision care fee growth. In addition, for the first nine
months, the leverage loss was also impacted by increased advertising
expenditures at Pearle, partially offset by a leverage gain on store occupancy
costs. Fiscal 1998 depreciation and amortization expense of $8.7 million in the
third quarter and $25.1 million in the first nine months was $0.9 million and
$2.9 million more, respectively, than the same periods in fiscal 1997 reflecting
the acquisition of AVC and an increase in capital expenditures.
Operating income decreased 10.0% to $11.3 million for the third quarter of
fiscal 1998 from $12.5 million for the same period a year ago reflecting a
shortfall at Pearle, which more than offset improved results at Cole Vision and
Things Remembered and the $1.1 million business integration charge associated
with the acquisition of AVC last year. For the first nine months of fiscal 1998,
operating income increased 8.5% to $50.8 million from $46.8 million for the same
period last year. This increase was primarily the result of the increase in net
revenue and the $1.1 million business integration charge last year.
Interest expense decreased $0.1 million from the third quarter of fiscal
1997 to $6.9 million and decreased $3.2 million in the nine months of fiscal
1998 to $20.6 million. The decreases were primarily attributable to the purchase
and retirement of $150.9 million of 11-1/4% Senior Notes in connection with a
tender offer in September 1997, partially offset by additional interest on
$125.0 million of 8-5/8% Senior Subordinated Notes issued in August 1997.
Interest and other income includes the recognition of $6.0 million of income in
the third quarter of fiscal 1998 from cash received in a nontaxable settlement
of certain contingencies related to several claims against and indemnifications
from the former owner of Pearle ("the Pearle Settlement").
An income tax provision was recorded in the first nine months of fiscal
1998 and fiscal 1997 using the Company's estimated annual effective tax rates of
41% and 43%, respectively, excluding the nontaxable income from the Pearle
Settlement. The reduction in the rate primarily reflects the estimated impact of
non-deductible amortization of goodwill in both years.
Net income increased to $9.1 million for the third quarter of fiscal 1998
from a loss of $9.5 million for the same period in fiscal 1997. For the first
nine months of fiscal 1998, net income increased to $25.0 million from $0.3
million for the same period last year. The third quarter increase was primarily
due to the Pearle Settlement this year, a $0.8 million loss from discontinued
operations last year and an extraordinary loss of $12.2 million on early
extinguishment of debt last year, partially offset by a $1.3 million decrease in
operating income. The nine month increase was due to the Pearle Settlement,
improvement in income from operations, the reduction of net interest expense,
the lower effective tax rate, a $1.6 million loss from discontinued operations
in the first nine months of fiscal 1997 and the extraordinary loss on early
extinguishment of debt last year.
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.
8
<PAGE> 11
There were no working capital borrowings outstanding as of October 31,
1998. During the first nine months of fiscal 1998, the maximum amount of working
capital borrowings outstanding was $12.0 million. There were no working capital
borrowings outstanding at any time during fiscal 1997.
In connection with the Pearle Settlement agreement, the Company assumed
secondary liability for approximately $10.0 million of loans to certain
franchisees held by a third party. The Company is contingently liable should any
of these franchisees default, and also for prepayment penalties of up to $1.1
million. The Company has established reserves for potential losses on the loans,
which mature through 2001. The settlement also included a release of the former
owner of Pearle from certain future non-tax claims related to Pearle.
Operations for the first nine months provided $26.2 million of cash in
fiscal 1998 and used $41.9 million of cash in fiscal 1997. The increase in cash
provided by operations was primarily attributable to the increase in income from
continuing operations, the payment in 1997 of $15.0 million of taxes due on the
1996 sale of Pearle's European operation, the receipt of an $8.6 million income
tax refund in fiscal 1998, and lower amounts of cash used in the first nine
months of fiscal 1998 to fund working capital.
Cash used by investing activities included capital additions of $30.2
million and $25.3 million for the first nine months of fiscal 1998 and fiscal
1997, respectively. The majority of capital expenditures were for store
fixtures, equipment and leasehold improvements for new stores and the remodeling
of existing stores. In fiscal 1997, capital expenditures of $6.6 million were
incurred in connection with the construction of Things Remembered's new
warehouse and distribution facility. In May 1998, the Company purchased an
office building in Twinsburg, Ohio, which will serve as the headquarters for the
Company's optical and systems operations, for $9.5 million. The Company is
currently evaluating financing alternatives for both facilities.
During the first nine months of fiscal 1998 and fiscal 1997, investing
activities also included $6.8 million and $27.7 million, respectively, of cash
used for the acquisitions of businesses that consisted primarily of optical
retail locations.
During the first nine months of fiscal 1998, the Company repaid a $3.2
million note payable to a subsidiary of Pearle Europe B.V. (Pearle Europe),
invested an additional $7.2 million in the form of 8% shareholder loans to
Pearle Europe in connection with Pearle Europe's acquisition of two optical
operations in Germany and Austria, and was repaid $3.7 million by Pearle Europe
representing a shareholder loan and accrued interest.
Investments in systems development costs totaled $12.4 million and $11.6
million in the first nine months of fiscal 1998 and fiscal 1997, respectively.
During the current fiscal year through November 30, 1998, the Company has
repurchased 211,100 shares of common stock for an aggregate purchase price of
approximately $4.8 million and has remaining authority to purchase up to 768,900
shares of common stock in the open market and block purchases.
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 their planned store
expansion and to fund their planned capital expenditures and systems development
costs.
9
<PAGE> 12
RESTRUCTURING AND OTHER CHARGES; FOURTH QUARTER RESULTS
The Company recently announced that, to address the weakness in Pearle's
operating results, it has begun work to change the operating structure of its
optical business to more clearly align the merchandising and marketing of its
two principal brands, Pearle Vision and Sears Optical, with the needs of the
different consumers that each brand serves. The decision to create separate
organizational structures at Pearle and Sears Optical reflects the belief that
the Company can improve each unit's performance through additional management
focus.
The Company expects to report restructuring and other charges of
approximately $25.0 million reflecting expenses for revising the Pearle
operating model, including the write down of inventory and other assets, the
cost of consultants retained to assist management with certain aspects of the
restructuring, human resource expenses associated with personnel changes, the
costs of retention and recruitment of senior management, the costs of relocating
and consolidating facilities and other charges. All or a majority of the charges
are expected to be taken in the fourth quarter of fiscal 1998.
Given the recent trend of sales at Pearle, the ongoing competitive
pressures in the optical business and the importance of the upcoming holiday
season, management believes income from continuing operations before
restructuring and other unusual charges for the fourth quarter will be
approximately half of last year's level.
YEAR 2000
The Company has been working with a consultant to assess and resolve the
potential impact of the Year 2000 on the ability of the Company's computerized
information systems to accurately process information that may be date-sensitive
(the "Year 2000 Readiness Program"). Any of the Company's programs that
recognize a date using "00" as the year 1900 rather than the Year 2000 could
result in errors or system failures.
During the third quarter of fiscal 1998, the Company completed the
assessment of its internal critical and non-critical hardware and software.
Included in the Company's assessment was the identification of all critical and
non-critical computer programs and hardware, including non-information
technology systems such as HVAC, telephone and others containing embedded
microcontrollers, and an evaluation of their Year 2000 readiness. The Company
utilizes over 500 separate computer information systems across its operations,
many of which were recently installed and are Year 2000 ready. In addition,
modification to many of the Company's other critical programs has been
completed and testing of these programs is in process. The Company currently
believes that all critical programs and hardware will be Year 2000 ready,
including testing, by the end of the second quarter of 1999.
Concurrent with this internal assessment, the Company identified and
contacted critical vendors, host stores and managed health care partners with
whom the Company does business regarding their Year 2000 readiness. Although not
all responses from third parties have been received, the Company is not
currently aware of any critical third party whose Year 2000 issues is likely to
have a material effect on the Company.
The Company has not yet developed contingency plans and such plans will
depend primarily on the responses from critical third parties in the event the
10
<PAGE> 13
Company or critical third parties should fail to become Year 2000 ready. The
Company expects its contingency plans to be completed by the end of the first
quarter of fiscal 1999.
Notwithstanding that the Company is proceeding diligently with the
implementation of its own Year 2000 Readiness Program, including ascertaining
Year 2000 readiness of critical third parties, the inability of the Company or
critical third parties to effectuate timely and cost effective solutions to Year
2000 issues could have a material adverse effect on the Company.
The Company estimates the total cost of the Year 2000 Readiness Program
will be approximately $3.3 million, including approximately $0.3 million of new
hardware and software that will be capitalized. The remaining $3.0 million will
be expensed as incurred (approximately $1.7 million in fiscal 1998 and $1.3
million in fiscal 1999). These costs include only external costs as the Company
does not separately track internal costs, which consist primarily of payroll
related costs of employees, for the Year 2000 Readiness Program. The estimate of
external costs does not include costs associated with addressing and resolving
issues as a result of the failure of third parties to become Year 2000 ready.
For the 13 and 39 weeks ended October 31, 1998, in addition to internal
costs, the Company has incurred approximately $0.7 million and $1.0 million,
respectively, of external Year 2000 costs, all of which have been expensed.
FORWARD-LOOKING INFORMATION
Certain sections of this Form 10-Q, including this Management's Discussion
and Analysis, contain forward-looking statements within the meaning of the
Private Securities Litigation Act of 1995. 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
timing and achievement of the restructuring of the optical business, the ability
of the Company and its suppliers, host stores, and managed care organization
partners to achieve Year 2000 readiness, the Company's ability to select and
stock merchandise attractive to customers, the implementation of its store
acquisition program, 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.
11
<PAGE> 14
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 October 31, 1998.
12
<PAGE> 15
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 3, 1998
13
<PAGE> 16
COLE NATIONAL CORPORATION
FORM 10-Q
QUARTER ENDED OCTOBER 31, 1998
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
14
<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-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 19,293
<SECURITIES> 0
<RECEIVABLES> 64,150
<ALLOWANCES> 6,898
<INVENTORY> 151,802
<CURRENT-ASSETS> 259,370
<PP&E> 266,447
<DEPRECIATION> 127,156
<TOTAL-ASSETS> 663,145
<CURRENT-LIABILITIES> 200,275
<BONDS> 276,393
0
0
<COMMON> 15
<OTHER-SE> 155,798
<TOTAL-LIABILITY-AND-EQUITY> 663,145
<SALES> 796,093
<TOTAL-REVENUES> 796,093
<CGS> 264,331
<TOTAL-COSTS> 739,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,629
<INCOME-PRETAX> 38,160
<INCOME-TAX> 13,186
<INCOME-CONTINUING> 24,974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,974
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.64
</TABLE>
