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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 August 3, 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 August 26, 1996, 1,100 shares of the registrant's common stock, $.01 par
value, were outstanding.
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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED AUGUST 3, 1996
INDEX
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<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of August 3, 1996 and
February 3, 1996.......................................... 1
Consolidated Statements of Income for the 13 weeks
ended August 3, 1996 and July 29, 1995 and for the
26 weeks ended August 3, 1996 and July 29, 1995............ 2
Consolidated Statements of Cash Flows for the 26 weeks
ended August 3, 1996 and July 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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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
August 3, February 3,
Assets 1996 1996
- ------ --------- -----------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 46,088 $ 29,260
Accounts receivable 18,917 18,544
Inventories 84,164 84,794
Prepaid expenses and other 6,147 5,869
Deferred income tax benefits 10,616 10,616
--------- ---------
Total current assets 165,932 149,083
Property and equipment, at cost 159,709 154,589
Less - accumulated depreciation and
amortization (94,508) (90,883)
--------- ---------
Total property and equipment, net 65,201 63,706
Other assets 7,256 5,038
Cost in excess of net assets of purchased
businesses, net 80,178 81,163
--------- ---------
Total assets $ 318,567 $ 298,990
========= =========
Liabilities and Stockholder's Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 360 $ 292
Accounts payable 24,902 29,082
Payable to affiliates 24,867 1,255
Accrued interest 6,997 7,044
Dividend payable -- 13,500
Accrued liabilities 61,193 53,676
Accrued income taxes 6,208 5,970
--------- ---------
Total current liabilities 124,527 110,819
Long-term debt, net of discount 180,110 180,218
Deferred income taxes and other 5,406 5,456
Stockholder's equity:
Common stock -- --
Paid-in capital 118,065 118,065
Accumulated deficit (109,541) (115,568)
--------- ---------
Total stockholder's equity 8,524 2,497
--------- ---------
Total liabilities and stockholder's
equity $ 318,567 $ 298,990
========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
--------------------- ---------------------
August 3, July 29, August 3, July 29,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $153,465 $138,099 $296,355 $263,353
Costs and expenses:
Cost of goods sold 47,400 43,341 91,900 82,065
Operating expenses 87,847 78,885 175,261 156,353
Depreciation and amortization 4,248 3,845 8,450 7,672
-------- -------- -------- --------
Total costs and expenses 139,495 126,071 275,611 246,090
-------- -------- -------- --------
Income from operations 13,970 12,028 20,744 17,263
Interest expense, net 4,924 5,316 9,982 10,600
-------- -------- -------- --------
Income before income taxes 9,046 6,712 10,762 6,663
Income tax provision 3,979 2,954 4,735 2,932
-------- -------- -------- --------
Net income $ 5,067 $ 3,758 $ 6,027 $ 3,731
======== ======== ======== ========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
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COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
----------------------
August 3, July 29,
1996 1995
-------- --------
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Cash flows from operating activities:
Net income $ 6,027 $ 3,731
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 8,450 7,672
Non-cash interest expense 214 203
Change in assets and liabilities:
Increase in accounts receivable,
prepaid expenses and other assets (803) (4,918)
Decrease in inventories 630 7,597
Increase (decrease) in accounts payable, accrued
liabilities and payable to affiliates 3,389 (4,797)
Decrease in accrued interest (47) (20)
Increase (decrease) in accrued income taxes 238 (917)
-------- --------
Net cash provided by operating activities 18,098 8,551
-------- --------
Cash flows from financing activities:
Advances from Parent, net 9,721 --
Repayment of long-term debt (161) --
-------- --------
Net cash used by financing activities 9,560 --
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (9,531) (8,402)
Acquisition of business -- (800)
Other, net (1,299) (941)
-------- --------
Net cash used by investing activities (10,830) (10,143)
-------- --------
Cash and temporary cash investments:
Net increase (decrease) during the period 16,828 (1,592)
Balance, beginning of the period 29,260 19,730
-------- --------
Balance, end of the period $ 46,088 $ 18,138
======== ========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
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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 (the
Parent). 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 August 3, 1996 and the
results of operations for the 13 and 26 weeks ended August 3, 1996 and July 29,
1995, and cash flows for the 26 weeks ended August 3, 1996 and July 29, 1995.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at August 3, 1996 and
February 3, 1996 were valued at the lower of first-in, first-out (FIFO) cost or
market.
Cash Flows
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $4,544,000 and $10,460,000, respectively, for the 26 weeks
ended August 3, 1996, and $3,851,000 and $10,759,000, respectively, for the 26
weeks ended July 29, 1995.
(2) TRANSACTIONS WITH PARENT
During the second quarter of fiscal 1996, the Parent used a portion of the
net proceeds from its public stock offering to purchase approximately $15.1
million of the Company's outstanding 11.25% Senior Notes in the open market. The
remaining proceeds of approximately $9.7 million were advanced to the Company.
Of the $180.1 million of long-term debt outstanding at August 3, 1996,
approximately $15.1 million, plus accrued interest, is payable to the Parent.
(3) 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.
(4) 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 and 26 week periods ended August
3, 1996 and July 29, 1995 (the Company's second quarter and first six months,
respectively). 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 second quarter of fiscal 1996 increased 11.1% to
$153.5 million from $138.1 million for the same period last year. Net sales for
the first six months of fiscal 1996 increased 12.5% to $296.4 million from
$263.4 million for the same period a year ago. The increases in consolidated
sales for the second quarter and first six months of fiscal 1996 were due to
comparable store sales increases of 8.2% and 7.9%, respectively, and to the
opening of additional Cole Gift and Cole Vision units. Comparable store sales
increased primarily as a result of successful eyewear promotions and 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
August 3, 1996, the Company operated 2,321 specialty service retail units
compared to 2,287 at July 29, 1995.
Gross profit increased to $106.1 million in the second quarter of
fiscal 1996 from $94.8 million for the same period last year. Second quarter
gross margins in fiscal 1996 and fiscal 1995 were 69.1% and 68.6%, respectively.
For the first six months, gross profit increased to $204.5 million in fiscal
1996 from $181.3 million for the same period a year ago. Gross margins for the
first six months in fiscal 1996 and fiscal 1995 were 69.0% and 68.8%,
respectively. The increases in gross margin percentages were the result of lower
product costs and a higher level of personalization in the sales mix at Things
Remembered.
Operating expenses increased 11.4% to $87.8 million in the second
quarter of fiscal 1996 from $78.9 million for the second quarter last year. For
the first six months of fiscal 1996, operating expenses increased 12.1% to
$175.3 million from $156.4 million for the same period in fiscal 1995. Operating
expense increases for both periods compared to last year were primarily due to
higher advertising expenditures, payroll costs and store occupancy expenses.
Advertising expenditures at Cole Vision were increased for optical promotions to
encourage continued sales growth above last year's successful promotions.
Payroll costs increased because of more retail units open in 1996 and additional
payroll to support increased sales. Store occupancy expenses increased primarily
as a result of more retail units, higher percentage rents caused by increased
comparable store sales and the increased number of Things Remembered
personalization superstores. Fiscal 1996 depreciation and amortization expense
of $4.2 million in the second quarter and $8.5 million in the first six months
was $0.4 and $0.8 million more, respectively, than the same periods in fiscal
1995 reflecting an increase in capital expenditures beginning in the latter part
of fiscal 1993.
Income from operations increased 16.1% in the second quarter of fiscal
1996 to $14.0 million and increased 20.2% to $20.7 million in the first six
months primarily because of strong sales at Cole Vision and Things Remembered.
Net interest expense decreased $0.4 million to $4.9 million in the
second quarter of fiscal 1996 and decreased $0.6 million to $10.0 million in the
first six months. The decrease for the six months was primarily because of the
retirement of $5.0 million of Senior Notes in November 1995, the elimination of
working
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<PAGE> 8
capital borrowings and increased interest income from an increase in temporary
cash investments.
Income tax provisions were recorded in the second quarter and first six
months of fiscal 1996 and fiscal 1995 using the Company's estimated annual
effective tax rate of 44%.
Net income for the second quarter increased to $5.1 million in 1996
from $3.8 million for the second quarter of 1995. For the first six months of
fiscal 1996, net income increased to $6.0 million from $3.7 million for that
same period last year. For both the second quarter and first six months of
fiscal 1996, increases were 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:
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 August 3, 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: September 13, 1996
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COLE NATIONAL GROUP, INC.
FORM 10-Q
QUARTER ENDED AUGUST 3, 1996
EXHIBIT INDEX
<TABLE>
<CAPTION>
Pagination By
Sequence
Exhibit Numbering
Number Description System
- ------ ----------- -------------
<S> <C> <C>
27 Financial Data Schedule 10
</TABLE>
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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> 6-MOS
<FISCAL-YEAR-END> FEB-1-1997
<PERIOD-START> FEB-4-1996
<PERIOD-END> AUG-3-1996
<CASH> 46,088
<SECURITIES> 0
<RECEIVABLES> 18,917
<ALLOWANCES> 0
<INVENTORY> 84,164
<CURRENT-ASSETS> 165,932
<PP&E> 159,709
<DEPRECIATION> 94,508
<TOTAL-ASSETS> 318,567
<CURRENT-LIABILITIES> 124,527
<BONDS> 180,110
<COMMON> 0
0
0
<OTHER-SE> 8,524
<TOTAL-LIABILITY-AND-EQUITY> 318,567
<SALES> 296,355
<TOTAL-REVENUES> 296,355
<CGS> 91,900
<TOTAL-COSTS> 275,611
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,982
<INCOME-PRETAX> 10,762
<INCOME-TAX> 4,735
<INCOME-CONTINUING> 6,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,027
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
