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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 3, 1997, OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO_______.
COMMISSION FILE NUMBER 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 27, 1997, 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 MAY 3, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF MAY 3, 1997 AND
FEBRUARY 1, 1997.......................................... 1
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE 13
WEEKS ENDED MAY 3, 1997 AND MAY 4, 1996................... 2
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE 13
WEEKS ENDED MAY 3, 1997 AND MAY 4, 1996................... 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................ 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 5 - 7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................... 8
</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 3, February 1,
Assets 1997 1997
- ------ ---------- ---------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 20,202 $ 73,141
Accounts receivable, less allowance for doubtful
accounts of $1,632 in 1997 and $3,068 in 1996 41,835 39,539
Current portion of notes receivable 5,106 6,060
Inventories 127,456 119,236
Prepaid expenses and other 8,636 7,362
Deferred income tax benefits 24,925 24,925
--------- ---------
Total current assets 228,160 270,263
Property and equipment, at cost 218,422 211,408
Less - accumulated depreciation and amortization (107,089) (100,598)
--------- ---------
Total property and equipment, net 111,333 110,810
Other assets:
Notes receivable, excluding current portion 22,039 24,387
Deferred income taxes and other 35,130 28,057
Intangible assets, net 138,237 139,308
--------- ---------
Total assets $ 534,899 $ 572,825
========= =========
Liabilities and Stockholder's Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 457 $ 477
Accounts payable 44,672 62,145
Payable to affiliates 51,973 65,590
Accrued interest 8,706 9,630
Accrued liabilities 115,825 123,001
Accrued income taxes 6,057 6,978
--------- ---------
Total current liabilities 227,690 267,821
Long-term debt, net of discount and current portion 314,363 314,359
Other long-term liabilities 26,956 27,000
Stockholder's deficit:
Common stock - -
Paid-in capital 122,681 122,681
Foreign currency translation adjustment (182) (26)
Accumulated deficit (156,609) (159,010)
--------- ---------
Total stockholder's deficit (34,110) (36,355)
--------- ---------
Total liabilities and stockholder's equity $ 534,899 $ 572,825
========= =========
</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 OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended
---------------------
May 3, May 4,
1997 1996
-------- --------
<S> <C> <C>
Net revenue $248,542 $142,890
Costs and expenses:
Cost of goods sold 85,770 44,500
Operating expenses 142,565 87,414
Depreciation and amortization 7,607 4,202
-------- --------
Total costs and expenses 235,942 136,116
-------- --------
Income from operations 12,600 6,774
Interest expense, net 8,313 5,058
-------- --------
Income before income taxes 4,287 1,716
Income tax provision 1,886 756
-------- --------
Net income $ 2,401 $ 960
======== ========
</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 3, May 4,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,401 $ 960
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 7,607 4,202
Non-cash interest 225 106
Change in assets and liabilities:
Increase in accounts and notes receivable,
prepaid expenses and other assets (1,655) (2,083)
Increase in inventories (8,220) (3,610)
Decrease in accounts payable, accrued
liabilities and other liabilities (23,296) (3,897)
Decrease in accrued interest (924) (5,101)
Decrease in accrued income taxes (921) (3,285)
-------- --------
Net cash used by operating activities (24,783) (12,708)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (85) (130)
Advances from (to) affiliates, net (13,617) 23
Other (155) -
-------- --------
Net cash used by financing activities (13,857) (107)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (7,041) (3,324)
Systems development costs (2,543) (349)
Other (4,715) (146)
-------- --------
Net cash used by investing activities (14,299) (3,819)
-------- --------
Cash and temporary cash investments:
Net decrease during the period (52,939) (16,634)
Balance, beginning of the period 73,141 29,260
-------- --------
Balance, end of the period $ 20,202 $ 12,626
======== ========
</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 1, 1997.
In the opinion of management, the accompanying financial statements contain
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the Company's financial position as of May 3, 1997 and the
results of operations and cash flows for the 13 weeks ended May 3, 1997 and May
4, 1996.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories. Inventories at May 3, 1997 and May 4,
1996 were valued at the lower of first-in, first-out (FIFO) cost or market.
Cash Flows
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $2,974,446 and $9,492,000, respectively, for the 13 weeks
ended May 3, 1997, and $4,087,000 and $10,308,000, respectively, for the 13
weeks ended May 4, 1996.
(2) SEASONALITY
The Company's business historically has been seasonal with approximately
30% of its revenue and approximately 50% of its income from operations occurring
in the fourth fiscal quarter because of the importance of gift sales during the
Christmas retailing season. Although the Pearle acquisition will moderate the
seasonality of the Company due to relatively lower levels of optical product
sales during the Christmas holiday season, the Company's business will remain
seasonal. Therefore, results of operations for interim periods are not
necessarily indicative of full year results.
(3) RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 3, 1997 and May 4, 1996
(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 1, 1997 included in its annual report on Form 10-K.
The Company's fiscal year ends on the Saturday closest to January 31.
Fiscal years are identified according to the calendar year in which they begin.
For example, the fiscal year ended February 1, 1997 is referred to as "fiscal
1996."
RESULTS OF OPERATIONS
Net revenue for the first quarter of fiscal 1997 increased 73.9% to $248.5
million from $142.9 million for the same period in fiscal 1996. The increase was
primarily attributable to the acquisitions of Pearle and Sears Optical of Canada
in November 1996, which accounted for $85.5 million of the increase. For the
quarter, the Company's consolidated comparable store sales increased 5.4% in
fiscal 1997 and 7.6% in fiscal 1996. A strong comparable store sales increase of
10.9% at Cole Vision was primarily a result of successful eyewear promotions and
growth in managed vision care sales. Comparable store sales decreased 3.7% at
Cole Gift which was negatively impacted by the lower levels of mall traffic and
unseasonably bad weather in the early spring. In the first quarter of fiscal
1997, the Company began classifying capitation and other fees associated with
its growing managed vision care business as revenue, which previously had been
netted with operating expenses. The opening of additional Cole Gift and Cole
Vision units also contributed to the first quarter revenue increases. At May 3,
1997, the Company had 3,119 specialty service retail locations, including 327
franchised locations, compared to 2,308 at May 4, 1996.
Gross profit increased to $162.8 million in the first quarter of fiscal
1997 from $98.4 million in the same period last year. The gross profit increase
was primarily attributable to the addition of Pearle, increased revenue at Cole
Vision and the classification of managed vision care fees as revenue. Gross
margins for the first quarter of fiscal 1997 and fiscal 1996 were 65.5% and
68.9%, respectively. The lower gross margin percentage resulted primarily from
the addition of Pearle which has a lower gross margin than the Company has
historically experienced due to the higher costs of in-store laboratories and
lower margin wholesale sales to franchised stores. This was partially offset by
revenue generated by Pearle's franchise royalties and fees, interest income on
Pearle's franchise notes receivable and the managed vision care fees, each of
which has no corresponding cost of goods sold.
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Operating expenses increased 63.1% to $142.6 million in the first quarter
of fiscal 1997 from $87.4 million in 1996, but as a percentage of revenue,
operating expenses decreased to 57.4% in fiscal 1997 from 61.2% in fiscal 1996.
The leverage improvement was primarily a result of the addition of Pearle, which
has lower operating expenses as a percentage of revenue than the rest of the
Company, along with leverage gains achieved by Cole Vision's comparable store
sales increase. Fiscal 1997 depreciation and amortization expense of $7.6
million was $3.4 million more than fiscal 1996 reflecting the addition of Pearle
and an increase in capital expenditures.
Income from operations increased 86.0% to $12.6 million for the first
quarter of fiscal 1997 from $6.8 million for the same period a year ago,
primarily the result of the Pearle acquisition and strong sales growth at Cole
Vision, offset in part by softer sales performance at Cole Gift.
Net interest expense increased $3.3 million over the first quarter of
fiscal 1996 to $8.3 million. The increase was primarily attributable to the
additional interest on $150.0 million of Notes issued in connection with
financing the Pearle acquisition, partially offset by a decrease in interest
expense due to the retirement of $15.1 million of Senior Notes in the third
quarter of fiscal 1996.
An income tax provision was recorded in the first quarter of both fiscal
1997 and fiscal 1996 using the Company's estimated annual effective tax rate of
44%.
Net income increased to $2.4 million for the first quarter of fiscal 1997
from $1.0 million for the first quarter of fiscal 1996. The increase was due to
improvement in income from operations offset, in part, by the increase in net
interest expense.
The Company's business historically has been seasonal with approximately
30% of its revenue and approximately 50% of its income from operations occurring
in the fourth fiscal quarter because of the importance of gift sales during the
Christmas retailing season. Although the Pearle acquisition will moderate the
seasonality of the Company due to relatively lower levels of optical product
sales during the Christmas holiday season, the Company's business will remain
seasonal. Therefore, results of operations for interim periods are not
necessarily indicative of full year results.
FORWARD-LOOKING INFORMATION
Certain sections of this Form 10-Q contain forward-looking statements.
Forward-looking statements are made based upon management's expectations and
beliefs concerning future events impacting the Company. All forward-looking
statements involve risk and uncertainty.
The Company operates in a highly competitive environment, and its future
liquidity, financial condition and operating results may be materially affected
by a variety of factors, some of which may be beyond the control of the Company,
including risks associated with the integration of Pearle, the Company's ability
to select and stock merchandise attractive to customers, economic and weather
factors affecting consumer spending, operating factors, including manufacturing
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quality of optical and engraved goods, affecting customer satisfaction, the
Company's relationships with host stores and franchisees, the mix of goods sold,
pricing and other competitive factors, and the seasonality of the Company's
business.
-7-
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed herewith and made a part
hereof:
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly
period ended May 3, 1997.
-8-
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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 13, 1997
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COLE NATIONAL GROUP, INC.
FORM 10-Q
QUARTER ENDED MAY 3, 1997
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> MAY-03-1997
<CASH> 20,202
<SECURITIES> 0
<RECEIVABLES> 48,573
<ALLOWANCES> 1,632
<INVENTORY> 127,456
<CURRENT-ASSETS> 228,160
<PP&E> 218,422
<DEPRECIATION> 107,089
<TOTAL-ASSETS> 534,899
<CURRENT-LIABILITIES> 227,690
<BONDS> 314,363
<COMMON> 0
0
0
<OTHER-SE> (34,110)
<TOTAL-LIABILITY-AND-EQUITY> 534,899
<SALES> 248,542
<TOTAL-REVENUES> 248,542
<CGS> 85,770
<TOTAL-COSTS> 235,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,313
<INCOME-PRETAX> 4,287
<INCOME-TAX> 1,886
<INCOME-CONTINUING> 2,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,401
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
