UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| þ |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended August 3, 2002, |
OR
| o |
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 1-12814
COLE NATIONAL CORPORATION
(Exact name of registrant as specified in its
charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
34-1453189 (I.R.S. employer identification no.) |
|
| 5915 Landerbrook Drive Mayfield Heights, Ohio (Address of principal executive offices) |
44124 (Zip code) |
(440) 449-4100
(Registrant’s telephone number, including area code)
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 þYES o NO
As of August 31, 2002, 16,167,337 shares of the registrant’s common stock were outstanding.
COLE NATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED AUGUST 3, 2002
INDEX
| Page No. | ||||||
| PART I. | FINANCIAL INFORMATION | |||||
| Item 1. | Financial Statements | |||||
| Consolidated Balance Sheets as of August 3, 2002 and February 2, 2002 | 1 | |||||
| Consolidated Statements of Operations for the 13 and 26 weeks ended August 3, 2002 and August 4, 2001 | 2 | |||||
| Consolidated Statements of Cash Flows for the 26 weeks ended August 3, 2002 and August 4, 2001 | 3 | |||||
| Notes to Consolidated Financial Statements | 4 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 14 | ||||
| Item 4. | Controls and Procedures | 14 | ||||
| PART II. | OTHER INFORMATION | |||||
| Item 1. | Legal Proceedings | 15 | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 15 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 16 | ||||
PART I. — FINANCIAL INFORMATION
Item 1. Financial Statements
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
| August 3, | February 2, | |||||||||||
| 2002 | 2002 | |||||||||||
Assets |
||||||||||||
Current assets: |
||||||||||||
Cash and cash equivalents |
$ | 48,931 | $ | 63,656 | ||||||||
Accounts receivable, less allowances of
$5,588 and $4,008, respectively |
44,574 | 39,609 | ||||||||||
Current portion of notes receivable |
2,899 | 2,926 | ||||||||||
Inventories |
118,318 | 111,098 | ||||||||||
Refundable income taxes |
458 | 502 | ||||||||||
Prepaid expenses and other |
22,088 | 22,757 | ||||||||||
Deferred income tax benefits |
547 | 477 | ||||||||||
Total current assets |
237,815 | 241,025 | ||||||||||
Property and equipment, at cost |
303,851 | 297,649 | ||||||||||
Less — accumulated depreciation and amortization |
(182,391 | ) | (174,300 | ) | ||||||||
Total property and equipment, net |
121,460 | 123,349 | ||||||||||
Notes receivable, excluding current portion, less allowances
of $4,217 and $5,209, respectively |
20,706 | 19,056 | ||||||||||
Deferred income taxes and other assets |
80,509 | 74,220 | ||||||||||
Tradenames, net |
42,992 | 42,992 | ||||||||||
Goodwill, net |
103,551 | 103,552 | ||||||||||
Total assets |
$ | 607,033 | $ | 604,194 | ||||||||
Liabilities and Stockholders’ Equity |
||||||||||||
Current liabilities: |
||||||||||||
Current portion of long-term debt |
$ | 50 | $ | 85 | ||||||||
Accounts payable |
53,590 | 57,647 | ||||||||||
Accrued interest |
7,970 | 6,539 | ||||||||||
Accrued liabilities |
83,358 | 79,722 | ||||||||||
Accrued income taxes |
743 | 3,501 | ||||||||||
Total current liabilities |
145,711 | 147,494 | ||||||||||
Long-term debt, net of discount and current portion |
285,000 | 284,318 | ||||||||||
Other long-term liabilities |
17,073 | 16,775 | ||||||||||
Stockholders’ equity |
159,249 | 155,607 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 607,033 | $ | 604,194 | ||||||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
1
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
| Thirteen Weeks Ended | Twenty-Six Weeks Ended | |||||||||||||||||
| August 3, | August 4, | August 3, | August 4, | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Net revenue |
$ | 288,857 | $ | 273,348 | $ | 578,966 | $ | 543,639 | ||||||||||
Costs and expenses: |
||||||||||||||||||
Cost of goods sold |
94,520 | 91,307 | 190,168 | 179,029 | ||||||||||||||
Operating expenses |
185,234 | 171,374 | 368,621 | 345,277 | ||||||||||||||
Goodwill and tradename amortization |
— | 1,436 | — | 2,898 | ||||||||||||||
Total costs and expenses |
279,754 | 264,117 | 558,789 | 527,204 | ||||||||||||||
Operating income |
9,103 | 9,231 | 20,177 | 16,435 | ||||||||||||||
Interest and other (income) expense, net: |
||||||||||||||||||
Interest expense |
6,947 | 7,010 | 14,076 | 14,068 | ||||||||||||||
Interest and other (income), net |
(613 | ) | (787 | ) | (1,246 | ) | (2,126 | ) | ||||||||||
Total interest and other (income) expense, net |
6,334 | 6,223 | 12,830 | 11,942 | ||||||||||||||
Income before income taxes |
2,769 | 3,008 | 7,347 | 4,493 | ||||||||||||||
Income tax provision |
1,108 | 1,786 | 2,939 | 2,574 | ||||||||||||||
Income after taxes |
1,661 | 1,222 | 4,408 | 1,919 | ||||||||||||||
Equity in net income of Pearle Europe |
1,030 | 237 | 1,826 | 185 | ||||||||||||||
Income before extraordinary loss |
2,691 | 1,459 | 6,234 | 2,104 | ||||||||||||||
Extraordinary loss on early extinguishment
of debt, net of $4.1 million tax benefit |
(7,634 | ) | — | (7,634 | ) | — | ||||||||||||
Net income (loss) |
$ | (4,943 | ) | $ | 1,459 | $ | (1,400 | ) | $ | 2,104 | ||||||||
Basic earnings per common share: |
||||||||||||||||||
Income before extraordinary loss |
$ | 0.16 | $ | 0.09 | $ | 0.39 | $ | 0.13 | ||||||||||
Extraordinary loss |
(0.47 | ) | — | (0.48 | ) | — | ||||||||||||
Net income (loss) |
$ | (0.31 | ) | $ | 0.09 | $ | (0.09 | ) | $ | 0.13 | ||||||||
Diluted earnings per common share: |
||||||||||||||||||
Income before extraordinary loss |
$ | 0.16 | $ | 0.09 | $ | 0.38 | $ | 0.13 | ||||||||||
Extraordinary loss |
(0.46 | ) | — | (0.46 | ) | — | ||||||||||||
Net income (loss) |
$ | (0.30 | ) | $ | 0.09 | $ | (0.08 | ) | $ | 0.13 | ||||||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
2
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| Twenty-Six Weeks Ended | ||||||||||||
| August 3, | August 4, | |||||||||||
| 2002 | 2001 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (1,400 | ) | $ | 2,104 | |||||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
18,370 | 19,952 | ||||||||||
Extraordinary loss on early extinguishment of debt |
7,634 | — | ||||||||||
Equity in net income of Pearle Europe |
(1,826 | ) | (185 | ) | ||||||||
Noncash interest, net |
(97 | ) | (49 | ) | ||||||||
Gain on sale of fixed assets |
— | (683 | ) | |||||||||
Increases (decreases) in cash resulting from changes in
assets and liabilities: |
||||||||||||
Accounts and notes receivable, prepaid expenses and other assets |
(4,157 | ) | 1,333 | |||||||||
Inventories |
(7,227 | ) | (8,108 | ) | ||||||||
Accounts payable, accrued liabilities and other liabilities |
347 | 7,175 | ||||||||||
Accrued interest |
1,182 | (318 | ) | |||||||||
Accrued, refundable and deferred income taxes |
(350 | ) | 2,648 | |||||||||
Net cash provided by operating activities |
12,476 | 23,869 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchases of property and equipment, net |
(11,969 | ) | (19,907 | ) | ||||||||
Net proceeds from sale of fixed assets |
— | 4,712 | ||||||||||
Systems development costs |
(2,219 | ) | (4,578 | ) | ||||||||
Investment in Pearle Europe, net |
— | (6,446 | ) | |||||||||
Other, net |
(138 | ) | (176 | ) | ||||||||
Net cash used for investing activities |
(14,326 | ) | (26,395 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Repayment of long-term debt |
(158,094 | ) | (312 | ) | ||||||||
Proceeds from issuance of long-term debt |
150,000 | — | ||||||||||
Payment of deferred financing fees |
(5,920 | ) | — | |||||||||
Net proceeds from exercise of stock options |
1,148 | 1,186 | ||||||||||
Issuance of notes receivable — stock options and awards |
— | (340 | ) | |||||||||
Other, net |
(9 | ) | (210 | ) | ||||||||
Net cash (used for) provided by financing activities |
(12,875 | ) | 324 | |||||||||
Cash and cash equivalents: |
||||||||||||
Net decrease during the period |
(14,725 | ) | (2,202 | ) | ||||||||
Balance, beginning of period |
63,656 | 36,725 | ||||||||||
Balance, end of period |
$ | 48,931 | $ | 34,523 | ||||||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
3
COLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (1) | Summary of Significant Accounting Policies |
Basis of Presentation
The consolidated financial statements include the accounts of Cole National Corporation and its wholly owned subsidiaries, including Cole National Group, Inc. 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 accounting principles generally accepted in the United States 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 unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended February 2, 2002.
In the opinion of management, the accompanying financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly its financial position as of August 3, 2002 and the results of operations and cash flows for the applicable periods ended August 3, 2002 and August 4, 2001.
Inventories
The accompanying interim consolidated financial statements have been prepared without physical inventories.
Property and Depreciation
The Company’s policy is to provide depreciation using the straight-line method over a period, which is sufficient to amortize the cost of the asset over its useful life or lease term. Leasehold improvements of optical departments operated in a host store under licenses, which are terminable under relatively short notice, are amortized over their estimated useful life.
Cash Flows
Net cash flows from operating activities reflect net cash payments for income taxes and payments for interest of $3,074,000 and $12,064,000 respectively, for the 26 weeks ended August 3, 2002, and $51,000 and $13,785,000, respectively, for the 26 weeks ended August 4, 2001.
Earnings Per Share
Earnings per share for the 13 and 26 weeks ended August 3, 2002 and August 4, 2001 have been calculated based on the following weighted average number of common shares and equivalents outstanding:
| Thirteen Weeks | Twenty-Six Weeks | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
Basic |
16,099,743 | 15,802,850 | 16,038,906 | 15,748,537 | ||||||||||||
Diluted |
16,624,967 | 16,243,001 | 16,547,198 | 16,019,867 | ||||||||||||
4
(1) Summary of Significant Accounting Policies (continued)
Total Other Comprehensive Income (Loss)
Total other comprehensive income (loss) for the 13 and 26 weeks ended August 3, 2002 and August 4, 2001 is as follows (000’s omitted):
| Thirteen Weeks | Twenty-Six Weeks | |||||||||||||||