<PAGE> 1
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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 July 31, 1999,
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)
(440) 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 23, 1999, 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 JULY 31, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1999 and January 30, 1999 ..... 1
Consolidated Statements of Operations for the 13 and 26 weeks ended
July 31, 1999 and August 1, 1998 ......................................... 2
Consolidated Statements of Cash Flows for the 26 weeks ended July 31,
1999 and August 1, 1998................................................... 3
Notes to Consolidated Financial Statements................................ 4 - 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 6 - 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................... 10
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
July 31, January 30,
Assets 1999 1999
- ------ ---------- ----------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 25,254 $ 51,057
Accounts receivable, less allowance for doubtful
accounts of $8,935 in 1999 and $7,189 in 1998 46,088 45,302
Current portion of notes receivable 3,452 2,707
Refundable income taxes 1,113 1,113
Inventories 126,852 119,881
Prepaid expenses and other 8,500 8,520
Deferred income tax benefits 13,433 13,742
---------- ----------
Total current assets 224,692 242,322
Property and equipment, at cost 253,712 246,597
Less - accumulated depreciation and amortization (139,924) (133,595)
---------- ----------
Total property and equipment, net 113,788 113,002
Other assets:
Notes receivable, excluding current portion 15,209 17,308
Deferred income taxes and other 54,572 51,555
Intangible assets, net 157,160 159,698
---------- ----------
Total assets $ 565,421 $ 583,885
========== ==========
Liabilities and Stockholder's Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 427 $ 407
Accounts payable 54,344 70,125
Payable to affiliates 66,063 69,060
Accrued interest 6,141 6,216
Accrued liabilities 89,481 101,040
Accrued income taxes 4,506 131
---------- ----------
Total current liabilities 220,962 246,979
Long-term debt, net of discount and current portion 274,529 274,706
Other long-term liabilities 14,491 13,954
Stockholder's equity 55,439 48,246
---------- ----------
Total liabilities and stockholder's equity $ 565,421 $ 583,885
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets
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<PAGE> 4
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
----------------------- -----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue $ 266,806 $ 266,572 $ 532,754 $ 537,314
Costs and expenses:
Cost of goods sold 90,205 89,132 177,503 179,421
Operating expenses 155,577 146,907 312,956 302,367
Depreciation and amortization 8,368 7,857 17,269 16,020
---------- ---------- ---------- ----------
Total costs and expenses 254,150 243,896 507,728 497,808
---------- ---------- ---------- ----------
Operating income 12,656 22,676 25,026 39,506
Interest and other (income) expense, net 6,599 6,830 13,189 13,560
---------- ---------- ---------- ----------
Income before income taxes 6,057 15,846 11,837 25,946
Income tax provision 2,485 6,397 4,853 10,638
---------- ---------- ---------- ----------
Net income $ 3,572 $ 9,449 $ 6,984 $ 15,308
========== ========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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<PAGE> 5
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
26 Weeks Ended
------------------------
July 31, August 1,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,984 $ 15,308
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation and amortization 17,269 16,020
Non-cash interest, net 544 523
Change in assets and liabilities:
Decrease (increase) in accounts and notes receivable, prepaid
expenses and other assets 512 (6,140)
Increase in inventories (6,971) (5,950)
Decrease in accounts payable, accrued
liabilities and other liabilities (26,392) (23,557)
Increase (decrease) in accrued interest (75) 207
Increase in accrued, refundable and deferred
income taxes 4,375 9,055
---------- ----------
Net cash provided (used) by operating
activities (3,754) 5,466
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net (12,910) (13,036)
Systems development costs (6,550) (10,150)
Acquisition of businesses, net -- (2,923)
Other, net (615) 466
---------- ----------
Net cash used by investing activities (20,075) (25,643)
---------- ----------
Cash flows from financing activities:
Repayment of long-term debt (200) (216)
Advances to affiliates, net (1,980) (13,258)
Other, net 206 (186)
---------- ----------
Net cash used by financing activities (1,974) (13,660)
---------- ----------
Cash and temporary cash investments:
Net decrease during the period (25,803) (33,837)
Balance, beginning of the period 51,057 67,989
---------- ----------
Balance, end of the period $ 25,254 $ 34,152
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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<PAGE> 6
COLE NATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Cole National Group, Inc. is a wholly owned subsidiary of Cole National
Corporation. The consolidated financial statements include the accounts of Cole
National Group and its wholly owned subsidiaries (collectively, the "Company").
All significant intercompany transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
without audit and certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although management
believes that the disclosures herein are adequate to make the information not
misleading. Results for interim periods are not necessarily indicative of the
results to be expected for the full year. These statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included in its annual report on Form 10-K for the fiscal year ended
January 30, 1999.
In the opinion of management, the accompanying financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly Cole National Group's financial position as of July 31, 1999
and the results of operations and cash flows for the 26 weeks ended July 31,
1999 and August 1, 1998.
Inventories
The accompanying interim consolidated financial statements have been
prepared without physical inventories.
Cash Flows
Net cash flows from operating activities reflect cash payments for income
taxes and interest of $392,000 and $13,114,000, respectively, for the 26 weeks
ended July 31, 1999, and $919,000 and $13,359,000, respectively, for the 26
weeks ended August 1, 1998.
(2) RESTRUCTURING CHARGE
In the fourth quarter of fiscal 1998, the Company recorded a restructuring
charge related to Pearle's operations. The Company's restructuring plan, which
included the closing of certain unprofitable stores during fiscal 1999 and
removing surfacing equipment from certain in-store full service labs through the
second quarter of 2000, is proceeding. The estimated costs of the restructuring
are expected to approximate original estimates. During the first half of fiscal
1999, the Company closed a total of 17 Pearle stores and no in-store labs. The
restructuring reserves remaining at January 30, 1999 were $7.1 million, of which
approximately $4.9 million were paid in the first six months of fiscal 1999. The
remaining reserve at July 31, 1999 of $2.2 million is expected to be paid
through the fourth quarter of fiscal 1999.
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(3) CREDIT FACILITY
In August 1999, the credit facility was amended and extended until January
31, 2003. Borrowings under the credit facility initially bear interest based on
leverage ratios at a rate equal to, at the option of the principal operating
subsidiaries of Cole National Group, either (a) the Eurodollar Rate plus 2% or
(b) 1% plus the highest of (i) the prime rate, (ii) the three-week moving
average of the secondary market rates for three-month certificates of deposit
plus 1% and (iii) the federal funds rate plus .5%. Cole National Group pays a
commitment fee of between .375% and .75% per annum on the total unused portion
of the facility based on the percentage of revolving credit commitments used.
(4) SEGMENT INFORMATION
Information on the Company's reportable segments is as follows (000's
omitted):
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
---------------------- -----------------------
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue:
Cole Vision $ 197,938 $ 202,329 $ 415,485 $ 427,343
Things Remembered 68,868 64,243 117,269 109,971
--------- --------- --------- ---------
Consolidated net revenue $ 266,806 $ 266,572 $ 532,754 $ 537,314
========= ========= ========= =========
Income or loss:
Cole Vision $ 4,061 $ 15,111 $ 18,418 $ 35,974
Things Remembered 10,479 8,969 9,138 6,342
--------- --------- --------- ---------
Total segment profit 14,540 24,080 27,556 42,316
Unallocated amounts:
Corporate expenses (1,884) (1,404) (2,530) (2,810)
--------- --------- --------- ---------
Consolidated operating income 12,656 22,676 25,026 39,506
Interest and other expense, net (6,599) (6,830) (13,189) (13,560)
--------- --------- --------- ---------
Income before income taxes $ 6,057 $ 15,846 $ 11,837 $ 25,946
========= ========= ========= =========
</TABLE>
(5) RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform with the 1999
presentation.
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<PAGE> 8
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 Cole National
Group's results of operations for the 13 and 26 week periods ended July 31, 1999
and August 1, 1998 (the Company's second quarter and first six months). This
discussion should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this filing and the audited
financial statements for the fiscal year ended January 30, 1999 included in the
annual report on Form 10-K.
Fiscal years end on the Saturday closest to January 31 and are identified
according to the calendar year in which they begin. For example, the fiscal year
ended January 30, 1999 is referred to as "fiscal 1998." The current fiscal year,
which will end January 29, 2000, is referred to as "fiscal 1999."
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
second quarter and first six months of fiscal 1999 and fiscal 1998 (dollars in
millions):
<TABLE>
<CAPTION>
Second Quarter First Six Months
----------------------------------- ------------------------------------
Fiscal Fiscal Fiscal Fiscal
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue-
Cole Vision $ 197.9 $ 202.4 (2.2%) $ 415.5 $ 427.3 (2.8%)
Things Remembered 68.9 64.2 7.2% 117.3 110.0 6.6%
-------- -------- --------- ---------
Total net revenue $ 266.8 $ 266.6 0.1% $ 532.8 $ 537.3 (0.8%)
Gross profit $ 176.6 $ 177.4 (0.5%) $ 355.3 $ 357.9 (0.7%)
Operating expenses 155.6 146.9 5.9% 313.0 302.3 3.5%
Depreciation & amortization 8.3 7.8 6.5% 17.3 16.1 7.8%
-------- -------- --------- ---------
Operating income $ 12.7 $ 22.7 (44.2%) $ 25.0 $ 39.5 (36.7%)
======== ======== ========= =========
Percentage of Net Revenue-
Gross margin 66.2% 66.6% (0.4) 66.7% 66.6% 0.1
Operating expenses 58.3 55.1 3.2 58.7 56.3 2.4
Depreciation & amortization 3.2 3.0 0.2 3.3 3.0 0.3
-------- -------- --------- ---------
Operating income 4.7% 8.5% (3.8) 4.7% 7.3% (2.6)
======== ======== ========= =========
Number of Retail Locations
at the End of the Period-
Cole Licensed Brands 1,176 1,161
Pearle company-owned 462 461
Pearle franchised 418 403
-------- ---------
Total Cole Vision 2,056 2,025
Things Remembered 810 823
-------- ---------
Total Cole National 2,866 2,848
======== =========
</TABLE>
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<PAGE> 9
The softness in net revenue for the second quarter and first six months of
fiscal 1999 was primarily attributable to decreases in consolidated comparable
store sales, partially offset by growth in the number of locations since last
year. Changes in comparable store sales by business were:
<TABLE>
<CAPTION>
Second Quarter First Six Months
-------------- ----------------
<S> <C> <C>
Cole Licensed Brands (U.S.) (4.5%) (4.7%)
Pearle company-owned (U.S.) (4.0%) (5.9%)
Total Cole Vision (4.0%) (4.8%)
Things Remembered 6.9% 7.0%
Total Cole National (1.0%) (2.0%)
</TABLE>
Sales at Cole Licensed Brands were negatively impacted by a competitive
promotional environment to which Cole began responding at the end of the second
quarter. This response produced an improvement in the sales trend during the
last two weeks of the quarter. Sales at Pearle were impacted by the competitive
promotional environment and Pearle's focus on long-term, brand-building in its
advertising campaign, as well as operating issues that the Company is actively
addressing. During the second quarter, Pearle refocused its marketing efforts to
become more promotional, resulting in an improved trend in comparable store
sales as compared to the first quarter. The second quarter sales decrease at
Cole Vision reflected a decline in the number of spectacles sold as well as a
lower average selling price for contact lenses at Cole Licensed Brands and a
reduction in the average transaction amount at Pearle due to a change in
promotions between years. At Things Remembered, the comparable store sales
increase reflected increased sales of additional personalization and new
merchandise at higher average unit retails, along with the benefits from
marketing directly to its existing customer base. The number of transactions at
Things Remembered in the second quarter was essentially flat compared to a year
ago. During the first six months of fiscal 1999, Cole National Group opened 52
new locations and closed 70 locations.
The gross profit decreases for the second quarter and first six months of
fiscal 1999 compared to those same periods in fiscal 1998 were primarily
attributable to the lower revenue at Cole Vision, partially offset by the
revenue increase at Things Remembered. Gross margin at Cole Vision declined 0.8
and 0.3 percentage points in the second quarter and first six months of fiscal
1999, respectively, compared to the same periods last year. The lower gross
margin at Cole Vision was due in part to the impact of lower contact lens
margins in the second quarter. Gross margin at Things Remembered improved 0.7
and 1.3 percentage points in the second quarter and first six months of fiscal
1999, respectively, reflecting increased sales of additional personalization and
higher margins from new products.
The unfavorable leverage in operating expenses in the second quarter was
primarily attributable to a 1.1 percentage point increase in payroll costs, a
1.4 percentage point increase in net advertising expenditures and a 0.6
percentage point increase in managed vision care expenses. The unfavorable
leverage for the first six months was primarily attributable to a 1.1 percentage
point increase in payroll costs, a 0.4 percentage point increase in net
advertising expenditures and a 0.5 percentage point increase in managed vision
care expenses. The unfavorable payroll leverages were due to the comparable
store sales decreases at Cole Vision and to staffing increases in managed vision
care and information systems, partly offset by payroll leverage gains on the
sales increases at Things Remembered. The unfavorable advertising leverage was
largely due to increased advertising at Cole
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<PAGE> 10
Vision in the second quarter of fiscal 1999 in response to the competitive
pricing environment. The increases in managed vision care expenses were
primarily attributable to growth in call and claims volumes associated with
increases in sponsor-funded programs. The depreciation and amortization expense
increases were primarily attributable to the increases in amortization of
systems development and software costs.
See the notes to consolidated financial statements for information on the
status of the Company's restructuring charge recorded in the fourth quarter of
fiscal 1998.
The decreases in income from operations were primarily the result of the
decreases in net revenue and gross profit, and the increases in operating
expenses and depreciation and amortization. Net interest and other expense in
fiscal 1999 decreased slightly from the second quarter and first six months of
fiscal 1998. An income tax provision was recorded in the first six months of
fiscal 1999 and fiscal 1998 using the Company's estimated annual effective tax
rate of 41% in both years.
YEAR 2000
The Company is proceeding with the implementation of its Year 2000
Readiness Program, including ascertaining Year 2000 readiness of critical third
parties. Management continues to believe that all critical programs and hardware
will be Year 2000 ready, including testing, by the end of the third quarter of
fiscal 1999 and expects that any necessary contingency plans will be completed
at that time.
Management estimates the total cost of the Year 2000 Readiness Program
will be approximately $3.6 million, including $0.3 million of new hardware and
software that has been capitalized. The remaining $3.3 million is being expensed
as incurred (approximately $2.4 million in fiscal 1998 and $0.9 million in
fiscal 1999, including $0.5 million during the first six months). These costs
include only external costs as internal costs, which consist primarily of
payroll-related costs of employees, are not tracked separately for the Year 2000
Readiness Program. The estimate of external costs does not include costs
associated with addressing and resolving issues as a result of the failure of
third parties to become Year 2000 ready. See the Company's Annual Report on Form
10-K for the fiscal year ended January 30, 1999 for further discussion of Year
2000.
RECENT DEVELOPMENTS AND FORWARD-LOOKING INFORMATION
In the second half of fiscal 1999, the Company will continue to respond to
the competitive pricing environment that exists in the retail optical market
with the development and implementation of promotional messages in order to
attract customers and improve comparable store sales. These actions may cause a
negative impact on gross margin and may not significantly improve the recent
trend in sales for the remainder of the year. Operating income for the second
half of fiscal 1999 is expected to be below the same period of the prior year.
Certain sections of this Form 10-Q, including this Management's Discussion
and Analysis, contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those forecast due to a variety of factors that can adversely
affect operating results, liquidity and financial condition such as risks
associated with the timing and achievement of the continuing restructuring and
improvements in the operations of the optical business, the ability of Cole
National Group and its suppliers, host
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<PAGE> 11
stores, and managed vision care organization partners to achieve Year 2000
readiness, the integration of acquired operations, the ability to select, stock
and price merchandise attractive to customers, the implementation of its store
acquisition program, economic and weather factors affecting consumer spending,
operating factors affecting customer satisfaction, including manufacturing
quality of optical and engraved goods, the relationships with host stores and
franchisees, the mix of goods sold, pricing and other competitive factors, and
the seasonality of the business. Forward-looking statements are made based upon
management's expectations and beliefs concerning future events impacting Cole
National Group. All forward-looking statements involve risk and uncertainty.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates, which could impact its results of operations and financial
condition. Foreign exchange risk arises from the Company's exposure in
fluctuations in foreign currency exchange rates because The Company's reporting
currency is the United States dollar. Management seeks to minimize the exposure
to foreign currency fluctuations through natural internal offsets to the fullest
extent possible.
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<PAGE> 12
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) Report on Form 8-K
The Company has not filed any reports on Form 8-K for the quarterly period
ended July 31, 1999.
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<PAGE> 13
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 14, 1999
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<PAGE> 14
COLE NATIONAL GROUP, INC.
FORM 10-Q
QUARTER ENDED JULY 31, 1999
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
-12-
<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> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 25,254
<SECURITIES> 0
<RECEIVABLES> 58,475
<ALLOWANCES> 8,935
<INVENTORY> 126,852
<CURRENT-ASSETS> 224,692
<PP&E> 253,712
<DEPRECIATION> 139,924
<TOTAL-ASSETS> 565,421
<CURRENT-LIABILITIES> 220,962
<BONDS> 274,529
<COMMON> 0
0
0
<OTHER-SE> 55,439
<TOTAL-LIABILITY-AND-EQUITY> 565,421
<SALES> 532,754
<TOTAL-REVENUES> 532,754
<CGS> 177,503
<TOTAL-COSTS> 507,728
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,189
<INCOME-PRETAX> 11,837
<INCOME-TAX> 4,853
<INCOME-CONTINUING> 6,984
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,984
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
