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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 4, 1996, 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 33-66342
COLE NATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1744334
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5915 LANDERBROOK DRIVE
MAYFIELD HEIGHTS, OHIO 44124
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216)449-4100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM IN THE REDUCED DISCLOSURE
FORMAT.
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
------ ------
ALL OF THE OUTSTANDING CAPITAL STOCK OF THE REGISTRANT IS HELD BY COLE NATIONAL
CORPORATION.
AS OF MAY 28, 1996, 1,100 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR
VALUE, WERE OUTSTANDING.
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<TABLE>
<CAPTION>
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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MAY 4, 1996
INDEX
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MAY 4, 1996 AND
FEBRUARY 3, 1996.......................................... 1
CONSOLIDATED STATEMENTS OF INCOME FOR THE 13 WEEKS ENDED
MAY 4, 1996 AND APRIL 29, 1995............................ 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 13 WEEKS
ENDED MAY 4, 1996 AND APRIL 29, 1995...................... 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 5 - 6
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 7
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</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
May 4, February 3,
Assets 1996 1996
- ------ -------- ---------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 12,626 $ 29,260
Accounts receivable 21,234 18,544
Inventories 88,404 84,794
Prepaid expenses and other 5,049 5,869
Deferred income tax benefits 10,616 10,616
-------- --------
Total current assets 137,929 149,083
Property and equipment, at cost 155,743 154,589
Less - accumulated depreciation and
amortization (92,159) (90,883)
-------- --------
Total property and equipment, net 63,584 63,706
Other assets 5,525 5,038
Cost in excess of net assets of purchased
businesses, net 80,871 81,163
-------- --------
Total assets $287,909 $298,990
======== ========
Liabilities and Stockholder's Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 294 $ 292
Accounts payable 22,281 29,082
Payable to affiliates 14,778 1,255
Accrued interest 1,943 7,044
Dividend payable - 13,500
Accrued liabilities 56,900 53,676
Accrued income taxes 2,685 5,970
-------- --------
Total current liabilities 98,881 110,819
Long-term debt, net of discount 180,146 180,218
Deferred income taxes and other 5,425 5,456
Stockholder's equity:
Common stock - -
Paid-in capital 118,065 118,065
Accumulated deficit (114,608) (115,568)
-------- --------
Total stockholder's equity 3,457 2,497
-------- --------
Total liabilities and stockholder's
equity $287,909 $298,990
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
May 4, April 29,
1996 1995
-------- --------
<S> <C> <C>
Net sales $142,890 $125,254
Costs and expenses:
Cost of goods sold 44,500 38,724
Operating expenses 87,414 77,468
Depreciation and amortization 4,202 3,827
-------- --------
Total costs and expenses 136,116 120,019
-------- --------
Income from operations 6,774 5,235
Interest expense, net 5,058 5,284
-------- --------
Income (loss) before income taxes 1,716 (49)
Income tax provision (benefit) 756 (22)
-------- --------
Net income (loss) $ 960 $ (27)
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------
May 4, April 29,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 960 $ (27)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Depreciation and amortization 4,202 3,827
Non-cash interest expense 106 100
Change in assets and liabilities:
Increase in accounts receivable,
prepaid expenses and other assets (2,083) (4,024)
Decrease (increase) in inventories (3,610) 908
Increase (decrease) in accounts payable, accrued
liabilities and payable to affiliates (3,874) 1,502
Decrease in accrued interest (5,101) (5,243)
Decrease in accrued income taxes (3,285) (3,206)
-------- --------
Net cash used by operating activities (12,685) (6,163)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (130) -
-------- --------
Net cash used by financing activities (130) -
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (3,324) (4,534)
Other, net (495) (844)
-------- --------
Net cash used by investing activities (3,819) (5,378)
-------- --------
Cash and temporary cash investments:
Net decrease during the period (16,634) (11,541)
Balance, beginning of the period 29,260 19,730
-------- --------
Balance, end of the period $ 12,626 $ 8,189
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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COLE NATIONAL GROUP, INC. 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 Group, Inc. ("CNG") and its wholly owned subsidiaries (collectively,
the Company). CNG is a wholly owned subsidiary of Cole National Corporation. All
significant intercompany transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Company
believes that the disclosures herein are adequate to make the information not
misleading. These statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the fiscal year ended February 3, 1996.
In the opinion of management, the accompanying financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's financial position as of May 4, 1996 and the
results of operations and cash flows for the 13 weeks ended May 4, 1996 and
April 29, 1995.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at May 4, 1996 and April 29,
1995 were valued at the lower of first-in, first-out (FIFO) cost or market.
Cash Flows
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $4,087,000 and $10,308,000, respectively, for the 13 weeks
ended May 4, 1996, and $3,186,000 and $10,627,000, respectively, for the 13
weeks ended April 29, 1995.
(2) ASSET IMPAIRMENT
During the first quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of". Adoption of SFAS
No. 121 had no material impact on the Company's results of operations, financial
position or cash flows.
(3) SEASONALITY
The Company's business is seasonal with approximately 30% of its sales and
approximately 50% of its income from operations generated in the fourth fiscal
quarter, which contains the important Christmas retailing season. Therefore,
earnings or losses for a particular interim period are not necessarily
indicative of full year results.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information required by this item has been omitted pursuant to
General Instruction H of Form 10-Q.
The following is a discussion of certain factors affecting the
Company's results of operations for the 13 week periods ended May 4, 1996 and
April 29, 1995 (the Company's first quarter). This discussion should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this filing and the Company's audited financial statements
for the fiscal year ended February 3, 1996.
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
For example, the fiscal year ended February 3, 1996 is referred to as "fiscal
1995."
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal 1996 increased 14.1% to
$142.9 million from $125.3 million for the same period of fiscal 1995. The
increase in sales was due to a comparable store sales increase of 7.6%, the
opening of additional Cole Gift and Cole Vision units and a shift in the
Company's fiscal calendar. Comparable store sales increased primarily as a
result of strong sales at Cole Vision due to successful eyewear promotions,
growth in the managed vision care program at Cole Vision along with the roll-out
of monogrammed softgoods and introduction of new merchandise at Cole Gift. At
May 4, 1996, the Company operated 2,308 specialty service retail units compared
to 2,249 at April 29, 1995. Also, sales increased approximately $3.5 million as
Cole Gift benefited from a week of Mother's Day sales that were shifted into
the quarter this year.
Gross profit increased to $98.4 million in the first 13 weeks of fiscal
1996 from $86.5 million for the same period a year ago. First quarter gross
margins in fiscal 1996 and fiscal 1995 were 68.9% and 69.1%, respectively. The
decrease of 0.2% in the first quarter gross margin percentage was due to
clearance sales in connection with the closing of 85 low volume Cole Gift Center
departments at host stores during the first quarter of fiscal 1996 that more
than offset other improvements in gross margin.
Operating expenses increased 12.8% to $87.4 million in the first
quarter of fiscal 1996 from $77.5 million for the first quarter last year due
primarily to higher payroll costs, store occupancy expenses and advertising
expenditures. Payroll costs increased because of more retail units open in 1996
and additional payroll to support the increased sales. Store occupancy expenses
increased primarily as a result of higher percentage rents caused by increased
comparable store sales, more retail units open in 1996 and the increased number
of Things Remembered personalization superstores. Advertising expenditures for
the optical promotions were increased to encourage continued sales growth above
last year's successful promotions. Depreciation and amortization expense of $4.2
million in fiscal 1996 was $0.4 million more than fiscal 1995 reflecting an
increase in capital expenditures beginning in the latter part of fiscal 1993.
Income from operations increased 29.4% or $1.5 million to $6.8 million
in the first quarter of fiscal 1996 primarily because of strong sales at Cole
Vision and the reduction of operating expenses as a percentage of sales, due in
part to the performance of Cole Gift which benefited from the aforementioned
shift in Mother's Day sales.
Net interest expense decreased $0.2 million to $5.1 million in the
first quarter of fiscal 1996 primarily because of the retirement of $5.0 million
of Senior Notes in November 1995, the elimination of working capital borrowings
and increased interest income from an increase in temporary cash investments.
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An income tax provision or benefit was recorded in the first quarter of
both fiscal 1996 and fiscal 1995 using the Company's estimated annual effective
tax rate of 44%.
Net income increased to $1.0 million for the first quarter of fiscal
1996 from approximately break-even for the first quarter of fiscal 1995. The
increase was due to the improvement in income from operations and the decrease
in net interest expense.
The Company's business is seasonal with approximately 30% of its sales
and approximately 50% of its income from operations occurring in the fourth
fiscal quarter because of the importance of gift sales during the Christmas
retailing season. Therefore, results of operations for interim periods are not
necessarily indicative of full year results.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
3.1(i) Certificate of Amendment of the Certificate of Incorporation of
Cole National Group, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly
period ended May 4, 1996.
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COLE NATIONAL GROUP, INC.
By: /s/ Wayne L. Mosley
-----------------------------------------
Wayne L. Mosley
Vice President and Controller
(Duly Authorized Officer and Principal
Accounting Officer)
Date: June 12, 1996
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COLE NATIONAL GROUP, INC.
FORM 10-Q
QUARTER ENDED MAY 4, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Pagination By
Sequence
Exhibit Numbering
Number Description System
- ------ ----------- ------
<S> <C> <C>
3.1(i) Certificate of Amendment of the
Certificate of Incorporation of
Cole National Group, Inc. 10 - 11
27 Financial Data Schedule 12
</TABLE>
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EXHIBIT 3.1(i)
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
COLE NATIONAL GROUP, INC.
The undersigned, a Vice President of Cole National Group, Inc. (the
"Corporation"), a corporation organized and existing under the General
Corporation Law of the State of Delaware, does hereby certify:
A. That on March 16, 1995, the Board of Directors of the Corporation
adopted the following resolution declaring the advisability of amending the
Certificate of Incorporation of the Corporation as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be amended by deleting Article FOURTH in its entirety and
replacing it so as to read as follows:
FOURTH: The total number of shares which the Corporation shall
have authority to issue is Two Thousand (2,000) shares of Common
Stock, par value $.01 per share.
B. That in lieu of a meeting and vote of the sole stockholder and in
accordance with the provisions of Section 228 of the General Corporation Law of
the State of Delaware, the holder of all of the outstanding shares of Common
Stock of the Corporation did consent in writing to such Amendment of the
Certificate of Incorporation.
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C. That such amendment has been duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the undersigned does make this Certificate of
Amendment, hereby declaring and certifying under penalties of perjury that this
is his act and deed and the facts stated herein are true, and accordingly has
hereunto set his hand this 16th day of March, 1995.
/s/ Joseph Gaglioti
----------------------------
Joseph Gaglioti
Vice President
I, John F. Downie, the Senior Vice President, Secretary and General
Counsel of the Corporation, do hereby attest that the foregoing Certificate of
Amendment was duly adopted in accordance with the provisions of Section 242 of
the General Corporation Law of the State of Delaware and, in witness whereof, I
have hereunto set my hand this 16th day of March, 1995.
Attest:/s/ John F. Downie
----------------------------
John F. Downie
Senior Vice President, Secretary
and General Counsel
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-03-1996
<PERIOD-END> MAY-04-1996
<CASH> 12,626
<SECURITIES> 0
<RECEIVABLES> 21,234
<ALLOWANCES> 0
<INVENTORY> 88,404
<CURRENT-ASSETS> 137,929
<PP&E> 155,743
<DEPRECIATION> 92,159
<TOTAL-ASSETS> 287,909
<CURRENT-LIABILITIES> 98,881
<BONDS> 180,146
<COMMON> 0
0
0
<OTHER-SE> 3,457
<TOTAL-LIABILITY-AND-EQUITY> 287,909
<SALES> 142,890
<TOTAL-REVENUES> 142,890
<CGS> 44,500
<TOTAL-COSTS> 136,116
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,058
<INCOME-PRETAX> 1,716
<INCOME-TAX> 756
<INCOME-CONTINUING> 960
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 960
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
