<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): NOVEMBER 15, 1996
COLE NATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
33-66342
(COMMISSION FILE NUMBER)
34-1744334
(I.R.S. EMPLOYER 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
The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K, dated
November 15, 1996 as set forth in the pages attached hereto:
"Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits" is hereby amended to include certain financial statements and pro
forma financial information required in connection with the acquisition of
Pearle, Inc.
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial statements of business acquired.
Pearle, Inc. and Subsidiaries
Audited Consolidated Financial Statements:
<TABLE>
<S> <C>
Independent Auditors' Report.................................................. 4
Consolidated Balance Sheets at September 30, 1996 and 1995.................... 5
Consolidated Statements of Operations for the Years Ended September 30, 1996,
1995 and 1994............................................................... 6
Consolidated Statements of Stockholder's Equity for the Years Ended September
30, 1996, 1995 and 1994..................................................... 7
Consolidated Statements of Cash Flows for the Years Ended September 30, 1996,
1995 and 1994............................................................... 8
Notes to Consolidated Financial Statements.................................... 9
</TABLE>
(b) Pro forma financial information.
Cole National Group, Inc. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Financial Data:
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Data..................... 19
Unaudited Pro Forma Condensed Consolidated Balance Sheet As of November 2,
1996........................................................................ 21
Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet............. 22
Unaudited Pro Forma Condensed Consolidated Statement of Income For the Fiscal
Year Ended February 3, 1996................................................. 23
Unaudited Pro Forma Condensed Consolidated Statement of Income For the 39
Weeks Ended November 2, 1996................................................ 24
Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income...... 25
Computation of Pro Forma Ratio of Earnings to Fixed Charges................... 28
</TABLE>
(c) Exhibits.
<TABLE>
<C> <S>
2.1 Stock Purchase Agreement, dated as of September 24, 1996, among The
Pillsbury Company, Pearle, Inc. and Cole National Corporation (Incorporated
by reference to Exhibit 2.1 of Cole National Corporation's Current Report on
Form 8-K, filed with the Commission on December 2, 1996).
2.2 Purchase Agreement, dated as of November 15, 1996, among Cole National
Corporation and Cole National Group, Inc. (Incorporated by reference to
Exhibit 2.3 of Cole National Corporation's Current Report on Form 8-K, filed
with the Commission on December 2, 1996).
4.1 Indenture dated November 15, 1996, by and among Cole National Group, Inc.
and Norwest Bank Minnesota, National Association (Incorporated by reference
to Exhibit 4.1 of Cole National Corporation's Current Report on Form 8-K,
filed with the Commission on December 2, 1996).
4.2 Registration Rights Agreement dated November 15, 1996, by and among Cole
National Group, Inc. and CIBC Wood Gundy Securities Corp., CS First Boston
Corporation, NationsBanc Capital Markets, Inc. and Smith Barney Inc.
(Incorporated by reference to Exhibit 4.2 of Cole National Corporation's
Current Report on Form 8-K, filed with the Commission on December 2, 1996).
23.1* Consent of KPMG Peat Marwick LLP.
</TABLE>
2
<PAGE> 3
<TABLE>
<C> <S>
99.1 Credit Agreement, dated as of November 15, 1996, among Cole Vision
Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle, Inc.
and Pearle Service Corporation and Canadian Imperial Bank of Commerce.
(Incorporated by reference to Exhibit 99.1 of Cole National Corporation's
Current Report on Form 8-K, filed with the Commission on December 2, 1996).
99.2 CNG Guarantee and Cash Collateral Agreement, dated as of November 15, 1996,
by Cole National Group, Inc. and Cole National Corporation (Incorporated by
reference to Exhibit 99.3 of Cole National Corporation's Current Report on
Form 8-K, filed with the Commission on December 2, 1996).
99.3 Guarantee and Collateral Agreement, dated as of November 15, 1996, by Cole
Vision Corporation, Things Remembered, Inc., Cole Gift Centers, Inc.,
Pearle, Inc. and Pearle Service Corporation and Canadian Imperial Bank of
Commerce (Incorporated by reference to Exhibit 99.4 of Cole National
Corporation's Current Report on Form 8-K, filed with the Commission on
December 2, 1996).
<FN>
- ---------------
* Filed herewith.
</TABLE>
3
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pearle, Inc.:
We have audited the accompanying consolidated balance sheets of Pearle,
Inc. and subsidiaries as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholder's equity, and cash flows for
each of the years in the three-year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Pearle, Inc.
and subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 8, the Company changed its method of accounting
for income taxes in fiscal 1994 to adopt the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes.
KPMG Peat Marwick LLP
Dallas, Texas
November 22, 1996
4
<PAGE> 5
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 7,411 $ 17,800
Accounts and notes receivable:
Trade, less allowance for doubtful accounts of $2,908 in 1996 and
$2,944 in 1995................................................... 21,326 15,657
Current portion of franchise notes................................ 7,310 8,252
Other............................................................. 3,787 3,947
Inventories.......................................................... 36,751 35,432
Prepaid expenses..................................................... 1,741 1,661
Deferred income taxes................................................ 9,118 9,710
-------- --------
Total current assets............................................ 87,444 92,459
Property, plant and equipment, net..................................... 57,860 62,459
Franchise notes receivable, excluding current portion.................. 25,250 32,137
Intangible assets, net................................................. 121,669 216,767
Other assets........................................................... 809 544
-------- --------
$293,032 $404,366
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................................... $ 12,998 $ 8,268
Checks outstanding................................................... 11,196 9,711
Accrued payroll costs................................................ 12,212 14,140
Income taxes payable................................................. -- 18,710
Accrued advertising.................................................. 342 3,707
Accrued store closure costs.......................................... 2,233 6,573
Other accrued expenses and liabilities............................... 21,356 25,168
-------- --------
Total current liabilities....................................... 60,337 86,277
Payables to Parent and affiliated companies............................ -- 201,399
Deferred income taxes.................................................. 1,927 9,059
Other noncurrent liabilities........................................... 5,036 6,501
-------- --------
Total liabilities............................................... 67,300 303,236
-------- --------
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, 100 shares
issued and outstanding............................................ -- --
Additional paid-in capital........................................... 646,243 417,187
Accumulated deficit.................................................. (426,775) (324,392)
Foreign currency translation adjustment.............................. 6,264 8,335
-------- --------
Total stockholder's equity...................................... 225,732 101,130
Commitments and contingencies.......................................... -- --
-------- --------
$293,032 $404,366
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Trade sales.............................................. $ 341,141 $331,105 $311,233
Franchise revenues....................................... 24,883 23,147 24,785
-------- -------- ---------
Total revenues...................................... 366,024 354,252 336,018
-------- -------- ---------
Operating expenses:
Cost of sales, including buying and occupancy costs...... 184,486 187,185 181,340
Selling, general and administrative expenses............. 164,129 155,256 160,820
Restructuring and store closure costs.................... (2,083) 7,265 1,876
Royalty payments and other affiliate charges............. 6,406 6,039 5,916
Amortization of intangible assets........................ 15,604 14,260 14,289
Provision for impairment of intangible assets and related
costs................................................. 94,673 -- --
-------- -------- ---------
Total operating expenses............................ 463,215 370,005 364,241
-------- -------- ---------
Operating loss...................................... (97,191) (15,753) (28,223)
Other expense (income):
Gain on sale of subsidiary............................... -- (14,811) --
Interest expense to Parent............................... 15,461 15,769 17,309
Other interest, net...................................... (4,258) (4,829) (4,080)
-------- -------- ---------
Loss before income tax benefit and cumulative effect
of accounting change............................. (108,394) (11,882) (41,452)
Income tax benefit......................................... (6,011) (12,845) (10,480)
-------- -------- ---------
Income (loss) before cumulative effect of accounting
change.............................................. (102,383) 963 (30,972)
Cumulative effect of a change in accounting for income
taxes.................................................... -- -- 842
-------- -------- ---------
Net income (loss)................................... $(102,383) $ 963 $(31,814)
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
--------------------------------------------------------------------
FOREIGN
ADDITIONAL CURRENCY TOTAL
COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDER'S
STOCK CAPITAL DEFICIT ADJUSTMENT EQUITY
-------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Balances at September 30, 1993...... $ -- $ 405,829 $(293,541) $ 976 $ 113,264
Net loss............................ -- -- (31,814) -- (31,814)
Capital contribution from
affiliate......................... -- 7,222 -- -- 7,222
Effect of foreign currency
translation....................... -- -- -- 3,283 3,283
-------- -------- --------- ------- --------
Balances at September 30, 1994...... -- 413,051 (325,355) 4,259 91,955
Net income.......................... -- -- 963 -- 963
Capital contribution from
affiliate......................... -- 4,136 -- -- 4,136
Effect of foreign currency
translation....................... -- -- -- 4,076 4,076
-------- -------- --------- ------- --------
Balances at September 30, 1995...... -- 417,187 (324,392) 8,335 101,130
Net loss............................ -- -- (102,383) -- (102,383)
Distribution of assets to
affiliate......................... -- (19,730) -- -- (19,730)
Capital contributions from
affiliate......................... -- 248,786 -- -- 248,786
Effect of foreign currency
translation....................... -- -- -- (2,071) (2,071)
-------- -------- --------- ------- --------
Balances at September 30, 1996...... $ -- $ 646,243 $(426,775) $ 6,264 $ 225,732
======== ======== ========= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $(102,383) $ 963 $(31,814)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 31,587 33,448 39,953
Provision for bad debts............................... 1,797 (481) 2,162
Provision for inventory shrinkage and reserves........ 2,037 1,361 6,137
Restructuring and store closure costs................. (2,015) 7,164 2,487
Provision for impairment of intangible assets and
related costs....................................... 94,673 -- --
Gain on sale of subsidiary............................ -- (14,811) --
Changes in assets and liabilities:
Accounts and notes receivable....................... (6,642) 260 3,595
Inventories......................................... (3,004) 1,627 10,564
Prepaid expenses.................................... (80) 5,409 (5,409)
Checks outstanding.................................. 1,485 5,185 (10,079)
Accrued payroll costs............................... (1,928) 2,755 (2,572)
Income taxes payable................................ 3,360 6,573 751
Accrued advertising................................. (3,365) (2,353) 1,795
Accrued store closure costs......................... (2,512) (4,434) (18,878)
Accounts payable and accrued and other
liabilities...................................... (1,391) (7,695) (19,797)
Other assets........................................ (265) 662 3,939
Deferred income taxes............................... (6,540) (4,094) 19,094
Other noncurrent liabilities........................ (912) 625 1,512
--------- -------- --------
Net cash provided by operating activities........ 3,902 32,164 3,440
--------- -------- --------
Cash flows from investing activities:
Capital expenditures..................................... (13,558) (7,321) (6,083)
Proceeds from sale of property, plant and equipment...... 1,078 400 1,840
Proceeds from sale of subsidiary......................... -- 14,811 --
Other, net............................................... (710) 2,045 (257)
--------- -------- --------
Net cash provided by (used in) investing
activities..................................... (13,190) 9,935 (4,500)
--------- -------- --------
Cash flows from financing activities:
Increase (decrease) in payables to Parent and affiliated
companies............................................. 18,629 (37,396) (10,355)
Capital contribution from affiliate...................... -- 4,146 7,222
Distribution of assets to affiliate...................... (19,730) -- --
--------- -------- --------
Net cash used in financing activities............ (1,101) (33,250) (3,133)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (10,389) 8,849 (4,193)
Cash and cash equivalents at beginning of year............. 17,800 8,951 13,144
--------- -------- --------
Cash and cash equivalents at end of year................... $ 7,411 $ 17,800 $ 8,951
========= ======== ========
Supplemental disclosures of cash flow information -- cash
paid (received) during the year for:
Income taxes.......................................... $ 101 $(16,988) $(29,878)
========= ======== ========
Interest.............................................. $ 11,203 $ 10,759 $ 13,229
========= ======== ========
Supplemental schedule of noncash financing activities:
Capitalization of amounts payable to Parent and
affiliated companies.................................. $ 220,028 $ -- $ --
========= ======== ========
Current income taxes payable assumed by affiliate........ $ 22,070 $ -- $ --
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General
Prior to November 15, 1996, Pearle, Inc. ("Pearle" or the "Company"), was a
wholly owned subsidiary of Grand Metropolitan Incorporated ("GrandMet" or the
"Parent") (see note 2). GrandMet is an indirect wholly-owned subsidiary of Grand
Metropolitan Public Limited Company. Pearle is a retailer of eyecare products
and services through company operated and franchised optical stores in the
United States, Canada, Puerto Rico, Belgium and the Netherlands. In addition,
Pearle operates an optical processing laboratory and distribution center in
connection with its retail operations.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. Intercompany balances and transactions have
been eliminated in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash equivalents were
$1,207,000 and $1,174,000 at September 30, 1996 and 1995, respectively.
(d) Inventories
Inventories consist of frames, lenses and other raw materials and are
stated at the lower of weighted average cost or market.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance and repair
costs are expensed as incurred.
Depreciation and amortization are computed on a straight-line basis over
the estimated useful lives of the assets. Amortization of leasehold improvements
is based on the shorter of the lives of the respective leases or the estimated
useful lives of the improvements. The following is a summary of depreciation and
amortization periods for each classification of property, plant and equipment:
<TABLE>
<S> <C>
Buildings................ 20-33 years
Leasehold improvements... 4-20 years
Fixtures and equipment... 3-10 years
</TABLE>
(f) Intangible Assets
The excess of cost over the fair value of net tangible assets acquired upon
GrandMet's acquisition of the Company in 1985 and other businesses acquired by
Pearle since that time has been reflected as intangible assets in the
accompanying consolidated balance sheets. Such intangible assets are being
amortized on a straight-line basis over periods up to 40 years (see note 7). As
a result of the sale of the stock of the Company on November 15, 1996, it was
determined that a portion of the excess of cost over the fair value of net
tangible assets acquired was not recoverable. Accordingly, an impairment of
$87,985,000 was recorded in the consolidated financial statements at September
30, 1996 (see note 2).
Goodwill is recorded on the repurchase of franchise locations based on a
discounted cash flow model and is amortized over the expected life of the store
location.
9
<PAGE> 10
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(g) Income Taxes
Effective October 1, 1993, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), Accounting for Income Taxes, requiring the
asset and liability method of accounting for deferred income taxes. SFAS No. 109
changes the Company's method of accounting for income taxes from the deferred
method required under Accounting Principles Board Opinion 11 to the asset and
liability method. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company has reported the cumulative effect of adopting SFAS No. 109 as
a change in method of accounting for income taxes in the fiscal year 1994
consolidated statement of operations.
(h) Trade Sales
Trade sales represent sales of goods and services to retail customers by
Company operated stores and sales of merchandise inventory to franchisees and
other outside customers.
(i) Franchise Revenues
Franchise royalty revenues based on sales by franchisees are accrued as
earned. Gains and losses from the sale of existing Company owned stores to
franchisees are recognized at the time of the sale. A provision for doubtful
notes receivable is included as an offset to gain or loss on sale of franchises,
as appropriate. Initial franchise fees are recorded as income when all material
services or conditions relating to the sale of the franchises have been
substantially performed or satisfied by Pearle and when the related store begins
operations. Accrued franchise royalty revenues are included in trade accounts
receivable.
(j) Advertising Expenses
The Company expenses advertising production costs and advertising costs as
incurred. Gross advertising expense before contributions from franchisees was
approximately $47,678,000, $43,903,000 and $43,496,000 during the years ended
September 30, 1996, 1995 and 1994, respectively.
(k) Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiaries are
translated to United States dollars at the rates of exchange on the balance
sheet date. Income and expense items of these subsidiaries are translated at
average monthly rates of exchange. The resultant translation gains or losses are
included in the foreign currency translation adjustment component of
stockholder's equity.
(l) Postretirement Benefits Other than Pensions
The estimated cost of retiree benefit payments, principally health and life
insurance benefits, are accrued during the employees' active service periods
(see note 13).
(m) Use of Estimates
The preparation of the consolidated 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 consolidated
financial
10
<PAGE> 11
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) SALE OF COMPANY
On September 24, 1996, The Pillsbury Company ("Pillsbury"), an intermediate
parent of the Company, entered into a Stock Purchase Agreement (the Agreement)
with Cole National Corporation, an unrelated third party, to sell Pillsbury's
interest in the Company. The final closing of the sale occurred on November 15,
1996 at which time Cole National Corporation exchanged approximately $220
million cash for Pillsbury's interest in the Company.
As the net assets of the Company, excluding intercompany and other balances
which were assumed by Pillsbury at the time of the sale, exceeded the selling
price, an impairment of the assets of the Company was determined to exist at
September 30, 1996. Accordingly, an impairment of approximately $87,985,000 has
been recorded in the September 30, 1996 consolidated financial statements to
reflect the assets of the Company at their estimated fair value. The impairment
is recorded as a write-off of excess cost over fair value of net tangible assets
acquired. The terms of the Agreement will substantially affect the Company's
current affiliate tax, debt and cash sharing arrangements. As a result of the
sale, approximately $6,688,000 was or will be paid by an affiliate company on
behalf of Pearle. This amount has been included in the consolidated statement of
operations and as a corresponding capital contribution in the consolidated
statement of stockholder's equity, as this amount will not be repaid by Pearle.
(3) RESTRUCTURING AND STORE CLOSURE COSTS
During the year ending September 30, 1996, the Company recorded a
write-down of the accrued store closure costs in the consolidated statement of
operations of approximately $2,083,000 related to a change in estimate of the
liability relating to store closure costs. During the years ended September 30,
1995 and 1994 the Company recorded a net provision of approximately $7,265,000
and $1,876,000, respectively, for estimated costs, consisting primarily of
future commitments under operating leases, of closing unprofitable U.S. and
international retail locations. During the year ended September 30, 1994, the
Company also recorded a provision of $4,800,000 (included in cost of sales) for
charges related to obsolete inventory which occurred as a result of a change in
brand strategy.
(4) DISPOSAL OF SUBSIDIARY
On October 27, 1994, the Company entered into an agreement to sell all of
the capital stock of Ophthalmic Research Group International Company ("ORGIC")
to a third party for cash consideration of $14,811,000. Prior to fiscal year
1994, the remaining book value of the intangible assets acquired of
approximately $22,146,000 was written off since, in the opinion of management,
the value of such assets was not recoverable. As a result, the gain on sale in
1995 was equal to the cash consideration.
(5) RELATED PARTY TRANSACTIONS
In connection with an acquisition in 1989, Pearle pays to an affiliated
company an annual royalty payment equal to the greater of a predetermined
minimum amount or 4% of sales from the predecessor's stores as a license fee for
use of the predecessor's trademark. The Company paid $6,081,000, $5,714,000, and
$5,494,000 for royalties in 1996, 1995 and 1994, respectively, pursuant to the
licensing agreement. These amounts are included in the accompanying consolidated
statements of operations as royalty payments and other affiliate charges. The
Company paid $17,236,000 on November 15, 1996 to settle its obligation under the
license agreement. In exchange for the settlement all rights in the trademark
were assigned to the Company.
11
<PAGE> 12
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company received capital contributions from an affiliate of
approximately $4,146,000, and $7,222,000 during the years ended September 30,
1995 and 1994, respectively. These amounts have been recorded as additional
paid-in capital in the accompanying consolidated balance sheets. In addition, in
connection with the sale of the Company (see note 2), amounts payable to Parent
and affiliated companies have been cancelled and current income taxes payable
has been assumed by Pillsbury as of September 30, 1996, and accordingly have
been recorded as an increase to additional paid-in capital.
On September 30, 1996, the Company distributed assets of $19,730,000
relating to a controlled entity to an affiliated company. The distribution
resulted in a reduction of additional paid-in capital, and a corresponding
reduction in payables to Parent and affiliated companies.
On May 28, 1993, an affiliate of the Company purchased approximately
$75,280,000 of newly issued preferred stock from a subsidiary of the Company.
The cash received from the sale of such stock was then loaned to the affiliate
in exchange for a note receivable. All balances related to this transaction have
been eliminated in the consolidated financial statements due to the related
party nature of the transaction. In fiscal year 1995, the preferred stock was
redeemed and the proceeds used to retire the note receivable.
The Company maintains an ongoing financing relationship with GrandMet.
Excess cash from operations is transferred to GrandMet on a regular basis.
Interest expense related to intercompany balances is recorded monthly at the
LIBOR rate plus 1%.
Royalty payments and other affiliate charges included in the consolidated
statements of operations include allocations of management, tax, accounting and
other administrative expenses performed by GrandMet.
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Land........................................................ $ 6,803 $ 6,951
Buildings................................................... 26,922 26,784
Leasehold improvements...................................... 68,869 67,026
Fixtures and equipment...................................... 111,270 109,247
-------- --------
213,864 210,008
Less accumulated depreciation and amortization.............. 156,004 147,549
-------- --------
$ 57,860 $ 62,459
======== ========
</TABLE>
Depreciation and amortization expense related to property, plant and
equipment was $15,819,000, $18,619,000, and $22,567,000 for 1996, 1995 and 1994,
respectively.
12
<PAGE> 13
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(7) INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
AMORTIZATION -----------------------------
PERIOD 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Goodwill....................................... 7-40 years $ 213,221 $ 205,326
Patient files.................................. 4-8 years 21,297 21,600
Franchise agreements........................... 11-25 years 23,140 24,329
Franchise lease agreements..................... 1-11 years 2,234 2,235
Trademarks..................................... 40 years 55,496 55,496
Noncompetition agreements...................... 2-5 years 17,428 17,428
Other.......................................... 1-23 years 38,487 38,865
-------- --------
371,303 365,279
Less:
Accumulated amortization..................... 161,649 148,512
Provision for impairment..................... 87,985 --
-------- --------
$ 121,669 $ 216,767
======== ========
</TABLE>
(8) INCOME TAXES
The Company is included in the consolidated Federal income tax return of
GrandMet. In 1989 the Company entered into a tax sharing agreement with GrandMet
whereby GrandMet agreed to allocate to the Company certain tax benefits
resulting from the utilization of the Company's tax deductions by other members
of the consolidated GrandMet group. For financial reporting purposes, the
Company's Federal income tax provision is calculated as though the Company filed
a separate Federal income tax return, except for the effect of the
aforementioned 1989 agreement with GrandMet.
As discussed in note 1, the Company adopted SFAS No. 109 as of October 1,
1993. The cumulative effect of this change in accounting for income taxes of
approximately $842,000 was determined as of October 1, 1993 and is reported
separately in the consolidated statement of operations for the year ended
September 30, 1994.
Federal income tax returns have been examined by the Internal Revenue
Service and settled through fiscal 1988.
The loss before income tax benefit and cumulative effect of accounting
change in the accompanying consolidated statements of operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Domestic operations........................... $(113,304) $(17,814) $ (30,171)
Foreign operations............................ 4,910 5,932 (11,281)
-------- -------- ---------
Loss before income tax benefit and
cumulative effect of accounting
changes................................ $(108,394) $(11,882) $ (41,452)
======== ======== =========
</TABLE>
13
<PAGE> 14
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The income tax expense (benefit) attributable to loss before income tax
benefit and cumulative effect of accounting change consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.................................... $ (7,123) $ (9,380) $(27,535)
State...................................... 48 97 103
Foreign.................................... 2,250 532 (1,300)
-------- -------- ---------
Total current......................... (4,825) (8,751) (28,732)
-------- -------- ---------
Deferred:
Federal.................................... (1,097) (4,037) 17,454
Foreign.................................... (89) (57) 798
-------- -------- ---------
Total deferred........................ (1,186) (4,094) 18,252
-------- -------- ---------
Income tax benefit.................... $ (6,011) $(12,845) $(10,480)
======== ======== =========
</TABLE>
The tax effects of the primary temporary differences giving rise to the
deferred income tax assets and liabilities as determined under SFAS No. 109 are
as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Restructuring reserves............................................. $ 627 $ 2,444
Inventories, principally due to additional costs inventoried for
tax pursuant
to the Tax Reform Act of 1986.................................... 1,264 3,130
Accounts and notes receivable, principally due to allowance for
doubtful accounts................................................. 2,834 3,039
Employee related accruals, principally vacation pay and
post-retirement medical accruals.................................. 1,407 2,573
Accrued store closure costs........................................ 969 1,921
Warranty reserves.................................................. 86 392
Plant and equipment, principally due to differences in
depreciation...................................................... 3,049 --
Self insurance reserves............................................ 1,185 113
Other.............................................................. 1,271 848
-------- -------
Total gross deferred tax assets............................... 12,692 14,460
-------- -------
Deferred tax liabilities:
Intangibles, principally due to differences in amortization........ (3,698) (4,830)
Deferred income on franchise notes receivable...................... (1,339) (3,482)
Plant and equipment, principally due to differences in
depreciation...................................................... -- (110)
Prepaid advertising................................................ -- (112)
Other.............................................................. (464) (5,275)
-------- -------
Total gross deferred tax liabilities.......................... 5,501 (13,809)
-------- -------
Net deferred income tax asset................................. $ 7,191 $ 651
======== =======
</TABLE>
14
<PAGE> 15
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
These deferred income tax assets and liabilities are presented as follows
in the consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
Current deferred income tax asset....................................... $ 9,118 $ 9,710
Noncurrent deferred income tax liability................................ (1,927) (9,059)
-------- -------
Net deferred income tax asset................................. $ 7,191 $ 651
======== =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences.
A reconciliation of the U.S. federal statutory rate to the effective income
tax rate applicable to loss before income tax benefit and cumulative effect of
accounting change follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
U.S. federal statutory rate....................................... (35.0)% (35.0)% (35.0)%
State income taxes, net of Federal benefit........................ 0.3 0.2 0.2
Nondeductible goodwill and trademarks............................. 1.0 8.4 2.1
Provisions for impairment of intangible assets and related
costs........................................................... 29.1 -- --
Loss (earnings) of foreign subsidiaries........................... 0.5 (13.1) 8.3
Sale of ORGIC stock............................................... -- (70.8) --
Other............................................................. (1.4) 2.2 (.9)
------ ------ -----
Effective income tax rate............................... (5.5)% (108.1)% (25.3)%
====== ====== =====
</TABLE>
The disposition of ORGIC resulted in an income tax deduction of
approximately $24,000,000 in 1995.
(9) FRANCHISE REVENUES
A summary of franchise revenues follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Franchise royalties........................................... $23,363 $23,978 $23,543
Gain (loss) on sale of franchises, net of reserves............ 1,240 (1,661) 482
Franchise fees................................................ 280 830 760
------- ------- -------
$24,883 $23,147 $24,785
======= ======= =======
</TABLE>
The Company financed approximately $1,239,000, $1,478,000 and $1,506,000 in
1996, 1995 and 1994, respectively, in notes receivable in connection with the
sale of franchises.
The Company is reimbursed by franchisees for certain advertising
expenditures made on their behalf. The reimbursements amounted to $25,122,000,
$25,480,000 and $24,591,000 for 1996, 1995 and 1994, respectively, and are
netted against advertising expense in the accompanying statement of operations.
15
<PAGE> 16
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company's franchise notes receivable are from franchisees throughout
the U.S. and are collateralized by inventory, equipment, and leasehold
improvements at each location. The notes generally bear interest at the prime
rate plus 3% and require monthly payments of principal and interest over ten
years.
(10) LEASES
The Company leases most of its retail stores under noncancellable operating
leases with terms ranging from five to twenty years and which may contain
renewal options for consecutive five-year terms. Certain of these stores have
been sublet to franchisees. In addition, the Company also leases certain of its
manufacturing and office facilities and data processing equipment.
Net rent expense included in the accompanying consolidated statements of
operations is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Base rentals........................................ $ 39,312 $42,135 $43,185
Contingent rentals (based on sales)................. 924 330 35
Sublease rental income.............................. (17,626) (19,620) (20,796)
-------- ------- -------
$ 22,610 $22,845 $22,424
======== ======= =======
</TABLE>
Future minimum lease payments and sublease income receipts under
noncancellable operating leases as of September 30, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
PAYMENTS RECEIPTS
-------- --------
<S> <C> <C>
1997.......................................................... $ 38,834 $ 15,431
1998.......................................................... 35,245 13,269
1999.......................................................... 30,675 10,841
2000.......................................................... 22,416 8,165
2001.......................................................... 13,288 5,664
Thereafter.................................................... 28,663 7,615
-------- --------
$169,121 $ 60,985
======== =======
</TABLE>
Approximately $1,911,000 and $3,000,000 of these future minimum lease
payments are included in accrued store closure costs in the consolidated balance
sheet at September 30, 1996 and 1995, respectively.
(11) EMPLOYEE BENEFIT PLANS
The Company has a contributory profit sharing plan for employees in the
U.S. meeting certain service requirements as defined in the plan. The Company's
contribution to the plan consists of a minimum matching contribution plus an
additional performance contribution. Profit sharing plan expenses, which are
included in selling, general and administrative expenses, amounted to
$1,224,000, $1,279,000 and $1,010,000 in 1996, 1995 and 1994, respectively. The
Company also has retirement plans for employees of foreign subsidiaries.
(12) SALE OF FRANCHISE NOTES RECEIVABLE
Prior to fiscal year 1994, the Company sold approximately $72,500,000 of
franchise notes receivable with limited recourse to a large banking institution
for $81,000,000 in cash. The limited recourse provisions require Pearle to
reacquire all of the notes under certain circumstances, including failure to
maintain properties in good order, failure to deliver a monthly statement, or
false or misleading representations. Additionally, under other circumstances,
such as default, Pearle is required to repurchase the individual note involved.
Such repurchases are limited to 28% of the aggregate purchase price of all notes
($6,460,000 and $8,517,000
16
<PAGE> 17
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
remaining repurchase exposure at September 30, 1996 and 1995, respectively). The
notes are secured by inventory, receivables and fixed assets of the franchised
stores.
(13) POSTRETIREMENT BENEFIT PLANS
Prior to February 1993, the Company and its subsidiaries provided health
care and other benefits to substantially all retired employees and covered
dependents. Generally, employees who have attained certain age and service
requirements were eligible for these benefits.
Net postretirement benefit cost, included as a component of selling,
general and administration expenses, consisted of the following components:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Interest cost on accumulated postretirement benefit
obligation................................................. $ 42,100 $77,400 $76,800
Amortization of unrecognized gain............................ (19,700) -- --
-------- ------- -------
Net postretirement benefit cost.................... $ 22,400 $77,400 $76,800
======== ======= =======
</TABLE>
The actuarial present value of the accumulated postretirement benefit
obligation as recognized in the consolidated balance sheets at September 30,
1996 and 1995, respectively, is $589,200 and $978,000, and relates solely to
existing retirees.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 7.5% in 1996 and these rates are
anticipated to ratably decline to 5% by 2006. A one-percentage-point increase in
the assumed health care cost trend rate for each year would increase the
accumulated postretirement benefit obligation by approximately $46,600 and net
postretirement health care cost by approximately $3,500 as of September 30,
1996. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%.
(14) COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal proceedings and has certain
unresolved claims pending. The ultimate liability, if any, for the aggregate
amounts claimed cannot be determined at this time. Management of the Company,
based upon consultation with legal counsel, is of the opinion that there are no
matters pending or threatened which are expected to have a material adverse
effect on the Company's consolidated financial condition, results of operations
or liability.
The Company has certain commitments to purchase advertising in fiscal year
1997 approximating $11,205,500.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade and other
receivables and payables approximate fair value due to the short maturity of
those instruments.
Franchise notes receivable and the payable to Parent and affiliated
companies bear interest at floating rates based on market rates and are adjusted
quarterly; therefore, the carrying value of these instruments approximates fair
value.
17
<PAGE> 18
PEARLE, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(16) SELECTED FINANCIAL DATA FOR EUROPEAN OPERATIONS
The following summary sets forth selected financial information for the
Company's European operations in Netherlands and Belgium included in the
Company's consolidated financial statements:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Total revenues................................................ $63,817 $59,841 $48,704
Cost of sales, including buying and occupancy costs........... 35,849 33,372 26,805
Selling, general and administrative expenses.................. 20,177 19,583 17,974
Amortization and impairment of intangible assets.............. 238 236 209
------- ------- -------
Operating income......................................... 7,553 6,650 3,716
Interest expense (income), net................................ (488) (429) (99)
Income tax provision.......................................... 2,510 2,135 1,216
------- ------- -------
Net income............................................... $ 5,531 $ 4,944 $ 2,599
======= ======= =======
Total depreciation and amortization........................... $ 3,563 $ 3,373 $ 2,996
Capital expenditures.......................................... 3,193 3,279 2,272
Cash.......................................................... $ 1,380 $ 8,812 $ 4,751
Total current assets.......................................... 19,178 26,048 20,627
Total assets.................................................. 38,274 47,311 40,229
Total current liabilities..................................... 9,107 6,680 6,158
Payable to Company and affiliated companies................... (8,028) (3,985) (1,917)
Stockholder's equity.......................................... 34,339 41,049 33,292
</TABLE>
18
<PAGE> 19
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data has
been prepared in connection with the consummation on November 15, 1996, by Cole
National Group, Inc. (the "Company") and Cole National Corporation (the
"Parent") of the following transactions (collectively, the "Transactions"): (i)
the acquisition by the Parent of certain assets and all of the issued and
outstanding common stock of Pearle, Inc. ("Pearle"), which has 347 company-owned
and 339 franchised retail optical locations in North America and the Caribbean;
(ii) the sale of assets and/or outstanding common stock of Pearle Holdings B.V.
("Pearle Holdings"), Pearle's European operations, in transactions pursuant to
which the Parent ( and not the Company) retained a 20% equity interest in Pearle
Holdings' business; (iii) the sale of all the issued and outstanding common
stock of Pearle (excluding the Parent's retained interest in the European
operations) to the Company for approximately $154 million, as a result of which
Pearle became a wholly owned subsidiary of the Company (the "Pearle
Acquisition"); (iv) the purchase and cancellation (the "Senior Note Repurchase")
of $15.1 million of the Company's 11.25% Senior Notes due 2001 (the "Senior
Notes") held by the Parent; and the financing of the Pearle Acquisition through
the proceeds of the private placement (the "Offering") of $150 million principle
amount of 9 7/8% Senior Subordinated Notes due 2006 (the "Notes"). Concurrently,
with the consummation of the Offering, the Company's existing $50.0 million
revolving credit facility (the "Revolving Credit Facility") was replaced by a
senior secured revolving line of credit in an aggregate amount of $75.0 million
(the "New Credit Facility").
The following Unaudited Pro Forma Condensed Consolidated Statements of
Income for the fiscal year ended February 3, 1996 and the 39 weeks ended
November 2, 1996 include the results of Pearle's operations and give effect to
the Transactions as if they had occurred at the beginning of the periods
presented. Pearle's results of operations exclude Pearle Holdings, which was not
acquired by the Company. The following Unaudited Pro Forma Condensed
Consolidated Balance Sheet presents the pro forma financial condition of the
Company as if the Transactions had occurred as of November 2, 1996 and includes
the financial position of Pearle's operations as of September 30, 1996, the end
of Pearle's most recent fiscal year. Pearle's financial position excludes Pearle
Holdings and certain assets and liabilities that were not purchased or assumed
in the Pearle Acquisition.
The purchase price of Pearle was determined based on arms-length
negotiations between the parties to the Pearle purchase agreement. The excess of
the purchase price of Pearle over the net identifiable assets and liabilities of
Pearle is reported as goodwill. The carrying values of Pearle's net assets are
assumed to equal their fair values for purposes of these pro forma financial
statements, unless indicated otherwise in the Notes to Unaudited Pro Forma
Condensed Consolidated Balance Sheet and Statements of Income. These values are
subject to revision following the results of any appraisals. However, management
does not believe that the results of any such appraisals will yield materially
different values from the carrying values. The Unaudited Pro Forma Condensed
Consolidated Balance Sheet and Statements of Income were prepared reflecting:
(i) the Pearle Acquisition, which will be accounted for under the purchase
method of accounting;
(ii) the Senior Note Repurchase;
(iii) the Offering of the Notes; and
(iv) the New Credit Facility.
The pro forma information presented does not consider any future events
which may occur after the consummation of the Transactions. The Company believes
revenue and operating expense synergies and purchasing and other cost reductions
of the combined operations of the Company and Pearle will be realized after the
Company has installed its management controls, systems and merchandising and
marketing programs. However, for purposes of the Unaudited Pro Forma Condensed
Consolidated Statements of Income, these and other synergies in overhead
expenses have not been reflected because their realization cannot be assured.
Nor do the pro forma statements consider the incremental expenses, capital or
conversion costs which may be incurred as a result of the Pearle Acquisition.
Following the closing of the Transactions,
19
<PAGE> 20
integration and consolidation charges may be incurred which could result in the
Company reporting a negative stockholder's equity.
The financial information is presented for informational purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred had the Transactions been consummated at the dates
indicated, nor is it necessarily indicative of future operating results or
financial position. The unaudited pro forma condensed consolidated financial
data should be read in conjunction with the financial statements of the Company
and Pearle and the related notes thereto contained in (i) the Company's Annual
Report on Form 10-K for the year ended February 3, 1996 (Commission File No.
33-66342), (ii) the Company's Quarterly Report on Form 10-Q for the quarterly
period ended November 2, 1996 (Commission File No. 33-66342) and (iii) Pearle's
Audited Consolidated Financial Statements included elsewhere herein.
20
<PAGE> 21
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF NOVEMBER 2, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- --------------------------
COMPANY PEARLE (a) ADJUSTMENTS COMBINED
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and temporary cash
investments....................... $ 31,489 $ -- $ (15,013)(b) $ 16,476
Accounts and notes receivable,
prepaid expenses and other........ 25,870 24,162 -- 50,032
Inventories.......................... 103,778 28,955 -- 132,733
Deferred income tax benefits......... 10,616 9,118 1,750(c) 21,484
--------- --------- --------- ---------
Total current assets......... 171,753 62,235 (13,263) 220,725
Property and equipment, net............ 67,586 43,152 (5,000)(c) 105,738
Franchise notes receivable, excluding
current portion...................... -- 25,250 -- 25,250
Other assets........................... 8,294 809 6,689(d) 15,792
Cost in excess of net assets of
purchased businesses and other
intangible assets, net............... 79,485 117,281 (32,740)(e) 164,026
--------- --------- --------- ---------
Total assets........................... $ 327,118 $ 248,727 $ (44,314) $ 531,531
========= ========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt.... $ 300 $ -- $ -- $ 300
Accounts payable..................... 39,896 18,723 -- 58,619
Payable to affiliates................ 25,394 -- 14,924(f) 40,318
Accrued liabilities.................. 66,644 33,107 (140)(g) 99,611
--------- --------- --------- ---------
Total current liabilities.... 132,234 51,830 14,784 198,848
Long-term debt, net of discount........ 180,033 -- 133,951(h) 313,984
Deferred income taxes and other........ 5,390 4,107 -- 9,497
Stockholder's equity:
Common stock and paid-in capital..... 118,065 642,449 (642,449)(i) 118,065
Accumulated deficit.................. (108,604) (452,163) 451,904(i) (108,863)
Foreign currency translation
adjustment........................ -- 2,504 (2,504)(i) --
--------- --------- --------- ---------
Total stockholder's equity... 9,461 192,790 (193,049) 9,202
--------- --------- --------- ---------
Total liabilities and stockholder's
equity............................... $ 327,118 $ 248,727 $ (44,314) $ 531,531
========= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet.
21
<PAGE> 22
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) For purposes of the Unaudited Pro Forma Condensed Consolidated Balance
Sheet, the financial position of Pearle is as of September 30, 1996, the end
of Pearle's most recent fiscal year. Pearle's financial position excludes
the financial position of Pearle Holdings and reflects the elimination of
certain assets and liabilities that were not purchased or assumed in the
Pearle Acquisition; primarily cash on hand, income taxes payable and
payables to parent and affiliated companies.
(b) Records the estimated portion of the purchase price and the fees and
expenses funded from cash on hand.
(c) Records estimated writedown of property and equipment and the related
deferred income taxes to reflect the adoption by Pearle of SFAS No.
121-Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of.
(d) Records the estimated professional fees and expenses associated with the
financing requirements of the Pearle Acquisition and the write-off of the
unamortized deferred financing costs related to the Company's Revolving
Credit Facility. A breakdown of the estimated costs and write-off follows
(in thousands):
<TABLE>
<S> <C>
Financing fees and debt issuance costs............................... $4,900
Legal and professional fees and other costs.......................... 2,188
Write-off of unamortized deferred financing costs.................... (399)
------
$6,689
======
</TABLE>
(e) Records the purchase price allocation to goodwill and other intangible
assets using the purchase method of accounting. The preliminary allocation
of the purchase price and related transaction costs is as follows (in
thousands):
<TABLE>
<S> <C>
Purchase price.................................................... $ 154,000
Transaction costs................................................. 2,800
Less equity acquired (adjusted for the estimated impact of SFAS
No. 121)........................................................ (189,540)
------
Purchase price allocation adjustments to goodwill and other
intangible assets............................................ (32,740)
Historical goodwill and other intangible assets................... 117,281
------
Pearle's pro forma goodwill and other intangible assets......... $ 84,541
======
</TABLE>
(f) Records increase in the payable to Parent in connection with financing the
Transactions.
(g) Records the benefit to accrued income taxes resulting from the write-off of
unamortized deferred financing costs related to the Company's Revolving
Credit Facility.
(h) Records the issuance of the Notes, net of discount, and the purchase and
cancellation by the Company of $15.1 million of Senior Notes held by the
Parent, net of unamortized discount.
(i) Eliminates the stockholder's equity of Pearle and records the write-off of
unamortized deferred financing costs, net of the related income tax benefit.
22
<PAGE> 23
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ -------------------------
COMPANY PEARLE (a) ADJUSTMENTS COMBINED
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue................................... $577,091 $ 296,641 $ -- $ 873,732
Costs and expenses:
Cost of goods sold & operating expenses
(b)...................................... 515,474 274,244 -- 789,718
Restructuring charges, net (c).............. -- 8,775 -- 8,775
Royalty payments & other affiliate
charges.................................. -- 5,167 (5,167)(d) --
Depreciation and amortization............... 15,686 28,509 (12,014)(e) 32,181
-------- -------- -------- --------
Total costs and expenses............ 531,160 316,695 (17,181) 830,674
-------- -------- -------- --------
Income (loss) from operations................. 45,931 (20,054) 17,181 43,058
Gain on sale of subsidiary.................... -- (14,811) 14,811(g) --
Interest expense.............................. 22,143 16,354 (1,667)(h) 36,830
Interest income............................... (761) -- 611(i) (150)
-------- -------- -------- --------
Income (loss) before income taxes............. 24,549 (21,597) 3,426 6,378
Income tax provision (benefit)................ 10,799 (12,001) 5,579(j) 4,377
-------- -------- -------- --------
Net income (loss)............................. $ 13,750 $ (9,596) $ (2,153) $ 2,001
======== ======== ======== ========
Ratio of earnings to fixed charges (k)........ 1.8x 1.1x
EBITDA data (l):
Income (loss) from operations............... $ 45,931 $ (20,054) $ 17,181 $ 43,058
Restructuring charges, net.................. -- 8,775 -- 8,775
Royalty payments & other affiliate
charges.................................. -- 5,167 (5,167) --
Depreciation and amortization............... 15,686 28,509 (12,014) 32,181
-------- -------- -------- --------
EBITDA...................................... $ 61,617 $ 22,397 $ -- $ 84,014
Ratio of EBITDA to interest expense......... 2.8x 2.3x
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Income.
23
<PAGE> 24
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE 39 WEEKS ENDED NOVEMBER 2, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- -------------------------
COMPANY PEARLE (a) ADJUSTMENTS COMBINED
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenue................................ $ 443,057 $ 240,487 $ -- $ 683,544
Costs and expenses:
Cost of goods sold & operating expenses
(b)................................... 403,058 217,462 -- 620,520
Restructuring charges, net (c)........... -- (3,486) -- (3,486)
Royalty payments & other affiliate
charges............................... -- 5,842 (5,842)(d) --
Depreciation and amortization............ 12,780 21,055 (10,193)(e) 23,642
Provision for impairment of intangible
assets and related costs.............. -- 94,673 (94,673)(f) --
--------- --------- --------- ---------
Total costs and expenses......... 415,838 335,546 (110,708) 640,676
--------- --------- --------- ---------
Income (loss) from operations.............. 27,219 (95,059) 110,708 42,868
Interest expense........................... 15,943 12,258 (1,070)(h) 27,131
Interest income............................ (1,161) -- 582(i) (579)
--------- --------- --------- ---------
Income (loss) before income taxes.......... 12,437 (107,317) 111,196 16,316
Income tax provision (benefit)............. 5,473 (6,996) 9,182(j) 7,659
--------- --------- --------- ---------
Net income (loss).......................... $ 6,964 $ (100,321) $ 102,014 $ 8,657
========= ========= ========= =========
Ratio of earnings to fixed charges (k)..... 1.5x 1.4x
EBITDA data (l):
Income (loss) from operations............ $ 27,219 $ (95,059) $ 110,708 $ 42,868
Provision for impairment of intangible
assets and related costs.............. -- 94,673 (94,673) --
Restructuring charges, net............... -- (3,486) -- (3,486)
Royalty payments & other affiliate
charges............................... -- 5,842 (5,842) --
Depreciation and amortization............ 12,780 21,055 (10,193) 23,642
--------- --------- --------- ---------
EBITDA................................... $ 39,999 $ 23,025 $ -- $ 63,024
Ratio of EBITDA to interest expense...... 2.5x 2.4x
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statements
of Income.
24
<PAGE> 25
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(a) Pearle's most recent audited fiscal year ended on September 30, 1996. For
purposes of the Unaudited Pro Forma Condensed Consolidated Statement of
Income for the Company's fiscal year ended February 3, 1996, results of
operations for Pearle are for its four quarters ended December 31, 1995,
and exclude Pearle Holdings. For purposes of preparing the Unaudited Pro
Forma Condensed Consolidated Statement of Income for the Company's 39 weeks
ended November 2, 1996, the information for Pearle is the nine month period
ended September 30, 1996, Pearle's second, third and fourth fiscal
quarters, and excludes Pearle Holdings.
The results of operations of Pearle included in the Unaudited Pro Forma
Condensed Consolidated Statements of Income contain certain
reclassification entries in order to present financial information on a
basis consistent with the presentation used by the Company. These are (i)
the inclusion in net revenue of interest income on franchise notes
receivable ($4.7 million for the 12 months ending December 31, 1995 and
$3.0 million for the nine months ending September 30, 1996) and (ii) the
presentation of depreciation and amortization separately from cost of goods
sold and operating expenses.
(b) Cost of goods sold and operating expenses have been combined in the
accompanying Unaudited Pro Forma Condensed Consolidated Statements of
Income because information is not readily available to classify Pearle's
cost of goods sold and selling, general and administrative expenses in a
manner consistent with the Company's presentation. Pearle includes certain
store occupancy costs and depreciation in cost of goods sold, whereas the
Company reports such costs as operating expenses or depreciation and
amortization. In addition, Pearle includes payroll, supplies and other
costs related to the making of eyeglasses at its in-store labs in selling,
general and administrative expenses; the Company and Pearle both classify
similar costs of making eyeglasses at their respective central laboratories
in cost of goods sold. As a result of the Pearle Acquisition, the Company's
consolidated gross margin will likely decline from its historical levels
because Pearle is expected to have a lower gross margin than the Company
due to the higher cost of in-store labs and lower margin wholesale sales to
franchised stores partially offset by franchise royalties, fees and
interest income on franchise notes receivable which have no corresponding
cost of goods sold.
(c) For the twelve months ended December 31, 1995, Pearle recorded a net
provision of approximately $8.8 million for estimated costs, consisting
primarily of future commitments under operating leases, of closing
unprofitable North American retail locations. During the nine months ended
September 30, 1996, Pearle recorded net adjustments of $3.5 million to the
restructuring reserves previously established.
(d) Reflects the elimination of amounts paid to an affiliated company pursuant
to a licensing agreement in connection with a 1989 acquisition for use of
the predecessor's trademark and for management fees. As a result of the
Pearle Acquisition, all future payment obligations were cancelled.
(e) The Pearle Acquisition will be accounted for by the purchase method of
accounting. Under purchase accounting, the total purchase price will be
allocated to the tangible and intangible assets and liabilities of Pearle
based upon their respective fair values as of the closing of the Pearle
Acquisition based on valuations and other studies which are not yet
available. A preliminary allocation of the purchase price has been made to
major categories of assets and liabilities in the accompanying Unaudited
Pro Forma Condensed Consolidated Financial Data based on available
information and certain assumptions that management believes to be
reasonable. The actual allocation of purchase price and the resulting
effect on income from operations may differ significantly from the pro
forma amounts included herein. Consequently, the amounts reflected in the
Unaudited Pro Forma Condensed Consolidated Financial
25
<PAGE> 26
Data are subject to change, and the final amounts may differ substantially.
The following reflects the effect of purchase adjustments on depreciation
and amortization expense based upon management's assumptions (in
thousands):
<TABLE>
<CAPTION>
39 WEEKS FISCAL YEAR
ENDED ENDED
NOV. 2, 1996 FEB. 3, 1996
------------ ------------
<S> <C> <C>
Amortization of new goodwill and intangible assets over 40
years.................................................... $ 1,585 $ 2,114
Elimination of amortization of Pearle's historical goodwill
and intangible assets.................................... (11,778) (14,128)
------- --------
$(10,193) $(12,014)
======= ========
</TABLE>
(f) Reflects the elimination of the provision for impairment of intangible
assets and related costs that were nonrecurring incremental costs directly
attributable to the Pearle Acquisition. The impairment of approximately
$88.0 million was recorded as a write-off of excess cost over fair value of
net tangible assets acquired. The remaining charge of approximately $6.7
million reflected amounts paid or to be paid by a Pearle affiliate on
behalf of Pearle.
(g) On October 27, 1994, Pearle entered into an agreement to sell all of the
capital stock of Ophthalmic Research Group International Company ("ORGIC")
to a third party for cash consideration of $14.8 million. During the year
ended September 30, 1993, the remaining book value of ORGIC of
approximately $22.1 million was written off (included in amortization and
impairment of intangible assets) since, in the opinion of Pearle's
management, the value of such assets was not recoverable. As a result, the
gain on sale in 1995 was equal to the cash consideration.
(h) Reflects the effect on interest expense resulting from the adjustments
below (in thousands):
<TABLE>
<CAPTION>
39 WEEKS FISCAL YEAR
ENDED ENDED
NOV. 2, 1996 FEB. 3, 1996
------------ ------------
<S> <C> <C>
Interest on the Notes, including amortization of
discount................................................. $ 11,156 $ 14,874
Interest expense from pro forma borrowing under the New
Credit Facility.......................................... 20 324
Elimination of interest expense on the $15.1 million of
Senior Notes held by Parent to be purchased from and
cancelled by the Company................................. (1,286) (1,746)
Elimination of interest expense charged by Pearle's
parent................................................... (11,528) (15,872)
Amortization of financing costs of the New Credit Facility
and the Notes over their respective terms, less the
elimination of amortization of financing costs related to
the Company's Revolving Credit Facility.................. 568 753
------- --------
$ (1,070) $ (1,667)
======= ========
</TABLE>
(i) Reflects elimination of interest income on temporary cash investments used
to fund the Pearle Acquisition.
(j) Reflects the increase in income tax expense resulting from the combined pro
forma results of the Company and Pearle. Income tax expense includes the
provision for state, local and federal income taxes. The pro forma
effective tax rate differs from the federal statutory rate of 35%
principally because of state and local taxes and permanent differences
arising from amortization of the Company's existing goodwill and goodwill
associated with the Pearle Acquisition.
(k) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of earnings before income taxes and fixed charges. Fixed charges
consist of interest expense, including amortization of deferred debt
issuance costs, and one-third of minimum rental expense less sublease
rental income (the portion deemed representative of the interest factor).
26
<PAGE> 27
(l) EBITDA is defined as income from operations before depreciation and
amortization and nonrecurring charges including restructuring and store
closure costs. The Company has included information concerning EBITDA here
as it is relevant for covenant analysis under the Indentures for the Notes
and the Senior Notes and because it is used by certain investors as a
measure of a company's ability to service its debt. EBITDA is not a
performance measure under generally accepted accounting principles and
should not be considered more meaningful than operating income or cash
flows as an indicator of operating performance. For purposes of computing
the ratio of EBITDA to interest expense, interest expense excludes the
amortization of deferred financing costs. Amortization of deferred
financing costs used to compute the pro forma ratios of EBITDA to interest
expense were $0.9 million and $0.7 million for the fiscal year ended
February 3, 1996 and the 39 weeks ended November 2, 1996, respectively.
27
<PAGE> 28
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
39 WEEKS ENDED NOVEMBER 2, 1996 FISCAL YEAR ENDED FEBRUARY 3, 1996
------------------------------------------------- -------------------------------------------------
HISTORICAL HISTORICAL
----------------------------------- -----------------------------------
COMPANY PEARLE COMBINED PRO FORMA COMPANY PEARLE COMBINED PRO FORMA
------- ---------- -------- --------- ------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income (loss)
from operations........ $12,437 $ (107,317) $(94,880) $16,316 $24,549 $ (21,597) $ 2,952 $ 6,378
Fixed charges:
Interest expense....... 15,943 12,258 28,201 27,131 22,143 16,354 38,497 36,830
Portion of rents
representative of
interest factor
(a)................. 8,466 4,386 12,852 12,852 10,396 6,110 16,506 16,506
------- ---------- --------- ------- ------- --------- ------- -------
Total fixed
charges........ 24,409 16,644 41,053 39,983 32,539 22,464 55,003 53,336
------- ---------- --------- ------- ------- --------- ------- -------
Earnings before income
taxes and fixed
charges................ $36,846 $ (90,673) $(53,827) $56,299 $57,088 $ 867 $57,955 $59,714
Ratio of earnings to
fixed charges.......... 1.51 (b) (b) 1.41 1.75 (b) 1.05 1.12
======= ========== ========= ======= ======= ========= ======= =======
<FN>
- ---------------
(a) One-third of rent included in the calculation is considered an appropriate
portion of rentals representative of the interest factor. Rentals include
leased premises for laboratories, distribution and retailing operations and
certain leased equipment, net of sublease rental income.
(b) Pearle's earnings before income taxes and fixed charges were insufficient to
cover fixed charges by $107.3 and $21.6 million for the periods included in
the periods ended November 2, 1996 and February 3, 1996 above, respectively.
As a result, combined earnings before income taxes and fixed charges would
have been insufficient to cover fixed charges by $94.9 million in the period
ended November 2, 1996.
</TABLE>
28
<PAGE> 29
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 hereunto duly authorized.
COLE NATIONAL GROUP, INC.
By: /s/ WAYNE L. MOSLEY
---------------------------------
Date: December 19, 1996. Vice President
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGINATION
BY
SEQUENTIAL
NUMBERING
EXHIBIT DESCRIPTION OF EXHIBIT SYSTEM
- ------- ------------------------------------------------------------------------- ---------
<S> <C> <C>
2.1 Stock Purchase Agreement, dated as of September 24, 1996, among The
Pillsbury Company, Pearle, Inc. and Cole National Corporation
(Incorporated by reference to Exhibit 2.1 of Cole National Corporation's
Current Report on Form 8-K, filed with the Commission on December 2,
1996).
2.2 Purchase Agreement, dated as of November 15, 1996, among Cole National
Corporation and Cole National Group, Inc. (Incorporated by reference to
Exhibit 2.3 of Cole National Corporation's Current Report on Form 8-K,
filed with the Commission on December 2, 1996).
4.1 Indenture dated November 15, 1996, by and among Cole National Group, Inc.
and Norwest Bank Minnesota, National Association (Incorporated by
reference to Exhibit 4.1 of Cole National Corporation's Current Report on
Form 8-K, filed with the Commission on December 2, 1996).
4.2 Registration Rights Agreement dated November 15, 1996, by and among Cole
National Group, Inc. and CIBC Wood Gundy Securities Corp., CS First
Boston Corporation, NationsBanc Capital Markets, Inc. and Smith Barney
Inc. (Incorporated by reference to Exhibit 4.2 of Cole National
Corporation's Current Report on Form 8-K, filed with the Commission on
December 2, 1996).
23.1* Consent of KPMG Peat Marwick LLP.
99.1 Credit Agreement, dated as of November 15, 1996, among Cole Vision
Corporation, Things Remembered, Inc., Cole Gift Centers, Inc., Pearle,
Inc. and Pearle Service Corporation and Canadian Imperial Bank of
Commerce (Incorporated by reference to Exhibit 99.1 of Cole National
Corporation's Current Report on Form 8-K, filed with the Commission on
December 2, 1996).
99.2 CNG Guarantee and Cash Collateral Agreement, dated as of November 15,
1996, by Cole National Group, Inc. and Cole National Corporation
(Incorporated by reference to Exhibit 99.3 of Cole National Corporation's
Current Report on Form 8-K, filed with the Commission on December 2,
1996).
99.3 Guarantee and Collateral Agreement, dated as of November 15, 1996, by
Cole Vision Corporation, Things Remembered, Inc., Cole Gift Centers,
Inc., Pearle, Inc. and Pearle Service Corporation and Canadian Imperial
Bank of Commerce (Incorporated by reference to Exhibit 99.4 of Cole
National Corporation's Current Report on Form 8-K, filed with the
Commission on December 2, 1996).
<FN>
- ---------------
* Filed herewith.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Pearle, Inc.:
We consent to the inclusion of our report dated November 22, 1996, with
respect to the consolidated balance sheets of Pearle, Inc. and subsidiaries as
of September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholder's equity, and cash flows for each of the years in the
three-year period ended September 30, 1996, which report appears in the Form 8-K
of Cole National Group, Inc. dated December 18, 1996. Our report refers to a
change in accounting for income taxes in 1994.
/s/ KPMG PEAT MARWICK LLP
------------------------------
KPMG Peat Marwick LLP
Dallas, Texas
December 18, 1996
