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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003,
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 1-12814
COLE NATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1453189
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5915 LANDERBROOK DRIVE, MAYFIELD HEIGHTS, OHIO 44124
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (440) 449-4100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
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
YES |X| NO |_|.
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT
TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM
10-K OR ANY AMENDMENT TO THIS FORM 10-K. | |
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED
FILER (AS DEFINED IN RULE 12B-2 OF THE ACT). YES |X| NO |_|.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES
OF THE REGISTRANT AS OF AUGUST 3, 2002 WAS APPROXIMATELY $215,012,455,
BASED UPON THE LAST PRICE REPORTED FOR SUCH DATE BY THE NEW YORK STOCK
EXCHANGE.
AS OF MAY 12, 2003, 16,192,769 SHARES OF THE REGISTRANT'S COMMON
STOCK WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR THE ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD ON JUNE 25, 2003 ARE INCORPORATED HEREIN BY
REFERENCE INTO PART III.
TABLE OF CONTENTS
Part I Page
Item 1. Business ................................................................................. 1
2. Properties ............................................................................... 4
3. Legal Proceedings ....................................................................... 4
4. Submission of Matters to a Vote of Security Holders ...................................... 5
4a. Executive Officers of Cole National Corporation .......................................... 5
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .................... 6
6. Selected Financial Data .................................................................. 8
7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10
7A. Quantitative and Qualitative Disclosures About Market Risk ............................... 24
8. Financial Statements and Supplementary Data .............................................. 25
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 25
Part III
Item 10. Directors and Executive Officers of the Registrant ....................................... 25
11. Executive Compensation ................................................................... 26
12. Security Ownership of Certain Beneficial Owners and Management ........................... 26
13. Certain Relationships and Related Transactions ........................................... 26
14. Controls and Procedures .................................................................. 26
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 27
Signatures ............................................................................... 28
Certifications ........................................................................... 29
Exhibit Index ............................................................................ X-1
FORWARD LOOKING STATEMENTS
The Company's expectations and beliefs concerning the future contained in
this document are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those forecasted due to a variety of factors that can adversely affect the
Company's operating results, liquidity and financial condition such as risks
associated with potential adverse consequences of the restatement of the
Company's financial statements, including those resulting from litigation or
government investigations, restrictions or curtailment of the Company's credit
facility and other credit situations, costs and other effects associated with
the California litigation, the timing and achievement of improvements in the
operations of the optical business, the results of Things Remembered, which is
highly dependent on the fourth quarter holiday season, the nature and extent of
disruptions of the economy from terrorist activities or major health concerns
and from governmental and consumer responses to such situations, the actual
utilization of Cole Managed Vision funded eyewear programs, the success of new
store openings and the rate at which new stores achieve profitability, the
Company's ability to select, stock and price merchandise attractive to
customers, success of systems development and integration, competition in the
optical industry, integration of acquired businesses, economic and weather
factors affecting consumer spending, operating factors affecting customer
satisfaction, including manufacturing quality of optical and engraved goods, 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.
PART I
ITEM 1. BUSINESS
GENERAL
Cole National Corporation was incorporated as a Delaware corporation in
1984 as a successor to companies that began operations approximately 60 years
ago. Cole National Corporation, primarily through the subsidiaries owned by its
direct subsidiary, Cole National Group, Inc., is a leading provider of vision
care products and services, including managed vision care programs, and
personalized gifts with 2,944 retail locations in 50 states, Canada and the
Caribbean. References herein to the "Company" include Cole National Corporation,
its direct and indirect subsidiaries, and its predecessor companies. The
Company's retail vision locations do business primarily under the names "Pearle
Vision", "Sears Optical", "Target Optical" and "BJ's Optical" and its managed
vision care programs are offered primarily through Cole Managed Vision.
Collectively these businesses are referred to herein as "Cole Vision."
Personalized gifts are offered through retail locations, e-commerce and catalogs
by Things Remembered. The Company believes that, based on industry data, it is
the third largest retail optical company in the United States and operates the
only nationwide chain of personalized gift stores. The Company differentiates
itself from other specialty retailers by providing value-added services at the
point of sale at all of its retail locations. The Company also holds
approximately a 21% interest in Pearle Europe B.V., which operates 1,157 retail
optical locations in the Netherlands, Belgium, Germany, Austria, Italy, Poland,
Portugal, Estonia, Sweden, Finland and Russia.
The Company makes its annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any amendments to those reports
available, free of charge, through its website, http://www.colenational.com, as
soon as reasonably practicable after such material is electronically filed with,
or furnished to, the Securities and Exchange Commission.
COLE VISION
Cole Vision contributed 76% of the Company's net revenue in fiscal 2002
with 2,174 company-owned and franchised retail locations throughout the United
States, Canada, and the Caribbean as of February 1, 2003. Cole Managed Vision
programs provide vision care benefits to participants through access to a
network of company-owned, franchised and third-party optical locations.
COLE LICENSED BRANDS
Cole Licensed Brands operates principally under the "Sears Optical",
"Target Optical" and "BJ's Optical" names. As of February 1, 2003, Cole Licensed
Brands operated 1,310 retail locations in 47 states and Canada, including 826
departments on the premises of Sears department stores, 117 freestanding Sears
Optical stores, 126 departments in BJ's Wholesale Club stores, and 241
departments in Target stores. Retail locations are generally operated under a
lease or license arrangement through which the host store collects the sales
receipts, retains an agreed upon percentage of sales and remits the remainder on
a weekly or monthly basis.
1
Locations are, in most cases, retail eyecare stores offering brand name
and private label prescription eyeglasses, contact lenses and accessories, which
make available services of a doctor of optometry who performs complete eye
examinations and prescribes eyeglasses and contact lenses. Most optical
departments, which are typically 1,000 square feet in size, operate with a
department manager and support staff of one to seven associates depending on
store sales volume. In a majority of the stores, eye examination services are
available from independent doctors of optometry, as is often required by state
law, and from doctors of optometry employed by Cole Licensed Brands.
Each of the United States retail locations is computer-linked to six
centralized laboratory facilities, which grind, cut and fit lenses to order and
ship them to the stores. The Canadian retail locations are served by a
centralized laboratory located near Toronto. Next-day delivery is provided on
most eyewear when requested by customers. All of the frames and most lenses used
in eyeglasses are purchased from outside suppliers, both in the United States
and several foreign countries.
A variety of marketing and promotional efforts, primarily host
advertising, newspaper, direct mail, magazine, television and yellow pages are
used to build and maintain the customer base for each of the Cole Licensed
Brands stores. Host advertising includes the placement of promotional material
within sales circulars or credit card billings sent out by the host store to its
customers.
The Company believes it has developed excellent relationships with the
host stores in which Cole Licensed Brands operates. The Company has maintained
its relationships in the optical business with Sears for over 40 years. Although
leases and licenses with major hosts are terminable upon relatively short
notice, Cole Licensed Brands has never had a lease terminated other than in
connection with a store closing, relocation or major remodeling.
PEARLE
Pearle Vision (Pearle) operates 400 company-owned and 464 franchised
stores located in 45 states, Canada, and the Caribbean. Most Pearle stores
operate in either an "Express" or "Mainline" store format. Express stores
contain a full surfacing lab that can produce most glasses in approximately one
hour. Mainline stores can produce over 50% of prescriptions on-site in
approximately one hour. Other prescriptions are sent to Pearle's central
laboratory in Dallas, Texas. At February 1, 2003, 274 of the company-owned
stores and 135 of the franchised stores were Express, with most of the balance
being Mainline.
The Express stores typically are located in high-traffic freestanding
strip centers or mall locations with most stores averaging 3,000 square feet.
The Express stores are usually staffed with a manager and a support staff of
four to eight associates. Mainline stores have an average size of 1,700 square
feet and are also located in freestanding buildings, or in smaller strip or
regional centers. Mainline stores are usually staffed with a manager and two or
three associates. Most Pearle stores make exams available by on-site doctors of
optometry with approximately 80% leasing space from Pearle on an independent
basis. Most of the remaining doctors are direct employees of Pearle. In
California, eye exams are provided by doctors of optometry, employed by Pearle
Vision Care, Inc., a licensed health care service plan.
Pearle's marketing strategy employs a wide range of media at both the
national and local levels. The franchised and company-owned stores each
contribute a percentage of revenues to Pearle's marketing budget with a
significant amount of Pearle's marketing expenditures devoted to television.
Pearle's brand positioning of high quality eyecare products and services has
been reinforced by an advertising and promotions program, which includes
Pearle's long-standing advertising slogan: "Nobody Cares for Eyes More Than
Pearle".
Pearle operates a central lab and distribution center in Dallas, Texas
that inventories and distributes a comprehensive product line, including frames,
eyeglass lenses, contact lenses, optical supplies and eyewear accessories, to
company-owned and franchised locations.
Pearle has maintained a franchise program since 1980. Most of the
franchised stores are single store franchise operations, with no franchisee
operating more than ten stores. Each franchisee must enter into a franchise
agreement requiring payment of an initial franchise fee. The term of the typical
franchise agreement is equal to the lesser of ten years or the term of the
underlying base lease. Royalty and advertising contributions typically have been
based on a percentage of the franchisee's gross revenues from the retail
operation, excluding nonsurgical professional fees. The total monthly
advertising contribution is distributed to Pearle's system-wide advertising fund
and the local co-op market advertising fund. Franchisees are generally eligible
to participate in Cole Vision's managed vision care programs. In fiscal 2002, 17
new franchise locations were opened, 13 company-operated locations were sold to
franchisees, 2 franchise locations were converted to corporate stores and 4
franchise locations closed.
2
COLE MANAGED VISION
Recognizing the role that managed health care would play in the coming
years, Cole Vision Corporation created Cole Managed Vision (CMV) to bring its
own unique capabilities to the vision benefit marketplace, and to provide an
additional source of customers for the Company's owned and franchised retail
locations. Since then, CMV has been developing, marketing, and administering
group vision benefit programs for employers, health plans and associations
nationwide. Today, CMV manages funded benefits for more than 13 million
participants, and discount benefits for more than 80 million participants.
Managed vision care participants comprise approximately one third of Cole
Vision's retail customers.
THINGS REMEMBERED
Things Remembered contributed 24% of the Company's net revenue in fiscal
2002. As of February 1, 2003, Things Remembered operated 770 stores and kiosks
located in large, enclosed shopping malls located in 48 states. Each location
carries a wide assortment of engraveable items and provides "while you shop"
personalization services for any occasion including holiday, wedding, business
recognition and other special occasion gift events. Engraving is offered for
items purchased at the store as well as for items purchased elsewhere. Customers
can purchase Things Remembered's broad gift assortment through its catalogs
(1-800-274-7367) and its e-commerce site, http://www.thingsremembered.com.
Merchandise sold at Things Remembered stores and through the catalog and
internet consists of a broad selection of moderately priced gift categories and
items at prices generally ranging from $15 to $150. The gift offerings include
writing instruments, desk accessories such as desk sets, recognition plaques and
awards; women's gifts which include sterling jewelry, jewelry boxes, and
keepsake boxes; men's gifts which include barware, valet boxes, and leather
goods; gifts for newborns and children including baby cups, rattles and jewelry
as well as apparel and quilts. Gifts for the home include glassware, clocks,
frames, albums, doorknockers and a special assortment of holiday gifts such as
ornaments and other collectible items. Things Remembered features brand name
merchandise as well as higher margin private label merchandise. At some
locations computer-controlled embroidery equipment is utilized for the
personalization of merchandise, such as throws, pillows, polo shirts, bathrobes,
jackets, canvas totes and baby blankets. These soft goods are also available in
most of Things Remembered's other locations with personalization services
provided from a central fulfillment facility.
At February 1, 2003, Things Remembered locations consisted of 472 stores
and 298 kiosks. The typical store consists of about 1,300 square feet, while
kiosks, which are units generally located in the center of the common mall area,
are typically 200 square feet.
Things Remembered locations are usually operated by one or two employees
during nonpeak periods and up to 15 employees during the peak fourth quarter
holiday season. Locations typically employ a store manager on a full-time basis,
an assistant store manager on a full-time or part-time basis, and the balance of
employees as part-time sales associates.
Nearly all locations are equipped with computerized engravers and key
duplicating machines. Most stores also have equipment for etching glassware
items. All locations are equipped with point-of-sale terminals.
Most of the Things Remembered's store merchandise is shipped through its
centralized warehouse and distribution facility located near Youngstown, Ohio.
The warehouse utilizes a computerized carousel system to automate the process of
locating merchandise needed to fulfill store orders. The warehouse also has
systems and support capabilities to fulfill e-commerce and catalog orders within
72 hours.
PURCHASING
The merchandise, supplies and component parts required for the various
products sold by the Company are purchased from a large number of suppliers and
manufacturers and are generally readily available. In most cases, such purchases
are not made under long-term contracts. The Company believes that the loss of
any one supplier or manufacturer would not have a material adverse effect on its
operations.
COMPETITION
The Company operates in highly competitive businesses. Cole Vision
competes with other optical companies, private ophthalmologists, optometrists
and opticians and HMOs and other managed vision care companies in a highly
fragmented marketplace on the basis of the services it provides, as well as
price and product quality. In addition, Pearle competes on the basis of its
highly recognized brand name, superior customer service and large merchandise
assortment. The Company believes that, based on industry data, Cole Vision is
the third largest optical retail company in the United States. Although Things
Remembered
3
operates the only nationwide chain of gift stores offering "while you shop" gift
engraving, key duplicating, glass etching and monogramming, as well as related
merchandise, it competes with many other retailers that sell gift items. Things
Remembered competes with such other retailers primarily on the basis of the
value-added point of sale services, as well as price and product quality. Some
competitors have greater financial resources than the Company.
EMPLOYEES
As of February 1, 2003, the Company and its subsidiaries had approximately
9,418 full-time employees. This full-time work force is supplemented by 6,098
part-time and seasonal employees. Approximately 134 Pearle employees are
represented by labor unions. The Company considers its present labor relations
to be satisfactory.
SEGMENT INFORMATION
Information for the Company's two reportable segments and geographical
information are contained in Note 11 of the Notes to Consolidated Financial
Statements.
ITEM 2. PROPERTIES
In June 2001, the Company completed a third party sale and leaseback of
its office headquarters located in Twinsburg, Ohio, which comprises
approximately 175,000 square feet of office space. The lease expires in 2019 and
includes two options to renew for ten-year terms. Cole Vision's home office
functions are located in this facility. The Company expects to fully relocate
its executive offices, which are currently located in leased space in Mayfield
Heights, Ohio, to the Twinsburg facility during 2003.
All Cole Licensed Brands retail locations are leased or operated under a
license with the host store, and none of the individual retail locations are
material to operations. Leases for departments operated in Sears and Target
stores are terminable upon relatively short notice. Freestanding stores operated
under the name "Sears Optical" are leased for terms which average five years.
The leases for departments operated in BJ's Wholesale Club stores expire in
April 2006.
Cole Licensed Brands leases six optical laboratory facilities, located in
Columbus, Ohio; Knoxville, Tennessee (two); Memphis, Tennessee; Salt Lake City,
Utah; and Richmond, Virginia, pursuant to leases expiring (including renewal
options) between 2005 and 2017.
Pearle leases most of its retail stores under noncancelable operating
leases with terms generally ranging from five to ten years and which generally
contain renewal options for additional periods. Pearle is the principal lessee
on a majority of stores operated by franchisees who sublease the facilities from
Pearle.
In January 2002, Pearle completed a sale and leaseback of its Dallas,
Texas Support Center, which comprises approximately 129,000 square feet of
laboratory and distribution facilities. The lease expires in 2017 and includes
four options to renew for five-year terms. An adjoining office facility, no
longer used for operations, was sold in April 2001. Pearle also owns a small
headquarters and a laboratory facility in Puerto Rico.
Cole Vision also leases a home office, an optical laboratory and a
distribution facility for its Canadian operations pursuant to leases expiring in
2004. The Company expects to close its Canadian optical laboratory and
distribution facility in June 2003, and move those operations to the United
States.
Leases for Things Remembered stores and kiosks are generally for terms of
ten and five years, respectively. Things Remembered's home office functions are
located in a 50,000 square foot leased facility in Highland Heights, Ohio. The
lease expires (including renewal options) in 2007. Things Remembered leases its
210,000 square foot warehouse and distribution facility located near Youngstown,
Ohio. The lease expires in 2013 and includes three options to renew for
five-year terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time during the ordinary course of business, the Company may
be threatened with, or may become a party to, a variety of legal actions and
other proceedings incidental to its business.
A complaint was filed in the Superior Court of California, county of San
Diego against Cole National Corporation, its affiliates and certain of its
officers by the Attorney General of the State of California on February 14, 2002
and amended on February 22, 2002. The case, State of California v. Cole National
Corporation, et al., alleges claims for various statutory violations related to
the operation of 24 Pearle Vision Centers in California. The claims include
untrue or misleading
4
advertising, illegal dilation fees, unlawful advertising of eye exams,
maintaining an optometrist on or near the premises of a registered dispensing
optician, unlawful advertising of an optometrist, unlicensed practice of
optometry, and illegal relationships between dispensing opticians, optical
retailers and optometrists. The action seeks unspecified damages, restitution
and injunctive relief. Although the State of California obtained a preliminary
injunction to enjoin certain advertising practices and the charging of dilation
fees in July 2002, the terms of the injunction have not had and are not expected
to have a material effect on the Company's operations. In addition, both the
State and the Company have appealed the preliminary injunction. Although we
believe we are in compliance with California law and intend to continue to
defend the issues raised in the case vigorously, the case is in its early stages
and we cannot predict with certainty its outcome or costs.
A class action complaint was filed on August 14, 2002 in the Superior
Court of San Francisco, California, against Things Remembered by a purported
class of approximately 200 employees of Things Remembered alleging that the
members of the putative class were improperly denied overtime compensation in
violation of California law. The action sought unspecified damages, interest,
restitution, as well as declaratory and injunctive relief and attorneys' fees.
On February 3, 2003, Things Remembered and the plaintiffs reached an agreement
to resolve the lawsuit for $562,500. The settlement is subject to court
approval.
A class action complaint was filed on December 6, 2002 in the United
States District Court for the Northern District of Ohio against the Company and
certain present and former officers and directors by a purported class of
shareholders of the Company, alleging claims for various violations of federal
securities laws related to the Company's publicly reported revenues and
earnings. The action, which proposes a class period of March 23, 1999 through
November 26, 2002 and names the Company and certain present and former officers
and directors, seeks unspecified compensatory damages, punitive damages "where
appropriate", costs, expenses and attorneys fees. Following the announcement in
November 2002 of the restatement of the Company's financial statements, the
Securities and Exchange Commission began an inquiry into the Company's previous
accounting.
Cole National Group, Inc. has been named as a defendant, along with
numerous other retail companies, in patent infringement litigation in the United
States District Court for the District of Arizona, known as Lemelson Medical,
Education & Research Foundation, Limited Partnerships v. CompUSA, Inc. et. al.,
No. Civ. 00-0663, which challenges the defendants' use of bar code technology in
their retail operations. Cole National Group, Inc. is participating in a common
defense with a number of other defendants. A stay of the proceedings has been
sought and was granted, in deference to prior pending declaratory judgment suits
brought by the manufacturers and suppliers of the implicated technology seeking
to declare the patents in suit not infringed, invalid and unenforceable. Cole
National Group, Inc. likewise intends to oppose the allegations and claims
against it.
See Note 15 of Notes to Consolidated Financial Statements for further
discussion of these legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year ended February 1, 2003.
ITEM 4A. EXECUTIVE OFFICERS OF COLE NATIONAL CORPORATION
(a) The following persons are the executive officers of Cole National
Corporation who are not members of its Board of Directors, who have been
elected to their respective offices by the Board of Directors to serve
until the election and qualification of their respective successors:
Name Age Office
----------------- --- -------------------------------------------
Lawrence E. Hyatt 48 Executive Vice President and
Chief Financial Officer
Leslie D. Dunn 58 Senior Vice President -
Business Development,
General Counsel and Secretary
Joseph Gaglioti 57 Vice President and Treasurer
Ann M. Holt 46 Senior Vice President, Corporate Controller
and Principal Accounting Officer
5
(b) The following is a brief account of the positions held during the
past five years by each of the above named executive officers:
Mr. Hyatt has been Executive Vice President and Chief Financial
Officer since July 15, 2002. Prior to joining the Company, he was with
PSINet, Inc. as Chief Financial and Restructuring Officer since 2000; with
HMS Host Corporation as Chief Financial Officer since 1999; with Sodexho
Marriott Services, Inc. and its predecessor company as Chief Financial
Officer since 1989.
Ms. Dunn has been Senior Vice President-Business Development,
General Counsel and Secretary since September 1997. Prior to joining the
Company, she had been a partner in the law firm of Jones Day Reavis &
Pogue since 1985.
Mr. Gaglioti has been Vice President since 1992 and Treasurer since
1991. Mr. Gaglioti joined the Company in 1981.
Ms. Holt has been Senior Vice President, Corporate Controller and
Principal Accounting Officer since December 2002. She joined Cole National
Corporation as the Vice President, Finance for Cole Licensed Brands in
June 2000. Prior to joining the Company, she was with ICI Paints as Vice
President, Finance in the U.S. stores division since September 1998, and
with OfficeMax, Inc. as Vice President, Controller and other financial
management positions between 1990 and May 1998.
Information concerning Jeffrey A. Cole and Larry Pollock, the
Company's executive officers who are also Directors, will be included in
Cole National Corporation's Proxy Statement for the 2003 Annual Meeting of
Stockholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Cole National Corporation's common stock is traded on the New York Stock
Exchange (NYSE) under the symbol "CNJ". The following table sets forth, for the
fiscal periods indicated, the high and low sales prices per share.
Fiscal 2002 Fiscal 2001
------------------------ -------------------------
Quarter High Low High Low
- ------- ----- ------ ------ ------
First $19.65 $13.55 $10.40 $7.20
Second 19.03 12.45 15.22 9.65
Third 16.87 7.75 14.90 10.70
Fourth 13.99 9.54 16.55 12.78
The Company's dividend policy has been, and for the foreseeable future
will continue to be, to retain earnings to support its growth strategy. No
dividends were paid during the last two fiscal years.
As of March 31, 2003, there were 628 shareholders of record of Cole
National Corporation's common stock.
6
Securities authorized for issuance under equity compensation plans as of
February 1, 2003 follows:
Equity Compensation Plan Information Number of securities
remaining available
Plan category Number of securities Weighted-average for future issuance
to be issued upon exercise price of under equity
exercise of outstanding options, compensations plans
outstanding options warrants and rights (excluding securities
warrants and rights reflected in column (a))
(a) (b) (c)
-------------------- -------------------- ----------------------
Equity compensation plans approved by
security holders 1,231,606 $ 15.51 809,394
Equity compensation plans not approved by
security holders 1,520,928 12.09 62,191
--------- -------
Total 2,752,534 $ 13.61 871,585
========= =======
7
ITEM 6. SELECTED FINANCIAL DATA
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 February 1, 2003 is referred to as "fiscal 2002". Fiscal 2002, 2001, 1999
and 1998 each consisted of a 52-week period, and fiscal 2000 consisted of a
53-week period.
The selected financial data for the 2002, 2001 and 2000 fiscal years have
been derived from the Company's audited financial statements appearing in this
Form 10-K. The financial statements for the fiscal years 2001 and 2000 have been
restated. See Note 17 of the Notes to Consolidated Financial Statements for
further discussion of the restatement. The selected financial data for the 1999
and 1998 fiscal years have been derived from unaudited financial statements. The
unaudited financial statements for these years have been restated to be
consistent with the restatement adjustments made for the subsequent years.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
When you read this financial data, it is important that you also read the
consolidated financial statements and related notes included in this Form 10-K,
as well as the section of this report entitled Management's Discussion and
Analysis of Financial Condition and Results of Operations. Historical results
are not necessarily indicative of future results.
2002(1)(3) 2001(4) 2000(4) 1999(4) 1998(4)
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634 $ 1,041,188 $ 1,043,125
Operating income $ 26,997 $ 28,243 $ 16,400 $ 23,800 $ 24,956
Income (loss) before extraordinary loss $ 2,093 $ (2,387) $ (7,810) $ (2,110) $ (4,042)
Net income (loss) $ (5,149) $ (2,387) $ (7,810) $ (2,110) $ (4,042)
Basic earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) $ (0.14) $ (0.27)
Extraordinary loss (0.45) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (0.32) $ (0.15) $ (0.50) $ (0.14) $ (0.27)
=========== =========== =========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50) $ (0.14) $ (0.27)
Extraordinary loss (0.44) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (0.31) $ (0.15) $ (0.50) $ (0.14) $ (0.27)
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding (000's)
Basic 16,223 16,019 15,564 14,879 14,802
Diluted 16,500 16,019 15,564 14,879 14,802
Total assets $ 643,607 $ 635,594 $ 633,756 $ 626,054 $ 649,447
Working capital $ 66,509 $ 74,563 $ 50,887 $ 56,436 $ 79,246
Stockholders' equity $ 93,253 $ 108,316 $ 108,542 $ 117,443 $ 119,226
Current ratio 1.32 1.36 1.24 1.29 1.38
Long-term debt, including
capital leases $ 286,553 $ 284,574 $ 284,535 $ 284,754 $ 276,130
Number of stores at year end(2) 2,944 2,919 2,813 2,722 2,884
(1) Net income (loss) for fiscal 2002 includes an extraordinary loss of
$7,242, net of tax for early extinguishment of debt.
(2) Includes franchise locations.
(3) The Company ceased amortization of goodwill and tradenames in fiscal 2002
upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets".
(4) As restated.
8
The following selected financial data for the 1999 and 1998 fiscal years
is derived from unaudited financial statements, and compares originally reported
amounts with restated amounts for these two years.
1999 1998
---------------------------- ---------------------------
As reported Restated As reported Restated
----------- ----------- ----------- -----------
(Dollars in thousands, except per share)
Net revenue $1,040,426 $ 1,041,188 $1,049,441 $ 1,043,125
Operating income $ 29,113 $ 23,800 $ 42,346 $ 24,956
Net income (loss) $ 2,008 $ (2,110) $ 14,276 $ (4,042)
Basic earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.13 $ (0.14) $ 0.96 $ (0.27)
Extraordinary loss -- -- -- --
---------- ----------- ---------- -----------
Net income (loss) $ 0.13 $ (0.14) $ 0.96 $ (0.27)
========== =========== ========== ===========
Diluted earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.13 $ (0.14) $ 0.94 $ (0.27)
Extraordinary loss -- -- -- --
---------- ----------- ---------- -----------
Net income (loss) $ 0.13 $ (0.14) $ 0.94 $ (0.27)
========== =========== ========== ===========
Weighted average number of shares
outstanding (000's)
Basic 14,887 14,879 14,802 14,802
Diluted 14,941 14,879 15,176 14,802
Total assets $ 588,271 $ 626,054 $ 622,844 $ 649,447
Working capital $ 63,899 $ 56,436 $ 76,732 $ 79,246
Stockholders' equity $ 146,516 $ 117,443 $ 145,360 $ 119,226
Current ratio 1.45 1.29 1.44 1.38
Long-term debt, including
capital leases $ 284,584 $ 284,754 $ 276,013 $ 276,130
Number of stores at year end(1) 2,722 2,722 2,884 2,884
(1) Includes franchise locations.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As discussed in Note 17 to the Notes to Consolidated Financial Statements,
the Company's fiscal year 2001 and fiscal 2000 financial statements have been
restated. See Note 17 for a summary of the significant effects of the
restatement. The following discussion of the Company's financial condition and
results of operations gives effect to the restatement and should be read in
conjunction with the Consolidated Financial Statements and related notes.
OVERVIEW
Cole National, primarily through the subsidiaries owned by its direct
subsidiary, Cole National Group, Inc., is a leading provider of optical products
and services and personalized gifts. The Company sells its products and services
through 2,480 company-owned retail locations and 464 franchised locations in 50
states, Canada and the Caribbean.
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 February 1, 2003 is referred to as "fiscal 2002". Fiscal 2002 and fiscal
2001 each consisted of a 52-week period, and fiscal 2000 consisted of a 53-week
period.
The Company has two reportable segments, Cole Vision and Things
Remembered. Most of Cole Vision's revenue represents sales of prescription
eyewear, accessories and services through its Cole Licensed Brands and Pearle
Vision retail locations. Cole Vision revenue also includes sales of merchandise
to franchisees, royalties based on franchise sales, initial franchise fees for
Pearle Vision and capitation revenue, administrative service fee revenue and
discount program service fees from its Cole Managed Vision business.
Things Remembered's revenue represents sales of engraveable gift
merchandise, personalization and other services primarily through retail in-line
stores and kiosks. Things Remembered revenue also includes direct sales through
its e-commerce site, http://www.ThingsRemembered.com, sales through Things
Remembered catalogs and through affiliate programs direct to businesses.
10
RESULTS OF OPERATIONS
The following schedule sets forth the results from continuing operations
for the fiscal years ended February 1, 2003, February 2, 2002 and February 3,
2001. This schedule and subsequent discussions should be read in conjunction
with the consolidated financial statements and notes thereto included in Item 8
of this Form 10-K.
Change
Fiscal Year ----------------------
------------------------------------ 2002 vs. 2001 vs.
2002 2001 2000 2001 2000
-------- -------- -------- -------- --------
(Dollars in millions)
Net revenue:
Cole Vision $ 877.5 $ 836.8 $ 802.5 4.9% 4.3%
Things Remembered 270.6 272.3 276.1 (0.6) (1.4)
-------- -------- --------
Total net revenue $1,148.1 $1,109.1 $1,078.6 3.5% 2.8%
Gross margin:
Cole Vision $ 576.8 $ 550.9 $ 525.2 4.7% 4.9%
Things Remembered 192.6 193.8 193.8 (0.6) --
-------- -------- --------
Total gross margin $ 769.4 $ 744.7 $ 719.0 3.3% 3.6%
Operating expenses:
Cole Vision $ 546.2 $ 531.7 $ 513.0 2.7% 3.6%
Things Remembered 177.5 168.8 170.3 5.2 (0.9)
Unallocated corporate expense 18.7 11.0 14.1 70.0 (22.0)
-------- -------- --------
Total operating expenses $ 742.4 $ 711.5 $ 697.4 4.3% 2.0%
Goodwill and tradename amortization:
Cole Vision $ -- $ 4.1 $ 4.2 (100.0)% (2.4)%
Things Remembered -- 0.9 1.0 (100.0) (10.0)
-------- -------- --------
Total goodwill and tradename amortization $ -- $ 5.0 $ 5.2 (100.0)% (3.8)%
Operating income:
Cole Vision $ 30.6 $ 15.1 $ 8.0 102.6% 88.7%
Things Remembered 15.1 24.1 22.5 (37.3) 7.1
Unallocated corporate expense (18.7) (11.0) (14.1) 70.0 (22.0)
-------- -------- --------
Total operating income $ 27.0 $ 28.2 $ 16.4 (4.3)% 72.0%
======== ======== ========
Percentage of net revenue:
Gross margin 67.0% 67.1% 66.7% (0.1) 0.5
Operating expenses 64.7 64.2 64.7 0.5 (0.5)
Goodwill and tradename amortization -- 0.5 0.5 (0.5) --
Operating income 2.4% 2.5% 1.5% (0.2) 1.0
Number of retail locations at the end
of the period:
Cole Licensed Brands 1,310 1,282 1,164
Pearle company-owned 400 423 439
Pearle franchised 464 440 426
-------- -------- --------
Total Cole Vision 2,174 2,145 2,029
Things Remembered 770 774 784
-------- -------- --------
Total Cole National 2,944 2,919 2,813
======== ======== ========
Same-Store Sales Growth:
Cole Licensed Brands (U.S.) 3.7% 3.8% 3.7%
Pearle company-owned (U.S.) 4.0 2.6 2.0
Total Cole Vision 3.3 2.6 3.1
Things Remembered (2.5) (1.8) 5.4
Total Cole National 1.8% 1.4% 3.7%
Pearle US franchise stores 1.1% --% 3.3%
As used in Item 7 of this Form 10-K, same-store sales growth is a non-GAAP
financial measure, which includes deferred warranty sales on a cash basis and
does not reflect provisions for returns and remakes and certain other items. The
Company's current systems do not gather data on these items on an individual
store basis. Adjustments to the cash basis sales information accumulated at the
store level are made for these items on an aggregate basis. As a retailer, the
11
Company believes that a measure of same-store sales performance is important for
understanding its operations. The Company calculates same-store sales for stores
opened for at least twelve months. A reconciliation of same-store sales to net
revenue is presented below in the section "Reconciliation of Same-Store Sales
Growth".
Same-store sales for Pearle U.S. franchise stores is a non-GAAP financial
measure that is provided for comparative purposes only. The Company believes
that its franchisees' method of reporting sales is consistent on a year-to-year
basis.
FISCAL 2002 COMPARED TO FISCAL 2001
CONSOLIDATED OPERATIONS
Total revenues were $1,148.1 million in fiscal 2002, compared with
$1,109.1 million in fiscal 2001. Total revenues increased 3.5% in fiscal 2002,
primarily attributable to a 1.8% increase in same-store sales, an increase in
the number of stores open at year-end from 2,919 to 2,944 and an increase in
revenues from managed vision care programs.
Gross margin was $769.4 million in fiscal 2002, compared with $744.7
million in fiscal 2001, an increase of 3.3%. Gross margin dollars increased
primarily due to higher revenues at Cole Vision. Gross margin percent declined
to 67.0% in fiscal 2002, compared with 67.1% in fiscal 2001. The decline was
attributable to lower gross margin percent at Cole Vision. A shift in sales mix
to products with lower gross margin rates occurred at both Pearle Vision and
Cole Licensed Brands (further discussion is included in the Cole Vision
Segment). The gross margin rate at Things Remembered was the same as the prior
year.
Operating expenses were $742.4 million in fiscal 2002, compared with
$711.5 million in fiscal 2001, an increase of 4.3%. Increased costs of store
payroll, benefits, store occupancy and other store costs to support the increase
in revenues at Cole Vision comprised most of the increase. Operating expenses at
Cole Vision as a percent of sales declined from the prior year by 1.3%. At
Things Remembered, operating expenses increased 5.2% on declining sales,
primarily in occupancy, nonstore overhead and store wages. Store rent and
occupancy expenses increased in fiscal 2002 primarily due to increases in
insurance, taxes and other common area charges. These charges are generally
variable and can increase as mall ownership or tenant occupancy rates change.
Things Remembered nonstore expense increased in fiscal 2002 due primarily to
costs associated with the anticipated settlement of a class action complaint in
California involving overtime compensation (See Note 15 of the Notes to
Consolidated Financial Statements). Legal and settlement costs for this matter
totaled $1.1 million. Nonstore overhead also included costs of $0.5 million for
a new store point of sales system, the implementation of which has subsequently
been indefinitely delayed. Severance costs related to a senior Things Remembered
executive totaled $0.3 million. Store wage costs at Things Remembered increased
due to higher average hourly wage rates and increases in benefits and workers
compensation.
Also included in operating expenses, the Company incurred charges of
approximately $3.4 million in fiscal 2002 for outside audit fees related to the
reaudit of its restated financial statements for the previous two years. The
Company and its optical subsidiaries have been sued by the State of California,
which alleges claims for various statutory violations related to the operation
of 24 Pearle Vision Centers in California (see Note 15 of the Notes to
Consolidated Financial Statements). Legal costs associated with the defense of
this matter totaled $3.5 million in fiscal 2002 and were charged to the Cole
Vision segment. During the fourth quarter of fiscal 2002, the Company recorded a
restructuring charge against operating expense of $1.1 million. Of this amount,
$0.6 million was paid and $0.5 million was accrued to accrued liabilities for
ongoing benefits, salary continuation and out placement costs. Charges to the
liability are expected to total $0.4 million through the end of the first
quarter of fiscal 2003, with the remaining costs continuing through the fourth
quarter of fiscal 2003. The restructuring charge was related to a reduction in
workforce of 60 individuals in the corporate office and field management. The
Company expects the functions performed by these individuals to be absorbed by
others. The Company recorded a charge of $0.3 million related to the closing of
the corporate office and relocating it to the Company's facility in Twinsburg,
Ohio. The Company recorded incremental costs of $1.2 million for continuing
group medical and basic life insurance coverage for a group of employees covered
under a postemployment benefits plan. Coverage of these benefits continue until
death. In January 2002, the Company approved a plan freeze of its
noncontributory defined benefit pension plan. As a result, the Company recorded
no pension expense in fiscal 2002, compared to a $1.2 million charge in fiscal
2001, primarily in the Cole Vision segment. See Note 10 of Notes to the
Consolidated Financial Statements for more information. In conjunction with
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets," (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets, the Company evaluated the operating performance of each of its
locations. The Company recorded impairment charges of $0.9 million in fiscal
2002, compared with impairment charges of $3.7 million in fiscal 2001. The
reduction of the impairment charge was primarily attributable to improvements at
Pearle Vision. In November 2002, the Company changed its paid-time-off (PTO)
policy for its employees, and discontinued the practice of permitting most of
its employees to carryover three leave days from one year
12
to the next. As a result of this change in policy, the Company reversed $0.5
million of accrued leave into income, as an offset to operating expense.
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
(SFAS142), in the first quarter of fiscal 2002. SFAS 142 requires that goodwill
and certain intangible assets deemed to have indefinite useful lives no longer
be amortized, but instead, be subject to at least an annual review for
impairment. With the adoption of this statement, the Company ceased amortization
of goodwill and tradenames as of February 3, 2002. The Company recorded a $5.0
million goodwill and tradename amortization charge in fiscal 2001.
Operating income in fiscal 2002 was $27.0 million compared with $28.2
million in fiscal 2001, a decrease of 4.3%. A decline in operating income at
Things Remembered and the costs associated with the reaudit, restructuring and
legal costs associated with the California Attorney General's action, as well as
the increased costs of post-employment benefits offset improvements at Cole
Vision.
Interest and other (income) expense, consists of interest expense on the
Company's indebtedness, transaction gains and losses related to its holdings in
notes and interest receivable from Pearle Europe, which are denominated in a
foreign currency, interest income on franchise notes at Pearle Vision, interest
income from temporary investments, and gains and losses from the sale of assets.
Interest and other (income) expense, net, decreased to $20.0 million in fiscal
2002, compared to $25.5 million in fiscal 2001. The Company recorded a
transaction gain of $3.8 million related to its investment in notes and interest
receivable from Pearle Europe in fiscal 2002. This compared to a transaction
loss of $1.2 million in fiscal 2001. In addition, the Company recorded lower
interest expense in fiscal 2002 due to replacement of the $150.0 million 9-7/8%
Senior Subordinated Notes with the issuance of 8-7/8% Senior Subordinated Notes
in May 2002. See Note 5 of the Notes to Consolidated Financial Statements for
further information regarding this transaction. The Company recognized a gain of
$0.7 million from the sale of a Dallas, Texas facility in the first quarter of
fiscal 2001.
The effective income tax rate was 70.0% in fiscal 2002 compared with
187.8% in fiscal 2001. The lower effective tax rate in 2002 was primarily due to
the elimination of goodwill amortization pursuant to the new accounting standard
and a reduction in the provision for valuation allowances related to deferred
tax assets for charitable contribution carryforwards. See Note 9 of Notes to
Consolidated Financial Statements for further discussion.
The results for fiscal 2002 include an extraordinary loss on early
extinguishment of debt of $7.2 million, which is net of an income tax benefit of
$3.9 million. The extraordinary charge represents payment of premiums and other
costs of retiring Cole National Group's 9-7/8% Senior Subordinated Notes due
2006 and the write-offs of unamortized discount and deferred financing fees. See
the section below entitled "Liquidity and Capital Resources" and Note 5 of the
Notes to Consolidated Financial Statements for more information regarding this
transaction.
COLE VISION SEGMENT
Cole Vision revenues were $877.5 million in fiscal 2002, compared with
$836.8 million in fiscal 2001, an increase of 4.9%. Same store sales increased
4.0% at Pearle Vision company-owned stores, primarily reflecting an increase in
average spectacle selling price. Improved merchandise assortment and selling
skills at the store level have resulted in a higher rate of multi-pair purchases
and increased sales of additional features. At Cole Licensed Brands, same-store
sales increased 3.7%, driven by both average spectacle selling price and
increased sales of accessories. New premium product introductions at both Sears
Optical and Target Optical, offset slightly by increased sales of contact
lenses, was a key factor in the average selling price increase. Cole Managed
Vision sales also increased from the prior year, due to increases in claims
revenue and administrative service only (ASO) fees and the addition of laser
procedure revenue.
Gross margin percent declined 0.1% at Cole Vision in fiscal 2002 compared
to fiscal 2001. The decline in gross margin rate was attributable to a change in
sales mix at both Pearle Vision and Cole Licensed Brands. At Pearle, the decline
in margin rate was attributable to increased sales of product to franchisees,
which are sold at lower gross margin rates than retail sales at company-owned
locations. Sales to franchisees offer benefits for the Company, including
producing a more uniform merchandise assortment and consistent brand look across
all stores. Additionally, Pearle's mix of contact lens sales increased, which
also contributed to a decline of the gross margin rate.
At Cole Licensed Brands, the decline in gross margin rate was attributable
to the increased sales of premium product and saleable accessories. Accessories,
which include lens cleaner, lens cloth, clips and other products designed to
care for optical purchases, and premium products, generally are sold at lower
gross margin rates. In addition, Cole Licensed Brands made a strategic decision
to lower retail prices of contact lenses in fiscal 2002 to become more
competitive. The price decrease was a key factor in the gross margin rate
decline.
13
Operating expenses as a percent of sales declined at Cole Vision by 1.3%
in fiscal 2002, compared to fiscal 2001. In conjunction with SFAS 144, the
Company evaluated the operating performance of each of its locations. Cole
Vision recorded impairment charges of $0.4 million in fiscal 2002, compared with
impairment charges of $2.8 million in fiscal 2001. The reduction of the
impairment charge was primarily attributable to improvements at Pearle Vision.
At Pearle Vision, store payroll declined as a percent of sales compared to the
prior year due to higher same-store sales combined with reduced hours. The
average hours worked per store per week was reduced 3.3 hours. In addition,
overtime pay declined as a percent to sales compared to last year. Operating
expenses at Cole Licensed Brands declined as a percent to sales compared to last
year due primarily to improvements at Target Optical. Results at Target Optical
improved as the focus changed from aggressive growth to measured growth and
improved operations. Operating expenses at Cole Managed Vision declined as a
percent to sales compared to last year primarily due to the reduction of
processing fees paid to MetLife as claims processing was converted to the
Company's internal systems at a lower cost per claim. Pension expense was $1.0
million lower than the prior year at Cole Vision due to the Company's decision
to freeze the defined benefit pension plan. Operating expenses in fiscal 2002
included legal costs of $3.5 million associated with the California Attorney
General's action mentioned previously.
Operating income at Cole Vision improved to $30.6 million in fiscal 2002,
compared to $15.1 million in fiscal 2001. The revenue increase of $40.7 million
and improved expense leverage were the primary drivers of the increase in
operating income. Results at Target Optical improved as the focus changed from
aggressive growth to measured growth and improved operations. The cessation of
goodwill and tradename amortization resulted in $4.1 million lower expense in
fiscal 2002, compared to fiscal 2001. In addition, the growth in revenue and
improved claims management efficiencies resulted in higher operating income at
Cole Managed Vision. These improvements were offset by the $3.5 million in legal
costs associated with the California Attorney General's action.
THINGS REMEMBERED SEGMENT
Things Remembered sales were $270.6 million in fiscal 2002, compared with
$272.3 million in fiscal 2001, a decrease of 0.6%. The decrease in sales was
primarily due to a same-store sales decrease of 2.5% and a lower number of
stores operating than the prior year. Store count at fiscal year end dropped
from 774 to 770. The same-store sales decline was primarily attributable to a
slowdown in mall traffic during fiscal 2002. Demand for business award and
recognition gifts also declined during the year due to changes in general
economic conditions. Declines in customer count were partially offset by
increases in average transaction value and a 40% growth in the still relatively
small direct channel business.
The gross margin rate at Things Remembered was the same as the prior year.
At Things Remembered, operating expenses grew 5.2% on declining sales,
primarily in occupancy, nonstore overhead and store wages. Store rent and
occupancy charges increased in fiscal 2002 primarily due to increases in
insurance, taxes and other common area charges. These charges are generally
variable and can increase as mall ownership or tenant occupancy rates change.
Things Remembered nonstore expense increased in fiscal 2002 due primarily to
costs associated with the pending settlement of a class action complaint in
California involving overtime compensation (See Note 15 of the Notes to
Consolidated Financial Statements). Legal and settlement cost for this matter
totaled $1.1 million. Nonstore overhead also included costs of $0.5 million for
a new store point of sales system, the implementation of which has subsequently
been indefinitely delayed. Severance costs related to a senior Things Remembered
executive totaled $0.3 million. Store wage costs at Things Remembered increased
due to higher average hourly wage rates and increases in benefits and workers
compensation. Things Remembered recorded impairment charges of $0.5 million in
fiscal 2002, compared with impairment charges of $0.9 million in fiscal 2001.
Operating income decreased to $15.1 million in fiscal 2002 from $24.1
million in fiscal 2001. Reductions in revenue, higher mall occupancy costs,
higher payroll and overhead costs were the primary causes of the reduction in
operating income.
FISCAL 2001 COMPARED TO FISCAL 2000
CONSOLIDATED OPERATIONS
Total revenue was $1,109.1 million in fiscal 2001, compared with $1,078.6
million in fiscal 2000. Total revenue increased 2.8% in fiscal 2001, primarily
attributable to a 1.4% increase in same-store sales, an increase in the number
of stores opened at year-end from 2,813 to 2,919 and an increase in claims
revenue from managed vision care programs. These increases were partially offset
by one less week of revenue in fiscal 2001. Fiscal 2000 included 53 weeks of
operations, compared to 52 weeks in fiscal 2001. The 53rd week in fiscal 2000
provided approximately $17.6 million in revenue.
14
Gross margin was $744.7 million in fiscal 2001, compared with $719.0
million in fiscal 2000, an increase of 3.6%. Gross margin dollars increased
primarily due to higher revenues at Cole Vision and improvements in gross margin
rate at Things Remembered. Gross margin percent increased to 67.1% in fiscal
2001, compared to 66.7% in fiscal 2000. The increase was attributable to gross
margin rate improvements at both Cole Vision and Things Remembered. The gross
margin rate at Cole Vision was higher than the prior year, although it declined
in the second half of fiscal 2001, as more customers selected merchandise from
Cole Licensed Brands' new, higher cost frame assortment at Sears. Higher revenue
from managed vision care programs partially offset the impact of a decline in
frame margins in fiscal 2001. At Things Remembered, the gross margin rate
improved 1.0% compared to the prior year, reflecting the improvement in average
selling price, lower merchandise acquisition costs, and less inventory
shrinkage.
Operating expenses were $711.5 million in fiscal 2001, compared with
$697.4 million in fiscal 2000, an increase of 2.0%. Increased costs of store
payroll, store occupancy and other store costs to support the increase in
revenue at Cole Vision and the Target Optical expansion comprised most of the
increase. Operating expenses at Cole Vision declined as a percent of sales
compared to last year by 0.4%. Productivity gains at Pearle and reduced managed
care claims processing costs contributed to the improvement. Further discussion
is included in the Cole Vision segment. In conjunction with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS 121), which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets, the Company evaluated the operating performance of each
of its locations. In fiscal 2000, Pearle Vision recorded $3.5 million of
impairment charges related to the performance of 39 store locations. This
compared to impairment charges of $2.6 million for 28 locations in fiscal 2001,
a reduction of $0.9 million. At Things Remembered, operating expenses decreased
by $1.5 million. Lower costs of store payroll together with reduced bonus
expenses were partially offset by higher costs of store rent and occupancy.
Things Remembered recorded impairment charges in accordance with SFAS 121 of
$0.9 million in fiscal 2001 compared to $0.3 million the prior year.
Goodwill and tradename amortization was $5.0 million in fiscal
2001 compared to $5.2 million in fiscal 2000.
In fiscal 2001, the Company's operating income improved 72.0% from $16.4
million in fiscal 2000 to $28.2 million in fiscal 2001. Improvements were made
at both segments. At Cole Vision, operating income improved 88.7% from the prior
year due primarily to the reduced impairment charge and to productivity
improvements. Things Remembered operating income improved 7.1% despite a decline
in sales. Lower costs of store payroll and an increase in gross margin rate
mitigated the reduction in revenues. During fiscal 2000, the Company recorded a
restructuring charge against operating expense of $1.8 million. Of this amount,
$1.6 million was paid and $0.2 million was recorded to accrued liabilities for
salary continuation. Charges to the liability were $0.2 million in fiscal 2001.
The restructuring charge was related to a reduction in workforce of 44
individuals in the corporate office. In addition, a reduction in corporate bonus
expense of $0.8 million contributed to the improvement in operating income. The
improvement in operating income occurred despite one less week of sales, and the
absorption of increased losses from the continued expansion of Target Optical.
Interest and other (income) expense, net, increased $0.2 million in fiscal
2001.
The effective tax rate was 187.8% in fiscal 2001 compared to 10.6% in
fiscal 2000. The higher effective tax rate in 2001 was primarily due to
increased provision for state income taxes and an increase in the valuation
allowances related to deferred tax assets for contribution carryforwards. See
Note 9 of Notes to Consolidated Financial Statements for further discussion.
COLE VISION SEGMENT
Cole Vision revenues were $836.8 million in fiscal 2001, compared with
$802.5 million in fiscal 2000, an increase of 4.3%. Same-store sales increased
2.6% at Pearle Vision company-owned stores, reflecting an increase in average
selling price for the first nine months and an increase in the number of
transactions for the fourth quarter. The increase in average selling price was
due, in part, to not repeating a "50% off frames" promotion that ran during the
entire first quarter of fiscal 2000. At Cole Licensed Brands, same-store sales
increased 3.8%, primarily reflecting an increase in the average spectacle
selling price. The 53rd week in fiscal 2000 provided approximately $14.4 million
in revenue.
The gross margin rate at Cole Vision was higher compared to the prior
year, although it declined in the second half of 2001, as more customers
selected merchandise from Cole Licensed Brands' new, higher cost frame
assortment at Sears. Higher revenue from Cole Managed Vision partially offset
the impact of decline in frame margins in fiscal 2001.
Operating expenses increased 3.6%, but declined 0.4% as a percent of sales
compared to last year at Cole Vision. Increased store payroll, occupancy and
other store costs to support the increase in revenues at Cole Vision comprised
most of the increase. Operating expenses at Pearle decreased from the prior
year. Pearle Vision recorded $2.6 million of impairment
15
charges in accordance with SFAS 121 in fiscal 2001 compared to an impairment
charge of $3.5 million in fiscal 2000. In addition, payroll costs were favorable
due to productivity improvements. A reduction of the average weekly hours worked
per store relative to fiscal 2000 was achieved. Other store costs at Pearle were
lower than fiscal 2000, primarily due to write-offs of $0.8 million in third
party receivables in fiscal 2000. Expenses declined as a percent of sales
compared to last year at Cole Managed Vision due to a reduction in the
processing cost per claim and increased volume and leverage gains in capitated
business.
Operating income at Cole Vision improved to $15.1 million in fiscal 2001,
compared to $8.0 million in fiscal 2000. The reduction of the impairment charge
at Pearle Vision and other operating improvements at both Pearle and Cole
Managed Vision were the primary reasons for the increase. Gains in retail
operations were tempered by the loss of revenues associated with the 53rd week
in fiscal 2000 as well as the expansion of Target Optical. The Company opened
107 Target Optical stores during fiscal 2001. The losses associated with the
Target Optical expansion are expected to decline as older stores ramp up to
profitability, as a result of the new focus on opening only in Super Target
stores and with a switch from fixed to percentage rent. The average time to
store level profitability is also expected to become shorter.
THINGS REMEMBERED SEGMENT
Things Remembered revenues were $272.3 million in fiscal 2001, compared
with $276.1 million in fiscal 2000, a decrease of 1.4%. The largest contributor
to this year over year decrease was the 53rd week in fiscal 2000, which provided
approximately $3.2 million in revenue. The decrease in revenues was due to a
same-store sales decrease of 1.8%, attributable to the general slowdown in mall
traffic which worsened following the events of September 11 and from not
repeating a merchandise clearance promotion that was held in fiscal 2000.
However, the average transaction selling price increased as a result of sales of
new merchandise at higher average unit retails, more personalization and fewer
promotions.
At Things Remembered, the gross margin rate improved 1.0 percentage points
compared to the prior year, reflecting the improvement in average selling price,
lower merchandise acquisition costs and less inventory shrinkage.
Operating expenses decreased $1.5 million in fiscal 2001 compared to the
prior year due to lower costs of store payroll and bonus expense. These
improvements were partially offset by higher costs of rent and occupancy. Things
Remembered recorded impairment charges in accordance with SFAS 121 of $0.9
million in fiscal 2001 compared to $0.3 million in the prior year.
Operating income increased to $24.1 million in fiscal 2001 from $22.5
million in fiscal 2000, primarily due to lower operating expenses and
improvements in gross margin rate.
RECONCILIATION OF SAME-STORE SALES GROWTH
Same store sales growth is a non-GAAP financial measure, which includes
deferred warranty sales on a cash basis and does not reflect provisions for
returns and remakes and certain other items. The Company's current systems do
not gather data on these items on an individual store basis. Adjustments to the
cash basis sales information accumulated at the store level are made for these
items on an aggregate basis. As a retailer, the Company believes that a measure
of same store performance is important for understanding its operations. The
Company calculates same-store sales for stores opened for at least twelve
months. A reconciliation of same store sales to revenue reported on a GAAP basis
follows:
16
2002 2001 2000
----------- ----------- -----------
(Dollars in thousands)
Current year same-store sales $ 993,776 $ 961,240 $ 949,023
Prior year same-store sales(1) 976,291 948,060 915,286
Percent change 1.8% 1.4% 3.7%
Current year same-store sales $ 993,776 $ 961,240 $ 949,023
Adjustment for:
Sales at new and closed stores 30,185 25,510 26,504
Extended warranties (2,701) (1,846) (102)
Order vs. customer receipt (478) 4,341 (3,148)
Returns, remakes and refunds (1,183) (751) (707)
Other (37) 188 (968)
----------- ----------- -----------
Store sales 1,019,562 988,682 970,602
Nonstore revenues 157,042 146,631 129,072
Intercompany eliminations (28,485) (26,190) (21,040)
----------- ----------- -----------
GAAP Basis Net Revenue $ 1,148,119 $ 1,109,123 $ 1,078,634
=========== =========== ===========
(1) Prior year same-store sales differ from current year same-store sales in
the prior year due to store openings and closings.
LIQUIDITY AND CAPITAL RESOURCES
Cole National Corporation's primary source of liquidity is funds provided
from operations of its operating subsidiaries. In addition, its wholly owned
subsidiary, Cole National Group, Inc., and its operating subsidiaries have a
working capital line of credit. As of fiscal year end 2002, the total commitment
was $75.0 million and availability under the credit facility totaled $62.7
million after reduction for commitments under outstanding letters of credit.
There are no working capital borrowings outstanding as of February 1, 2003. The
maximum amount outstanding during fiscal 2002 was $2.3 million and the daily
average borrowing during fiscal 2002 was approximately $31,000.
The credit facility, which is guaranteed by Cole National Corporation and
Cole National Group, requires Cole National Group and its principal operating
subsidiaries to comply with various operating covenants that restrict corporate
activities, including covenants restricting the ability of the subsidiaries to
incur additional indebtedness, pay dividends, prepay subordinated indebtedness,
dispose of certain investments or make acquisitions. The credit facility also
requires Cole National Group to comply with certain financial covenants,
including covenants regarding minimum interest coverage and maximum leverage. On
November 25, 2002, the Company received a waiver from the lenders under the
credit facility, which expired on December 31, 2002, of certain covenants to
accommodate anticipated changes in the accounting treatment for the sale of
certain optical warranties and the costs associated with auditing the Company's
restated consolidated financial statements. On December 19, 2002, the credit
agreement was amended to accommodate the anticipated changes due to the
restatement. The Company received a waiver dated May 9, 2003 of the maximum
leverage coverage test for the fiscal year end 2002 and the first quarter of
fiscal 2003. During that waiver period the maximum leverage test was adjusted to
accommodate the effect of the restatement on the Company's financial statements.
This waiver will expire on the earlier of May 17, 2003 if the Lenders do not
receive the Form 10-K and 10-Q's for the first through third fiscal quarters of
2002; on May 23, 2003 if certain additional financial information is not
received by the Lenders; or June 30, 2003. The Company is currently in
compliance with the covenants in the credit agreement and currently expects to
meet the waiver conditions. The Company currently expects to complete a
permanent amendment to the credit agreement on or before June 30, 2003. However,
there is no assurance that the Company will be successful in its effort to
complete such an amendment by that time if at all. The Company believes that,
even if it is unsuccessful in its effort to complete such an amendment, it will
have sufficient liquidity from internal and other external sources.
On May 22, 2002, the Company issued $150.0 million of 8-7/8% senior
subordinated notes due 2012. The notes are unsecured and mature on May 15, 2012.
Net proceeds from the notes offering, together with cash on hand, were used to
retire $150.0 million of 9-7/8% senior subordinated notes due 2006 and pay
premium and other costs associated with retiring those notes. An extraordinary
loss on early extinguishment of debt of $7.2 million, which is net of an income
tax benefit of $3.9 million, representing the payment of premiums and other
costs of retiring the notes and write-offs of unamortized discount and deferred
financing fees, was recorded in the second quarter of fiscal 2002.
17
The indentures pursuant to which the 8-5/8% notes and the 8-7/8% notes
were issued contain certain optional and mandatory redemption features and other
financial covenants, including restrictions on the ability of Cole National
Group to incur additional indebtedness, pay dividends or make other restricted
payments to Cole National Corporation. The indentures also permit payments to
Cole National Corporation for certain tax obligations and for administrative
expenses not to exceed 0.25% of net sales. See Note 5 of the Notes to
Consolidated Financial Statements. The Company may from time to time purchase
its outstanding notes in the open market or refinance them depending on capital
market conditions.
No significant principal payment obligations are due under the Company's
outstanding indebtedness until April 2004, when a $5.0 million principal payment
is due under a 5.0% promissory note and until 2007, when the $125.0 million
Senior Subordinated debt is due. The ability of Cole National Corporation and
its subsidiaries to satisfy their obligations will be primarily dependent upon
the future financial and operating performance of the subsidiaries and upon Cole
National Corporation's ability to renew or refinance borrowings or raise
additional capital through equity financing or sales of assets.
The Company maintains a noncontributory defined benefit pension plan that
covers employees who have met eligibility service requirements and are not
members of certain collective bargaining units. The pension plan calls for
benefits to be paid to eligible employees at retirement, based primarily upon
years of service and their compensation levels near retirement. In January 2002,
the Company approved a plan freeze for all participants except for participants
who are at least age 50 or older with 10 years of benefit service as of March
31, 2002. These participants had their average pay frozen as of March 31, 2002,
and covered compensation frozen as of December 31, 2001, but their benefit
service will continue to grow. The Company's policy is to fund amounts necessary
to keep the pension plan in full force and effect, in accordance with the
Internal Revenue Code and the Employee Retirement Income Security Act of 1974.
During fiscal 2002, the Company changed the discount rate used to
calculate its projected benefit obligation from 7.5% to 6.5%. The change in the
discount rate reflects the overall decline in market interest rates and has led
to an increase in the projected benefit obligation at February 1, 2003. In
addition, the stock market declines have reduced the fair value of the pension
plan's assets. As a result of these factors, the pension plan was underfunded by
$16.0 million as of February 1, 2003. The Company has written off a prepaid
pension asset of $4.6 million and recorded the minimum pension liability by
charging $20.6 million to accumulated other comprehensive income (loss) in
stockholders' equity. This charge will not impact the actual funding
requirements of the plan or the Company's compliance with debt covenants.
In November 1998, the Board of Directors authorized the repurchase from
time to time of up to 1.0 million shares of common stock, through open market or
block transactions. It is expected that any purchases will be made from
internally generated funds and that the shares purchased will be used, in part,
to offset dilution from stock options and in connection with other benefit
plans. As of February 1, 2003, Cole National Corporation had purchased a total
of 318,000 shares of common stock and has authority to purchase up to 682,000
additional shares of common stock in the open market or through block purchases.
No shares were purchased during fiscal 2002, 2001 or 2000.
Cash and cash equivalents at year end were $42.0 million at February 1,
2003 compared to $63.4 million at February 2, 2002. Operations generated net
cash of $35.9 million in fiscal 2002, compared with $54.7 million in fiscal 2001
and $32.7 million in fiscal 2000. The primary reason for the $18.8 million
decrease in cash provided from operations in fiscal 2002 compared to fiscal 2001
was changes in working capital. Changes in working capital resulted in a use of
funds totaling $3.8 million in fiscal 2002 compared to a source of funds
totaling $8.3 million in fiscal 2001. During fiscal 2001, the Company undertook
an extensive re-merchandising program at Pearle Vision, which contributed to an
inventory reduction of $9.8 million. Changes in receivables and other assets
resulted in a use of $11.2 million in cash in fiscal 2002, compared to a source
of $0.7 million in fiscal 2001. The increase in receivables was primarily due to
increased sales and corresponding receivables at Cole Vision. Changes in
accounts payable and other liabilities resulted in a source of cash of $8.8
million in fiscal 2002 compared to a use of cash of $4.2 million in fiscal 2001.
The increase in other liabilities was due to accrued audit fees, deferred
revenues, accrued retirement plans, benefit obligations and bonus accruals.
Changes in accrued taxes resulted in a use of cash of $4.1 million in fiscal
2002, primarily due to a decrease in current year accruals for federal and state
income taxes.
Net cash from investing activities resulted in a use of funds of $51.0
million in fiscal 2002, compared to $36.9 million in fiscal 2001. Capital
expenditures, which accounted for most of the cash used for investing, were
$39.4 million, $33.8 million and $28.9 million in fiscal 2002, 2001 and 2000,
respectively. The majority of capital expenditures were for store fixtures,
equipment and leasehold improvements for new stores, including the Target
Optical expansion, and remodeling of existing stores. A payment was made to
Target Corporation in fiscal 2002 in consideration of prior years' capital
expenditures, which had been accrued. The Company paid approximately $5.6
million, $6.9 million and $8.4 million for systems development costs in fiscal
2002, 2001 and 2000, respectively. Such costs have been capitalized and are
being
18
amortized over the systems' estimated useful lives. In fiscal 2002, the Company
provided a $4.0 million loan to U.S. Vision, Inc., as part of that company's
management-led buyout. U.S. Vision is a large provider in Cole Managed Vision's
Preferred Provider Network. Interest on the note accrues at 8.75% per annum
(11.75% per annum in the event of default per the agreement) and is due
quarterly starting on December 31, 2002 and on the last day of each March, June
and September. The note matures December 1, 2003. The Company used $1.6 million
and $0.8 million in fiscal 2002 and fiscal 2001, respectively, for contingent
payments in connection with the prior acquisition of MetLife's managed vision
business. In fiscal 2001, net proceeds of $12.5 million were received from the
sale of two facilities no longer required for operations and from the sale and
leaseback of Pearle Vision's former headquarters office building in Dallas,
Texas and a portion of the land. In fiscal 2001, the Company used $6.4 million
for additional net investment in Pearle Europe, primarily in connection with its
acquisition of an optical retailer in Portugal.
For fiscal 2003, the Company plans to expand the number of stores,
including opening approximately 23 Target Optical stores, and to remodel and
relocate other stores. The Company expects to open in new Super Target stores
that will offer Target Optical excellent, highly visible and high traffic
locations. As a result, the Company's emphasis on Target Optical has moved from
opening stores to improving their operations. The Company currently estimates
that capital expenditures in fiscal 2003 will be approximately $35.5 million,
excluding acquisition and systems development costs. Approximately $3.9 million
is estimated to be incurred for systems development costs in 2003, which will be
capitalized and subsequently amortized.
Net cash used for financing activities totaled $6.4 million in fiscal
2002. Net cash provided by financing totaled $8.4 million and $8.3 million in
fiscal 2001 and fiscal 2000, respectively. In May 2002, Cole National Group,
Inc., issued $150.0 million of 8-7/8% Senior Subordinated Notes due May 2012.
The net proceeds of the issuance and cash on hand were used to retire all of
Cole National Group's $150.0 million 9-7/8% Senior Subordinated Notes due 2006.
Finance fees and early repayment of the 9-7/8% notes resulted in a net cash
usage of $14.2 million. In fiscal 2000, the Company entered into a sale and
leaseback transaction from the sale of its office facility in Twinsburg, Ohio.
The transaction was accounted for under the finance method of accounting. At the
time of the transaction, the Company had a continuing involvement. In July 2001,
the continuing involvement ended and the transaction was reflected as a sale and
leaseback. The Company received approximately $13.5 million in fiscal 2000, net
of related costs.
The Company believes that funds provided from operations, including cash
on hand, along with funds available under the credit facility, will provide
adequate sources of liquidity to allow its operating subsidiaries to continue to
expand the number of stores and to fund capital expenditures and systems
development costs.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company leases a substantial portion of its equipment and facilities
including laboratories, office and warehouse space, and retail locations. In
addition, Cole Vision operates departments in various host stores and pays
occupancy costs solely as a percentage of sales. A more complete discussion of
the Company's lease and license commitments is included in Note 12 of the Notes
to Consolidated Financial Statements.
The Company guarantees future minimum lease payments for certain store
locations leased directly by Pearle franchisees. The term of these guarantees
range from one to ten years of which many are limited to periods that are less
than the full term of the leases involved. A more complete discussion of the
Company's guarantees is included in Note 12 of the Notes to Consolidated
Financial Statements.
The following table summarizes certain payments due by period for
contractual obligations including operating leases:
Payments Due by Period (Dollars in thousands)
----------------------------------------------------------------------
Less Than After
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
- ----------------------- -------- -------- -------- -------- --------
Long-term debt $285,000 $ -- $ 6,000 $127,000 $152,000
Capital lease obligations, including interest 1,210 328 576 306 -
Operating leases 419,079 82,904 133,282 88,217 114,676
Sublease agreements (43,223) (10,765) (15,825) (9,793) (6,840)
-------- -------- -------- -------- --------
Total contractual obligations $662,066 $ 72,467 $124,033 $205,730 $259,836
======== ======== ======== ======== ========
19
INVESTMENT IN PEARLE EUROPE
Included in other assets is the Company's minority investment in Pearle
Europe B.V. ("Pearle Europe"). HAL Holding N.V. ("HAL") owns a 68% interest, the
Company owns a 21% interest, and Pearle Europe's management owns the remaining
11% interest in Pearle Europe. The Company believes that it no longer has the
ability to exercise significant influence over the operating and financial
policies of Pearle Europe as a result of a change in the shareholders agreement
in June 2000. Accordingly, as discussed in Notes 2 and 17 of Notes to
Consolidated Financial Statements, the Company's common equity investment in
Pearle Europe of $9.1 million at February 1, 2003 is accounted for using the
cost method. At February 1, 2003 the Company also holds $19.6 million of loans
and interest receivable from Pearle Europe.
Pearle Europe is one of Europe's largest optical retailers, and owns a
number of optical retail chains with a total of more than 1,100 stores in eleven
European countries. Pearle Europe's revenues for its fiscal year ended December
31, 2002 increased 22% to EUR 470 million or $490.0 million. In November 2002
Pearle Europe acquired the optical retail activities of Instrumentarium Oy
("Instrumentarium"), a Finnish company. These activities include optical retail
chains in Finland, where it is the market leader with 132 stores; Sweden, where
it has 31 stores, including 8 operated by franchisees; Estonia, where it has 15
stores; and Russia, where it has 1 store. Instrumentarium's revenue for 2002 was
EUR 106 million or $111.0 million.
The Company's equity interest in Pearle Europe includes 2 Class A Common
Shares and 22,887 Class B Common Shares. Pearle Europe is closely held, and
there is no market for these shares. The 2 Class A Common Shares have preferred
share characteristics.
On occasion, HAL, the Company or Pearle Europe sell shares to, or offer
liquidity to and purchase shares from members of Pearle Europe management.
Pearle Europe has developed a methodology to set a fair price for such purchase
and sale transactions that is based upon the performance of its operating
subsidiaries, the prices paid by Pearle Europe for recent acquisitions, and
other factors. The most recent sale transaction of Class B Common Shares was
completed by Pearle Europe at a price of EUR 4,190 per share. Applying this
price to the Company's holdings of Pearle Europe Class B shares would indicate a
value for the Company's holdings of EUR 96.0 million, which is equal to $103.0
million, using the exchange rate on February 1, 2003. A limited scope appraisal
by Valuation Research, the Company's independent valuation advisors, indicates
that this figure is within a range of reasonable values for the Company's equity
interest in Pearle Europe, without taking into account discounts for minority
interest or lack of marketability. Given the illiquid nature of this investment,
there is no assurance that the Company would be able to sell its interest in
Pearle Europe for that amount or at all. Moreover, the Company currently has no
plans to sell its interest in Pearle Europe.
Agreements between HAL, the Company and members of Pearle Europe
management require HAL and the Company to periodically offer to purchase Pearle
Europe shares held by the members of Pearle Europe Management. The offer price
is to be set by HAL and the Company by agreement, and is required to be "fair in
the opinion of" HAL and the Company. These offers are required to be made (1)
not later than September 3, 2003, (2) in May 2005, and (3) biannually in May
commencing in 2007. The obligations to fund the purchase of any shares as to
which the offer to purchase is accepted are pro rata to HAL and to the Company
based on their respective ownership interests on the date of the offer.
HAL and the Company have not yet agreed on the price to offer this year or
on the process to agree to the price or on the source of funding for any
purchases. Funds could be derived from payments by Pearle Europe, from the
separate resources of HAL and the Company, or from financings. In the event that
all of Pearle Europe's managers who are entitled to receive an offer to purchase
their shares were to accept that offer, the resulting obligation to the Company
could be material. The Company believes that it will have sufficient liquidity
to meet the obligation, if any, that may result from their commitment in fiscal
2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted SFAS 142, "Goodwill and Other Intangible Assets" (SFAS
142) in the first quarter of fiscal 2002. This statement requires that goodwill
and certain intangible assets deemed to have indefinite useful lives no longer
be amortized, but instead be subject to at least an annual review for
impairment. Other intangible assets with finite lives are amortized over their
useful lives. With the adoption of this statement, the Company ceased
amortization of goodwill and tradenames as of February 3, 2002. Amortization of
goodwill and tradenames totaled $5.0 million and $5.2 million in fiscal 2001 and
fiscal 2000, respectively.
During the second quarter of fiscal 2002, the Company completed the
transitional impairment testing of goodwill as required by SFAS 142. Based on
the findings of its outside valuation advisor, the Company has concluded that
there was no impairment of either its goodwill or tradenames at the adoption
date of the new accounting standard, effective February 3, 2002. The Company has
elected to perform its annual tests for potential impairment as of the first day
of the Company's
20
fourth quarter. Based on its annual tests performed in the fourth quarter of
fiscal 2002, the Company has concluded that there was no impairment of its
goodwill or tradenames. As part of the restatement, the Company and its outside
valuation advisor reviewed the previously completed impairment testing and
confirmed that there was no impairment of either goodwill or tradenames.
The Financial Accounting Standards Board (FASB) has issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS Statement
No. 13, and Technical Corrections" (SFAS 145). SFAS 145 states that the
rescission of SFAS No. 4 shall be applied in fiscal years beginning after May
15, 2002. Any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
Accounting Principles Board (APB) Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
classification as an extraordinary item shall be reclassified as operating
expenses. The Company will adopt SFAS 145 as of the beginning of fiscal 2003. As
a result, the loss on early extinguishment of debt reported as an extraordinary
item for the year ended February 1, 2003 will be reclassified at that time. The
pretax loss from the early extinguishment of debt will be presented as a
separate line within interest and other (income) expenses and the related income
tax benefit will reduce the reported income tax provision. Other portions of the
statement are not applicable to the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted SFAS 146 on January 1, 2003. The adoption had no
effect on the Company's financial position or operations.
The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosures" (SFAS 148) which amends SFAS No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). SFAS 148 provides alternate methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the disclosure
requirements of SFAS 123 to require more prominent and more frequent disclosures
in the financial statements about the effects of stock-based compensation. The
Company has adopted the disclosure provisions of SFAS 148 as of fiscal 2002.
The FASB has also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" (SFAS 143), and SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 143 provides guidance for legal
obligations arising from the retirement of long-lived assets. SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 was adopted during fiscal 2002 and had no effect on the
Company's financial position or operations. SFAS 143 will be adopted during
fiscal 2003 and is not expected to have a material effect on the Company's
financial position or operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Company adopted the fair value recognition provision
of this interpretation for guarantees issued or modified after December 31,
2002, which did not have a material effect on the Company's financial position
or operations. The disclosure provisions of the interpretation have been adopted
for the year ended February 1, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). The Interpretation
requires certain variable interest entities, including certain special purpose
entities, to be consolidated by the primary beneficiary if the equity investors
in the entity do not have all the essential characteristics of a controlling
financial interest or do not have sufficient equity at risk. The Interpretation
immediately applies to entities created after January 31, 2003, and at the
beginning of the Company's 2003 third quarter for existing variable interest
entities. Management is still assessing the impacts of this Interpretation on
its consolidated financial statements. However, it is reasonably possible that
the synthetic operating lease for the Highland Heights, Ohio facility will
require consolidation under this Interpretation. The consolidation will require
an additional $2.4 million in assets and liabilities on the consolidated balance
sheet.
In November 2002, the Emerging Issues Task Force of the FASB ("EITF")
reached a consensus on Issue 02-16, "Accounting by a Reseller for Cash
Consideration Received from a Vendor" (Issue 02-16). Certain aspects of the
issue were effective immediately, which were adopted and did not have a
significant impact on operations. The remaining portion of Issue 02-16 will be
adopted during fiscal 2003 and is not expected to have a material effect on the
Company's financial position or operations.
21
CONTINGENCIES
The Company and its optical subsidiaries have been sued by the State of
California, which alleges claims for various statutory violations related to the
operation of 24 Pearle Vision Centers in California. The claims include untrue
or misleading advertising, illegal dilation fees, unlawful advertising of eye
exams, maintaining an optometrist on or near the premises of a registered
dispensing optician, unlawful advertising of an optometrist, unlicensed practice
of optometry, and illegal relationships between dispensing opticians, optical
retailers and optometrists. The action seeks unspecified damages, restitution
and injunctive relief. Although the State of California obtained a preliminary
injunction to enjoin certain advertising practices and from charging dilation
fees in July 2002, the terms of the injunction have not had and are not expected
to have any material effect on the Company's operations. In addition, both the
State and the Company have appealed the preliminary injunction. The injunction
is not expected to have a material effect on the Company's operations. Although
the Company believes it is in compliance with California law and intends to
continue to defend the issues raised in the case vigorously, it may be required
to further modify its activities or might be required to pay damages and or
restitution in currently undeterminable amount if it is not successful, the cost
of which, as well as continuing defense costs, might have a material adverse
effect of the Company's operating results and cash flow in one or more periods.
Things Remembered, Inc. is in the process of settling a class action
complaint in California alleging that the putative class (alleged to include 200
members) were improperly denied overtime compensation in violation of a
California law. The action sought unspecified damages, interest, restitution, as
well as declaratory and injunctive relief and attorneys' fees. On February 3,
2003, Things Remembered and the plaintiffs reached an agreement to resolve the
lawsuit for $562,500. The settlement is subject to court approval. A liability
of $562,500 was recorded in the fourth quarter of 2002.
Cole National Corporation is defending a purported class action lawsuit
alleging claims for various violations of federal securities laws related to the
Company's publicly reported revenues and earnings. The action, which proposes a
class period of March 23, 1999 through November 26, 2002 and names the Company
and certain present and former officers and directors as defendants, seeks
unspecified compensatory damages, punitive damages "where appropriate", costs,
expenses and attorneys fees. Following the Company's announcement in November
2002 of the restatement of the Company's financial statements, (see Note 17 of
the Notes to Consolidated Financial Statements), the Securities and Exchange
Commission began an inquiry into the Company's previous accounting. The course
of this or further litigation or investigations arising out of the restatement
of the Company's financial statements cannot be predicted. In addition, under
certain circumstances the Company would be obliged to indemnify the individual
current and former directors and officers of the Company who are named as
defendants in litigation or who are or become involved in an investigation. The
Company believes it has insurance that should be available with respect to
litigation and any indemnification obligations. However, if the Company is
unsuccessful in defending against any such litigation, and if its insurance
coverage is not available or is insufficient to cover its expenses, indemnity
obligations and liability, if any, the litigation and/or investigation may have
a material adverse effect on the Company's financial condition, cash flow and
results of operations.
As described in Part I, Item 3, "Legal Proceedings", Cole National Group,
Inc. has been named as a defendant along with numerous other retailers, in
patent infringement litigation challenging the defendants' use of bar code
technology. The Company believes it has available defenses and does not expect
any liability. However, if Cole National Group, Inc. were to be found liable for
an infringement, it might have a material adverse effect on our operating
results and cash flow in the period incurred.
In the ordinary course of business, the Company is involved in various
other legal proceedings. The Company is of the opinion that the ultimate
resolution of these matters will not have a material adverse effect on the
results of operations, liquidity or financial position of the Company.
SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements requires the Company to estimate
the effect of various matters that are inherently uncertain as of the date of
the financial statements. Each of these required estimates varies in regard to
the level of judgment involved and its potential impact on the Company's
reported financial results. Estimates are deemed significant when a different
estimate could have reasonably been used or where changes in the estimate are
reasonably likely to occur from period to period, and would materially impact
the Company's financial condition, changes in financial condition or results of
operations. The Company's significant accounting policies are discussed in Note
1 of the Notes to Consolidated Financial Statements. Critical estimates inherent
in these accounting policies are discussed in the following paragraphs.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
The Company records an allowance for uncollectible accounts to reflect
management's best estimate of losses inherent in its portfolio of receivables
from Cole Licensed Brands' host stores, Pearle Vision franchisees and managed
vision care accounts. The allowance is established through a charge to the
provision and represents amounts of current and past due receivable balances
which management estimates will not be collectible. The Company calculates the
allowance for uncollectible
22
accounts using historical experience, current trends, credit policy and aging
reports. An analysis, including historical performance, break-even analysis and
payment arrangements is performed on delinquent accounts. The Company's
calculation is reviewed by management to assess whether additional consideration
is required to appropriately estimate losses in the receivable portfolio.
Management believes its receivables are adequately reserved under current
conditions. Any significant deterioration in the economic environment could
materially affect these expectations.
VALUATION OF INVENTORIES
Inventories are recorded at the lower of cost or market based on the
first-in, first-out (FIFO) method for the optical inventories and based on the
weighted average cost method for the gift inventories. The Company records a
reserve for future inventory cost markdowns to be taken for inventory not
expected to be part of its ongoing merchandise offering. The reserve is
estimated based on historical information regarding sell through for similar
products. The Company records a reserve for estimated shrinkage based on various
factors including sales volume, historical shrink results and current trends.
Management believes its inventories are appropriately valued.
VALUATION OF LONG-LIVED ASSETS
Property and equipment, systems development, and other finite intangibles
are amortized over their estimated useful lives. Useful lives are based on
management's estimates of the period that the assets will generate revenue.
These assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. An
initial screening is performed on all long-lived assets. Store locations less
than three years old and stores relocated within three years of fiscal year-end
are excluded from testing. If the undiscounted future cash flows from the
long-lived asset are less than the carrying value, the Company recognizes a loss
equal to the difference between the discounted future cash flow and the carrying
value. Management's estimate of future cash flow is based on our experience,
knowledge and market data. However, these estimates can be affected by factors
such as future store profitability, real estate demand and economic conditions
that can be difficult to predict.
Goodwill, noncompete agreements and tradename assets were amortized over
their estimated useful economic life using the straight-line method and are
carried at cost less accumulated amortization. Beginning with fiscal year 2002,
all goodwill and tradename amortization ceased in accordance with Statement of
Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142); and both goodwill and tradenames are tested at least
annually for impairment. The Company adopted the first day of the fourth fiscal
quarter for the annual impairment review.
VALUATION OF DEFERRED INCOME TAXES
Deferred tax assets and liabilities are recognized based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. Management regularly reviews its deferred tax assets
for recoverability and establishes a valuation allowance for tax assets based on
historical taxable income, projected future taxable income and the expected
timing of the reversals of existing temporary differences. In determining the
valuation allowance related to deferred tax assets, management estimates taxable
income into the future. The assessment of whether or not a valuation allowance
is required often requires significant judgment including the forecast of future
taxable income and the evaluation of tax planning initiatives. Adjustments to
the deferred tax valuation allowance are made to earnings in the period when
such assessment is made.
ALLOWANCE FOR REMAKES AND RETURNS
Sales are recorded in accordance with the Company's policy for revenue
recognition and deferred revenue discussed in the summary of Significant
Accounting Policies. Revenues have been reduced by allowances for remakes of
product and returns. The estimated allowances are calculated as a percentage of
sales and based upon historical return percentages.
MANAGED VISION UNDERWRITING RESULTS
The Company sells capitated managed vision care plans which generally have
a duration of one year. Based upon its experience, the Company believes that it
can predict utilization and claims experience under these plans with a high
level of confidence. Underwriting results are recognized using an estimated
percentage of claims revenue. Each quarter, a portion of the resulting gain is
reserved for potential variances between predicted and actual results. The
reserves are reconciled following the end of each plan year.
23
SELF-INSURANCE RESERVES
Due to the significant deductible under its insurance policies, the
Company is primarily self-insured for property loss, workers' compensation,
automobile and general liability costs. The liabilities are determined
actuarially based on claims filed and estimates for claims incurred but not
reported. These liabilities are not discounted. In estimating the obligation
associated with incurred losses, the Company utilizes loss development factors
prepared by independent third party actuaries. These development factors utilize
historical data to project the future development of incurred losses. Loss
estimates are adjusted based upon actual claims settlements and reported claims.
DEFINED BENEFIT RETIREMENT PLANS
The plan obligations and related assets of defined benefit retirement
plans are presented in Note 10 of the Notes to Consolidated Financial
Statements. Plan assets, which consist primarily of marketable equity and debt
instruments, are valued using market quotations. Plan obligations and annual
pension expense are determined by independent actuaries and through the use of a
number of assumptions. Key assumptions in measuring the plan obligations include
the discount rate and the estimated future return on plan assets. In determining
the discount rate, the Company utilizes the yield on high-quality, fixed income
investments currently available with maturities corresponding to the anticipated
timing of the benefit payments. Asset returns are based upon the anticipated
average rate of earnings expected on the invested funds of the plans. At
February 1, 2003, the weighted average actuarial assumptions of the Company's
plans were: discount rate 6.5%, and long-term rate of return on plan assets
9.0%.
FORWARD LOOKING STATEMENTS
The Company's management expects its continued emphasis on becoming better
retailers to have a positive impact on the Company's operations in fiscal 2003.
However, the difficult economy and weak mall traffic negatively impacted store
performance early in the 2003 fiscal year, and it is difficult to predict when
the current conditions in the retail industry are likely to improve. For the
first quarter of fiscal 2003, the Company expects low single digit negative
same-store sales in the Cole Vision segment continuing similar trends seen in
the fourth quarter of fiscal 2002. The Company expects positive same-store sales
at Things Remembered for the first quarter of fiscal 2003, compared to a
negative fourth quarter in fiscal 2002. Legal and accounting fees associated
with the restatement, the resulting litigation and the SEC inquiry and the
litigation in California are likely to have a negative impact on results in
fiscal 2003.
The Company's expectations and beliefs concerning the future contained in
this document are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those forecasted due to a variety of factors that can adversely affect the
Company's operating results, liquidity and financial condition such as risks
associated with potential adverse consequences of the restatement of the
Company's financial statements, including those resulting from litigation or
government investigations, restrictions or curtailment of the Company's credit
facility and other credit situations, costs and other effects associated with
the California litigation, the timing and achievement of improvements in the
operations of the optical business, the results of Things Remembered, which is
highly dependent on the fourth quarter holiday season, the nature and extent of
disruptions of the economy from terrorist activities or major health concerns
and from governmental and consumer responses to such situations, the actual
utilization of Cole Managed Vision funded eyewear programs, the success of new
store openings and the rate at which new stores achieve profitability, the
Company's ability to select, stock and price merchandise attractive to
customers, success of systems development and integration, competition in the
optical industry, integration of acquired businesses, economic and weather
factors affecting consumer spending, operating factors affecting customer
satisfaction, including manufacturing quality of optical and engraved goods, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changes in foreign currency
exchange rates in Canada and in Euros, which could impact its results of
operations and financial condition. Foreign exchange risk arises from the
Company's exposure to 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. A 10% adverse movement in
quoted foreign currency exchange rates could result in a loss in fair value of
investments and notes and interest receivables of $2.1 million.
During the third quarter of 2002 the Company entered into interest swap
agreements to take advantage of favorable market interest rates. These
agreements require the Company to pay an average floating interest rate based on
six month
24
LIBOR plus 4.5375% to a counter party while receiving a fixed rate on $50.0
million of the Company's $125.0 million 8-5/8% Senior Subordinated Notes due
2007. The agreements mature August 15, 2007 and qualify as fair value hedges.
The LIBOR rate is reset in arrears. The reset effective on February 15, 2003 for
six month LIBOR was 1.34% and resulted in a rate of 5.87750% applied from the
inception date of the swaps through February 1, 2003. At February 1, 2003 the
fair value of the swap agreement was an unrealized gain of approximately $0.8
million.
A change in six month LIBOR would effect the interest cost associated with
the $50.0 million notional value of the swap. A 50% change (approximately 67
basis points) in the market rates of interest for six month LIBOR as compared to
the 5.8775% rate in effect for fiscal 2002 would increase the Company's annual
interest cost by $0.3 million.
In addition, the Company is exposed to changes in the fair value of our
debt portfolio, primarily resulting from the effects of changes in interest
rates. The Company utilizes interest rate swaps to manage its exposure.
Management believes that its use of these financial instruments is in the
Company's best interests. The Company does not enter into financial instruments
for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item appears on pages F-1 through F-41 of
this Form 10-K and is incorporated herein by this reference. Other financial
statements and schedules are filed herewith as "Financial Statement Schedules"
pursuant to Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 13, 2002, upon the recommendation of the Company's Audit
Committee, the Board of Directors determined to replace Arthur Andersen LLP
("Arthur Andersen") as the Company's independent public accountants and to
appoint Deloitte & Touche LLP ("Deloitte & Touche") to serve as its independent
public accountants for the fiscal year 2002. The change in auditors was
effective June 13, 2002.
Arthur Andersen's reports on the Company's consolidated financial
statements for each of the fiscal years ended February 2, 2002 and February 3,
2001 did not contain an adverse opinion or disclaimer of opinion, nor were such
reports qualified or modified as to uncertainty, audit scope or accounting
principles.
During the Company's two fiscal years ended February 2, 2002 and February
3, 2001 and the subsequent interim period preceding the decision to change
independent public accountants, there were no disagreements with Arthur Andersen
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to Arthur
Andersen's satisfaction, would have caused them to make reference to the subject
matter of the disagreement in connection with their audit reports on the
Company's consolidated financial statements for such years, and there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
In the years ended February 2, 2002 and February 3, 2001 and through the
date of their appointment, the Company did not (i) receive a written report or
oral advice from Deloitte & Touche with respect to either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or (ii) consult with Deloitte & Touche on any
other matter that was either the subject of a disagreement, within the meaning
of Item 304(a)(1)(iv) of Regulation S-K, or any "reportable event," as that term
is defined in Item 304(a)(1)(v) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item as to Directors will be included in
Cole National Corporation's Proxy Statement under the caption "Election of
Directors" and is incorporated herein by this reference. The information
required by this item as to executive officers who are not Directors is included
in Item 4A of Part I of this report.
25
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in Cole National
Corporation's Proxy Statement under the caption "Compensation of Executive
Officers" and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in Cole National
Corporation's Proxy Statement under the caption "Security Ownership of
Management and Certain Beneficial Owners" and is incorporated herein by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in Cole National
Corporation's Proxy Statement under the caption "Compensation Committee
Interlocks, Insider Participation and Certain Transactions" and is incorporated
herein by this reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Immediately following the Signature section of this Annual Report are
certifications of the Company's Chief Executive Officer and Chief Financial
Officer required in accordance with Section 302 of the Sarbanes-Oxley Act of
2002 (the "Section 302 Certification"). This portion of our Annual Report on
Form 10-K is our disclosure of the results of our control evaluation referred to
in paragraphs (4), (5) and (6) of the Section 302 Certification and should be
read in conjunction with the Section 302 Certification for a more complete
understanding of the topics presented.
In November 2002 the Company determined it needed to restate its
previously issued financial statements for the timing of the recognition of
revenues earned on the sale of extended warranty contracts. The Company issued a
press release on November 26, 2002 announcing the restatement of its historical
consolidated financial statements beginning with its 1998 fiscal year. The
Company subsequently determined that it needed to make other changes to
previously issued financial statements in addition to the timing of the
recognition of warranty revenues. The adjustments have a significant negative
impact on the Company's previously reported revenue, net income, and earnings
per share. See Note 17 of the Notes to Consolidated Financial Statements for
further discussion of the restatement.
In March 2003, the Audit Committee engaged outside counsel to conduct an
inquiry into the issues surrounding the restatement. The results and conclusions
of that inquiry have been considered in the preparation of the accompanying
financial statements.
Within 90 days prior to the filing date of this Form 10-K, the Company
carried out an evaluation, under the supervision and with the participation of
its Chief Executive Officer and Chief Financial Officer, pursuant to Rule 13a-15
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended, of the effectiveness of the design and operation of its disclosure
controls and procedures. In making this evaluation, the Company has considered
matters relating to its restatement of previously issued financial statements,
including the substantial process that was undertaken to ensure that all
material adjustments necessary to restate the previously issued financial
statements were recorded. The Company believes that certain of the restatement
adjustments occurred because certain of the Company's control processes and
procedures related to the matters underlying such adjustments were not
effective.
In connection with the audit of the Company's financial statements for the
2002 fiscal year and the restated financial statements for the 2001 and 2000
fiscal years, Deloitte & Touche reported to management and the Board of
Directors on April 30, 2003 that certain deficiencies existed during the audit
period in the design or operation of the Company's internal accounting controls
which, constituted material weaknesses pursuant to standards established by the
American Institute of Certified Public Accountants. Such deficiencies related to
the application or selection of accounting principles, the use of management
judgment and estimates, and the adequacy of account details and reconciliations.
In order to improve the effectiveness of its control processes and
procedures, the Company has taken a number of actions within the past year. The
Company searched for and hired a new Chief Financial Officer from outside the
Company, and filled the position of Corporate Controller. The Audit Committee
approved a charter for the Internal Audit function; the Internal Audit staff was
strengthened and Internal Audit's role was expanded. The Company established an
internal representation requirement, whereby the operating executive and
financial officer of each business unit and major staff area are required to
certify on a quarterly basis the accuracy of the financial statements and the
adequacy of the control processes and procedures within that business unit or
staff area. With the approval of the Board of Directors, the Company amended its
26
Business Code of Conduct, and required that all management employees certify in
writing that they comply with it. The Business Code of Conduct includes
procedures for the receipt, retention and treatment of complaints received from
employees regarding among, other things, accounting and internal accounting
control matters. The Company is currently revising its Finance and Accounting
Policies and Procedures Manual.
Based in part upon these changes, the Company's Chief Executive Officer
and Chief Financial Officer concluded that as of the evaluation date, the
Company's disclosure controls and procedures were reasonably designed to ensure
that information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission.
(b) Other than as described above, since the evaluation date by the
Company's management of its internal controls, there have not been any
significant changes in the internal controls or in other factors that could
significantly affect the internal controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement Schedules
The consolidated financial statements and the related
financial statement schedules filed as part of this Form 10-K for
Cole National Corporation and its consolidated subsidiaries are
located as set forth in the index on page F-1 of this report.
(a)(3) Exhibits
See Exhibit Index on pages X-1 through X-7.
(b) Reports on Form 8-K
The Company filed a Form 8-K (Item 5) on November 26, 2002,
which attached a press release announcing that it would restate
certain of its historical financial statements as a result of a
change in the Company's accounting treatment for the timing of the
recognition of revenues earned on the sale of optical warranties.
The Company filed a Form 8-K (Item 5) on December 6, 2002
announcing that Ron Eilers, President and Chief Operating Officer of
Deluxe Corporation (NYSE: DLX), had been appointed to its Board of
Directors.
The Company filed a Form 8-K (Item 5) on December 19, 2002,
announcing that it had amended covenants in its agreement with the
bank lenders for its $75 million credit facility to accommodate
anticipated changes in the accounting treatment for the sale of
certain optical warranties and the auditing costs associated with
restating the Company's consolidated financial statements.
27
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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 CORPORATION
May 16, 2003 By: /s/ Ann M. Holt
----------------------------------------------
Ann M. Holt
Senior Vice President and Corporate Controller
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ Jeffrey A. Cole Chairman and Chief Executive Officer May 16, 2003
- ----------------------- and Director (Principal Executive Officer)
Jeffrey A. Cole
/s/ Larry Pollock President and Chief Operating Officer May 16, 2003
- ----------------------- and Director
Larry Pollock
/s/ Lawrence E. Hyatt Executive Vice President and May 16, 2003
- ----------------------- Chief Financial Officer
Lawrence E. Hyatt (Principal Financial Officer)
/s/ Ann M. Holt Senior Vice President and Corporate Controller May 16, 2003
- ----------------------- (Principal Accounting Officer)
Ann M. Holt
* Director May 16, 2003
- -----------------------
Ronald E. Eilers
* Director May 16, 2003
- -----------------------
Timothy F. Finley
* Director May 16, 2003
- -----------------------
Irwin N. Gold
* Director May 16, 2003
- -----------------------
Melchert Frans Groot
* Director May 16, 2003
- -----------------------
Peter V. Handal
* Director May 16, 2003
- -----------------------
Charles A. Ratner
* Director May 16, 2003
- -----------------------
Walter J. Salmon
* The undersigned, by signing her name hereto, does sign and execute this
report on Form 10-K pursuant to the Powers of Attorney executed by the
above-named officers and directors of Cole National Corporation and which
are being filed herewith with the Securities and Exchange Commission on
behalf of such officers and directors.
/s/ Ann M. Holt
- -----------------------------
Ann M. Holt, Attorney-in-Fact
28
CERTIFICATION
I, Jeffrey A. Cole, certify that:
1. I have reviewed this annual report on Form 10-K of Cole National Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/s/ Jeffrey A. Cole
------------------------------------
Jeffrey A. Cole
Chairman and Chief Executive Officer
29
CERTIFICATION
I, Lawrence E. Hyatt, certify that:
1. I have reviewed this annual report on Form 10-K of Cole National Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 16, 2003
/s/ Lawrence E. Hyatt
----------------------------
Lawrence E. Hyatt
Executive Vice President and
Chief Financial Officer
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Independent Auditors' Report F - 2
Consolidated Balance Sheets as of February 1, 2003 and February 2, 2002 (as restated) F - 3
Consolidated Statements of Operations for the 52 weeks ended February 1, 2003,
the 52 weeks ended February 2, 2002 (as restated) and the 53 weeks ended February 3, 2001 (as restated) F - 4
Consolidated Statements of Cash Flows for the 52 weeks ended February 1, 2003, the
52 weeks ended February 2, 2002 (as restated) and the 53 weeks ended February 3, 2001 (as restated) F - 5
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
for the 52 weeks ended February 1, 2003, the 52 weeks ended February 2, 2002 (as restated),
and the 53 weeks ended February 3, 2001 (as restated) F - 6
Notes to Consolidated Financial Statements F - 7
FINANCIAL STATEMENT SCHEDULES:
Schedule I - Condensed Financial Information of Registrant F - 38
Schedule II - Valuation and Qualifying Accounts F - 41
All financial statement schedules not included have been omitted because
they are not applicable or because the required information is otherwise
furnished.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cole National Corporation:
We have audited the accompanying consolidated balance sheets of Cole
National Corporation and subsidiaries (the "Company") as of February 1, 2003 and
February 2, 2002, and the related consolidated statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows for each of
the three fiscal years in the period ended February 1, 2003. Our audits also
included the financial statement schedules listed in the Index at Item 15(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cole National Corporation and
subsidiaries as of February 1, 2003 and February 2, 2002, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 1, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Notes 1 and 4 to the consolidated financial statements,
the Company changed its method of accounting for goodwill and other intangible
assets effective February 3, 2002.
As discussed in Note 17, the accompanying fiscal 2001 and 2000
consolidated financial statements have been restated.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
May 15, 2003
F-2
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
February 1, February 2,
2003 2002
--------- ---------
(As restated,
Assets see Note 17)
Current assets:
Cash and cash equivalents $ 41,963 $ 63,418
Accounts receivable, less allowances of
$3,063 in 2002 and $3,228 in 2001 50,544 41,365
Current portion of notes receivable 8,624 2,824
Inventories 118,119 119,203
Prepaid expenses and other 26,581 29,214
Deferred income taxes 31,333 27,252
--------- ---------
Total current assets 277,164 283,276
Property and equipment, at cost 318,914 305,419
Less - accumulated depreciation and amortization (197,906) (184,985)
--------- ---------
Total property and equipment, net 121,008 120,434
Notes receivable, excluding current portion, less allowances
of $3,010 in 2002 and $5,209 in 2001 22,928 20,193
Deferred income taxes 31,905 27,801
Other assets 54,142 52,201
Other intangibles, net 50,903 46,146
Goodwill, net 85,557 85,543
--------- ---------
Total assets $ 643,607 $ 635,594
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion long-term debt $ 232 $ 259
Accounts payable 67,579 65,124
Accrued interest 8,199 6,748
Accrued liabilities 92,096 92,577
Accrued income taxes 4,957 8,604
Deferred revenue 37,592 35,401
--------- ---------
Total current liabilities 210,655 208,713
Long-term debt, net of discount and current portion 286,553 284,574
Other long-term liabilities 41,587 22,942
Deferred revenue, long-term 11,559 11,049
Stockholders' equity:
Preferred stock -- --
Common stock 17 16
Paid-in capital 270,991 268,709
Accumulated other comprehensive loss (18,183) (4,895)
Accumulated deficit (145,698) (140,549)
Treasury stock at cost (9,900) (10,002)
Unamortized restricted stock awards (1,685) (2,628)
Notes receivable - stock option and awards (2,289) (2,335)
--------- ---------
Total stockholders' equity 93,253 108,316
--------- ---------
Total liabilities and stockholders' equity $ 643,607 $ 635,594
========= =========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-3
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
February 1, February 2, February 3,
2003 2002 2001
----------- ----------- -----------
(As restated, see Note 17)
Net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634
Cost and expenses:
Cost of goods sold 378,704 364,392 359,608
Operating expenses 742,418 711,478 697,458
Goodwill and tradename amortization -- 5,010 5,168
----------- ----------- -----------
Total costs and expenses 1,121,122 1,080,880 1,062,234
----------- ----------- -----------
Operating income 26,997 28,243 16,400
Interest and other (income) expense:
Interest expense 26,772 29,417 29,121
Interest and other (income) (6,763) (3,892) (3,832)
----------- ----------- -----------
Total interest and other (income) expense, net 20,009 25,525 25,289
----------- ----------- -----------
Income (loss) before income taxes 6,988 2,718 (8,889)
Income tax provision (benefit) 4,895 5,105 (940)
----------- ----------- -----------
Income(loss) after taxes 2,093 (2,387) (7,949)
Equity in net income of Pearle Europe -- -- 139
----------- ----------- -----------
Income (loss) before extraordinary loss 2,093 (2,387) (7,810)
Extraordinary loss on early extinguishment of debt,
net of $3.9 million tax benefit (7,242) -- --
----------- ----------- -----------
Net income (loss) $ (5,149) $ (2,387) $ (7,810)
=========== =========== ===========
Basic earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50)
Extraordinary loss (0.45) -- --
----------- ----------- -----------
Net income (loss) $ (0.32) $ (0.15) $ (0.50)
=========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50)
Extraordinary loss (0.44) -- --
----------- ----------- -----------
Net income (loss) $ (0.31) $ (0.15) $ (0.50)
=========== =========== ===========
Weighted average shares:
Basic 16,223 16,019 15,564
Diluted 16,500 16,019 15,564
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-4
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fifty-Two Fifty-Two Fifty-Three
Weeks Ended Weeks Ended Weeks Ended
February 1, February 2, February 3,
2003 2002 2001
----------- ----------- -----------
(As restated, see Note 17)
Cash flows from operating activities:
Net income (loss) $ (5,149) $ (2,387) $ (7,810)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 36,432 40,073 40,702
Gain on sale of building -- (683) --
Impairment losses 899 3,738 3,954
Deferred income tax provision (benefit) 3,202 2,725 (3,039)
Extraordinary loss on early extinguishment of debt, net of tax 7,242 -- --
Noncash interest, foreign currency (gains) losses and other, net (4,270) 946 1,531
Noncash compensation 1,350 1,955 1,154
Increases (decreases) in cash resulting from changes
in operating assets and liabilities:
Accounts and notes receivable, prepaid expenses and other assets (11,180) 651 (5,389)
Inventories 1,205 9,811 (6,258)
Accounts payable, accrued liabilities and other liabilities 8,811 (4,164) 6,018
Accrued interest 1,451 (61) 292
Accrued and refundable income taxes (4,137) 2,103 1,553
----------- ----------- -----------
Net cash provided by operating activities 35,856 54,707 32,708
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (39,360) (33,791) (28,933)
Net proceeds from sales and sale/leasebacks of fixed assets -- 12,481 --
Systems development costs (5,626) (6,918) (8,444)
Investment and notes receivables in Pearle Europe, net -- (6,446) 2,875
Contingent payments for acquisition of business (1,645) (847) --
Cash paid for note receivable from third party network provider (4,000) -- --
Other, net (329) (1,361) (640)
----------- ----------- -----------
Net cash used for investing activities (50,960) (36,882) (35,142)
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term debt (158,318) (592) (1,557)
Proceeds from issuance of long-term debt 150,000 -- 13,490
Payment of deferred financing fees (6,058) -- (422)
Increase (decrease) overdraft balances 6,210 7,872 (2,704)
Net proceeds from exercise of stock options and issuance of stock 1,745 1,564 895
Repayments (issuance) of notes receivable -
stock options and awards, net 46 (340) (1,284)
Other, net 24 (129) (108)
----------- ----------- -----------
Net cash (used for) provided by financing activities (6,351) 8,375 8,310
----------- ----------- -----------
Cash and cash equivalents:
Net (decrease) increase during the period (21,455) 26,200 5,876
Balance, beginning of period 63,418 37,218 31,342
----------- ----------- -----------
Balance, end of period $ 41,963 $ 63,418 $ 37,218
=========== =========== ===========
Supplemental disclosures:
Interest paid $ 24,597 $ 28,193 $ 27,734
=========== =========== ===========
Income taxes paid $ 5,350 $ 385 $ 538
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-5
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
February 1, February 2, February 3,
2003 2002 2001
--------- --------- ---------
(As restated, see Note 17)
Common Stock:
Balance at beginning of period $ 16 $ 16 $ 16
Issuance of stock 1 -- --
--------- --------- ---------
Balance at end of period 17 16 16
--------- --------- ---------
Paid-in Capital:
Balance at beginning of period 268,709 263,312 262,158
Issuance of shares for employee stock purchase plan 442 881 887
Stock compensation 488 549 233
Exercise of stock options 1,303 4,080 8
Issuance of restricted stock from treasury shares, net 49 (113) 26
--------- --------- ---------
Balance at end of period 270,991 268,709 263,312
--------- --------- ---------
Accumulated Other Comprehensive Income (Loss), net of tax:
Balance at beginning of period (4,895) (4,455) (2,344)
Minimum pension liability, net of tax of $6,987 (13,665) -- --
Foreign currency translation adjustment 377 (440) (2,111)
--------- --------- ---------
Other comprehensive loss (13,288) (440) (2,111)
--------- --------- ---------
Balance at end of period (18,183) (4,895) (4,455)
--------- --------- ---------
Accumulated Deficit:
Balance at beginning of period (140,549) (138,162) (130,352)
Net income (loss) (5,149) (2,387) (7,810)
--------- --------- ---------
Balance at end of period (145,698) (140,549) (138,162)
--------- --------- ---------
Treasury Stock at cost:
Balance at beginning of period (10,002) (6,483) (6,363)
Issuance of restricted stock, net of forfeitures 383 357 (66)
Shares received for exercise of stock options (223) (3,842) --
Shares held in deferred compensation plan (58) (34) (54)
--------- --------- ---------
Balance at end of period (9,900) (10,002) (6,483)
--------- --------- ---------
Unamortized Restricted Stock Awards:
Balance at beginning of period (2,628) (3,691) (4,961)
Issuance of restricted stock, net of forfeitures (438) (244) 40
Amortization of restricted stock awards 1,381 1,307 1,230
--------- --------- ---------
Balance at end of period (1,685) (2,628) (3,691)
--------- --------- ---------
Notes Receivable - Stock Options and Awards:
Balance at beginning of period (2,335) (1,995) (711)
Issuance of notes receivable -- (384) (1,284)
Repayments of notes receivable 46 44 --
--------- --------- ---------
Balance at end of period (2,289) (2,335) (1,995)
--------- --------- ---------
Total Stockholders' Equity $ 93,253 $ 108,316 $ 108,542
========= ========= =========
Total Comprehensive Income (Loss):
Net income (loss) $ (5,149) $ (2,387) $ (7,810)
Other comprehensive income (loss) per above (13,288) (440) (2,111)
--------- --------- ---------
Total comprehensive income (loss) $ (18,437) $ (2,827) $ (9,921)
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated financial statements.
F-6
COLE NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Cole
National Corporation ("the Parent"), its wholly owned subsidiary, Cole
National Group, Inc. and its wholly owned subsidiaries (collectively
referred to as "the Company"). The Company's 21% investment in Pearle
Europe B.V. is accounted for using the cost method beginning with the
third quarter of 2000 and accounted for using the equity method prior to
the third quarter of 2000. All significant intercompany transactions have
been eliminated in consolidation.
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 February 1, 2003 is referred to as "fiscal
2002." Fiscal 2002 and fiscal 2001 each consisted of 52-week periods;
fiscal 2000 consisted of a 53-week period.
Nature of Operations
The Company is a specialty service retailer operating in both host
and nonhost environments, whose primary lines of business are optical
products and services and personalized gifts. The Company sells its
products through 2,480 company-owned retail locations and 464 franchised
locations in 50 states, Canada, and the Caribbean. In connection with its
optical business, the Company is a managed vision care benefits provider
and claims payment administrator whose programs provide comprehensive
eyecare benefits primarily marketed directly to large employers, health
maintenance organizations (HMO) and other organizations. The Company has
two reportable segments: Cole Vision and Things Remembered (see Note 11).
Use of Estimates
The preparation of financial statements, in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant estimates are required in determining the allowance for
uncollectible accounts, inventory valuation, depreciation, amortization
and recoverability of long-lived assets, deferred income taxes, remakes
and returns allowances, managed vision underwriting results,
self-insurance reserves, and retirement and post-employment benefits.
Reclassifications
Certain reclassifications have been made to prior year financial
statements and the notes to conform to the current year presentation.
Revenue Recognition and Deferred Revenue
Revenues include sales of goods and services, including delivery
fees to retail customers at company-operated stores, sales of merchandise
inventory to franchisees and other outside customers, other revenues from
franchisees such as royalties based on sales and initial franchise fees,
and capitation and other fees associated with Cole Vision's managed vision
care business.
Revenues from merchandise sales and services, net of estimated
returns and allowances, are recognized at the time of customer receipt or
when the related goods are shipped direct to the customer and all
significant obligations of the Company have been satisfied. The reserve
for returns and allowances is calculated as a percentage of sales based on
historical return percentages. Capitation revenues are accrued when due
under related contracts at the agreed upon per member, per month rates.
Administrative service revenue is recognized when services are provided
over the contract period and the Company's customers are obligated to pay.
Additionally, the Company sells
F-7
discount programs which have twelve-month terms. Revenues from discount
programs are deferred and amortized over the 12-month term.
Additionally, the Company sells separately priced extended warranty
contracts with terms of coverage of 12 and 24 months. Revenues from the
sale of these contracts are deferred and amortized over the lives of the
contracts, while the costs to service the warranty claims are expensed as
incurred. Incremental costs directly related to the sale of such
contracts, such as sales commissions and percentage rent, are deferred in
prepaid expenses and charged to expense in proportion to the revenue
recognized.
A reconciliation of the changes in deferred revenue from the sale of
warranty contracts follows (dollars in thousands):
2002 2001
-------- --------
Deferred revenues:
Beginning balance $ 46,450 $ 44,604
Warranty contracts sold 53,023 50,074
Amortization of deferred revenue (50,322) (48,228)
-------- --------
Ending balance $ 49,151 $ 46,450
======== ========
Franchise revenues based on sales by franchisees are accrued as
earned. Initial franchise fees are recorded as revenue when all material
services or conditions relating to the sale of the franchises have been
substantially performed or satisfied by the Company and when the related
store begins operations.
Things Remembered sells memberships in its Rewards ClubTM program,
which allows members to earn rebates based on their accumulated purchases.
The Company defers and amortizes the membership fee revenue over the life
of the membership. The rebates, which can only be used to offset the price
of future customer purchases, are recognized as a reduction of revenue
based on the rebates earned and the estimated future redemptions. The
cumulative liability for unredeemed rebates is adjusted over time based on
actual experience and trends with respect to redemption.
Consideration Received from Vendors
The Company receives consideration from vendors as either rebates on
the purchase of the inventory or as reimbursement of costs incurred to
sell the vendors' products. Rebates received for purchases are deferred
and recorded as a reduction of cost of sales when the product is sold or
based upon estimated inventory turns.
Reimbursement for specific, incremental and identifiable advertising
costs incurred by the Company to sell the vendors' products are recorded
as a reduction of those costs at the time the expense is recognized in the
income statement. Co-op funds calculated as a percentage of inventory
purchases are offset against the related expense at the time the inventory
is sold.
Managed Vision Underwriting Results
The Company sells capitated managed vision care plans which
generally have a duration of one year. Based upon its experience, the
Company believes that it can predict utilization and claims experience
under these plans with a high level of confidence. Underwriting results
are recognized using an estimated percentage of claims revenue. Each
quarter, a portion of the resulting gain is reserved for potential
variances between predicted and actual results. The reserves are
reconciled following the end of each plan year.
Other Managed Vision Expenses
Cost of printing member cards, program descriptions and related
distribution costs for capitation and administrative service contracts are
expensed when incurred. Expenses for discount programs are recognized over
the 12-month contract period.
F-8
Advertising and Direct Response Marketing
Cost for newspaper, television, radio and other media advertising
are expensed when incurred and production costs are expensed the first
time the advertising occurs or when the service is performed, if later.
Costs for certain direct response advertising are capitalized if such
direct response advertising costs result in future economic benefit. Such
costs related to direct response advertising are amortized in proportion
to when the revenues are recognized, not to exceed 90 days. Generally,
other direct response program costs that do not meet the capitalization
criteria are expensed the first time advertising occurs.
The total cost of advertising charged to operating expense is net of
amounts reimbursed by franchisees based on a percentage of their sales.
Advertising expense is summarized as follows (dollars in thousands):
2002 2001 2000
-------- -------- --------
Gross advertising expense $ 85,215 $ 84,191 $ 86,133
Less: Franchisee contribution (21,303) (20,486) (20,458)
-------- -------- --------
Net advertising expense $ 63,912 $ 63,705 $ 65,675
======== ======== ========
Gains (Losses) from the Sale and Franchising Company Operated Stores
Gains (losses) from the sale and franchising company operated stores
include the gains or losses from the sale of existing Pearle operated
stores to new and existing franchisees, reduced by transaction costs and
direct administrative costs of franchising. The Company recognizes these
gains (losses) when the sale transaction closes, the franchisee has a
minimum amount of the purchase at-risk and the Company is satisfied that
the franchisee can meet its financial obligations. If the criteria for
gain recognition are not met, the gain is deferred to the extent a
remaining financial obligation in connection with the sales transaction
exists. Deferred gains are recognized when these criteria are met or as
the Company's financial obligation is reduced. Gains (losses) are recorded
as decreases (increases) to operating expenses and were $711,000 and
$44,000 in fiscal 2002 and 2001, respectively. No gains (losses) were
recorded in fiscal 2000.
Store Opening Expenses
Store opening expenses are charged to operations in the period the
expenses are incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks, investments in
money market accounts, treasury bills, commercial paper, and marketable
securities with maturities of three months or less and credit card
receivables recorded at the time of sale. Credit card receivables were
$4.2 million and $3.8 million as of February 1, 2003 and February 2, 2002,
respectively.
In addition, overdrafts resulting from outstanding checks at the end
of each reporting period are reclassified as current liabilities in either
accounts payable or accrued expenses. This reclassification to accounts
payable amounted to $28.4 million and $22.2 million at February 1, 2003
and February 2, 2002, respectively and to accrued expenses amounted to
$3.2 million at February 1, 2003 and February 2, 2002.
Valuation of Inventories
Inventories are recorded at the lower of cost or market based on the
first-in, first-out (FIFO) method for the optical inventories and based on
the weighted average cost method for the gift inventories. The Company
records a valuation reserve for future inventory cost markdowns to be
taken for inventory not expected to be part of its ongoing merchandise
offering. The reserve is estimated based on historical information
regarding sell through for similar products. The Company records a reserve
for estimated shrinkage based on various factors including sales volume,
historical shrink results and current trends.
Property and Equipment
Property and equipment are stated at cost. Repairs and maintenance
costs that extend the life of the asset are capitalized. Depreciation is
provided principally by using the straight-line method over the estimated
useful life of the
F-9
related assets, generally 2 to 10 years for furniture, fixtures and
equipment, 2 to 25 years for leasehold improvements and 5 to 40 years for
buildings and improvements.
Property and equipment at cost, consist of the following at February
1, 2003 and February 2, 2002 (dollars in thousands):
2002 2001
-------- --------
Land and building $ 3,812 $ 3,821
Furniture, fixtures and equipment 202,783 192,358
Leasehold improvements 112,319 109,240
-------- --------
Total property and equipment $318,914 $305,419
======== ========
Capitalized Lease Property
Capitalized lease assets are amortized using the straight-line
method over the term of the lease, or in accordance with practices
established for similar owned assets if ownership transfers to the Company
at the end of the lease term. Capital lease assets are included in
property and equipment and are $1.3 million and $1.5 million, net of
accumulated amortization, in fiscal 2002 and 2001, respectively.
Amortization is included with depreciation expense and was $960,000,
$844,000 and $1,218,000 in fiscal 2002, 2001 and 2000.
Software and Development Costs
Software development and implementation costs are expensed until the
Company has determined that the software will result in probable future
economic benefits and management has committed to funding the project.
Thereafter, all direct costs to develop or obtain internal use software,
including internal costs, are capitalized in other assets and amortized
over the estimated useful life of the software using the straight-line
method. Amortization periods range from two to seven years and begin when
the software is placed in service. At February 1, 2003 and February 2,
2002, these costs, net of accumulated amortization, were $31,665,000 and
$34,314,000, respectively. Amortization of software development costs in
fiscal 2002, 2001 and 2000 was $7,865,000, $7,659,000 and $7,695,000,
respectively.
Goodwill and Other Intangible Assets
Goodwill, noncompete agreements and tradename assets were amortized
over their estimated useful economic life using the straight-line method
and are carried at cost less accumulated amortization. Beginning with
fiscal year 2002, all goodwill and tradename amortization ceased in
accordance with Statement of Financial Accounting Standard (SFAS) No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), and both goodwill and
tradenames are tested at least annually for impairment. The Company
adopted the first day of the fourth fiscal quarter for the annual
impairment review. Other intangible assets with finite lives are amortized
over their estimated useful lives based on management's estimates of the
period that the assets will generate revenue.
Long-Lived Asset Recoverability
Long-lived assets, including intangible assets, are reviewed for
impairment when facts and circumstances indicate that the carrying value
of the asset may not be recoverable. When necessary, impaired assets are
written down to estimated fair value based on the best information
available. Estimated fair value is generally based on either appraised
value or measured by discounting estimated future cash flows. Considerable
management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates.
Impairment charges include the write-down of long-lived assets at stores
that were assessed for impairment because changes in circumstances
indicate the carrying value of an asset may not be recoverable. Impairment
charges recorded to operating expenses by segment follows (dollars in
thousands):
F-10
2002 2001 2000
---- ------ ------
Cole Vision $444 $2,848 $3,672
Things Remembered 455 890 282
---- ------ ------
Total impairment charges $899 $3,738 $3,954
==== ====== ======
Unamortized Debt Issuance Cost
Financing costs incurred in connection with obtaining long-term debt
are capitalized in other assets and amortized over the life of the related
debt using the effective interest method. At February 1, 2003 and February
2, 2002, deferred financing costs net of accumulated amortization were
$6,976,000 and $4,483,000, respectively. Amortization of financing costs
included in interest expense in fiscal 2002, 2001 and 2000 was $1,128,000,
$1,150,000 and $1,102,000, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amount of existing
assets and liabilities and their respective tax bases. This method also
requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities from a change in tax
rates is recognized in income in the period that includes the enactment
date. The Company includes interest on prior year taxes in income tax
expense.
Derivatives and Hedging Activity
The interest rate swap agreements utilized by the Company are
designated as fair value hedges of the underlying fixed rate debt
obligations and are recorded at fair value as an increase in noncurrent
assets or liabilities and an increase or decrease in long-term debt. These
interest rate swaps qualify for the short-cut method for assessing hedge
effectiveness under the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). Changes in fair
value of the interest rate swaps are offset by the changes in fair value
of the underlying debt.
Self Insurance
Due to the significant deductible under its insurance policies, the
Company is primarily self-insured for property loss, workers'
compensation, automobile and general liability costs. The liabilities are
determined actuarially based on claims filed and estimates for claims
incurred but not reported. These liabilities are not discounted.
Accrued Liabilities
Accrued liabilities consist of the following (dollars in thousands):
2002 2001
------- -------
Accrued payroll and related liabilities $31,617 $27,859
Customer deposits 15,882 14,961
Other 44,597 49,757
------- -------
$92,096 $92,577
======= =======
Other Long-Term Liabilities
Other long-term liabilities consist primarily of certain employee
benefit obligations, deferred lease credits and other lease-related
obligations, and other obligations not expected to be paid within 12
months. Deferred lease credits are amortized on a straight-line basis over
the life of the applicable lease.
F-11
Foreign Currency Translation
The assets and liabilities of the Company's foreign subsidiary and
the Company's notes receivable from Pearle Europe are translated to United
States dollars at the rates of exchange on the balance sheet date. Income
and expense items are translated at average rates of exchange for the
foreign subsidiary and at average year-to-date rates of exchange for
Pearle Europe. Translation adjustments for foreign subsidiary are
presented as a component of accumulated other comprehensive income within
stockholders' equity. Translation adjustments for the Company's notes
receivable from in Pearle Europe are charged to interest and other income.
Fair Value of Financial Instruments
Due to their short-term nature, the carrying value of the Company's
cash and cash equivalents, credit card and other receivables, and
short-term borrowings approximate fair value. The fair value of the notes
receivables has not been determined due to nonmarketability and related
party nature of the notes. Fair value estimates for the Company's
derivative and debt instruments are based on market prices when available
or are derived from financial valuation methodologies such as discounted
cash flow analyses.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income
available to common shareholders by the weighted average number of common
shares outstanding for the periods presented. Diluted earnings per common
share also includes the dilutive effect of potential common shares
(primarily dilutive stock options) outstanding for the periods presented.
The effects of stock options have not been included in fiscal 2001 and
2000 diluted loss per share as their effect would have been anti-dilutive.
The anti-dilutive stock options were 979,331, 1,361,422 and 2,371,558 for
fiscal 2002, 2001 and 2000, respectively. The following represents a
reconciliation from basic average common shares outstanding to diluted
average commons shares outstanding:
2002 2001 2000
--------- --------- ---------
(In thousands, except per share amounts)
Determination of shares:
Average common shares outstanding 16,223 16,019 15,564
Assumed conversion of dilutive stock options and awards 277 -- --
--------- --------- ---------
Diluted average common shares outstanding 16,500 16,019 15,564
========= ========= =========
Basic earnings (loss) per common share
before extraordinary loss $ 0.13 $ (0.15) $ (0.50)
Diluted earnings (loss) per common share
before extraordinary loss 0.13 (0.15) (0.50)
Stock-Based Compensation
In accordance with APB Opinion No. 25 "Accounting for Stock Issued
to Employees", the Company measures compensation expense for employee and
director stock options as the aggregate difference between the market
value of its common stock and the exercise price of the options on the
date that both the number of shares the grantee is entitled to receive and
the exercise price are known. Compensation expense associated with
restricted stock grants is equal to the market value of the shares on the
date of grant and is recorded pro rata over the required holding period.
For Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock Based Compensation" (SFAS 123) purposes, the fair
value of each option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
risk-free interest rates of 4.6%, 4.8% and 6.2% for grants in fiscal 2002,
2001 and 2000, respectively, volatility of 49-50%, 47-49% and 45-47% in
fiscal 2002, 2001 and 2000, respectively, and expected lives of six years
for options granted in all fiscal years. The weighted average fair value
of options granted during fiscal 2002, 2001 and 2000 at the date of grant
was $9.50, $6.31 and $3.59, respectively. Pro forma information relating
to the fair value of stock-based compensation is summarized as follows:
F-12
2002 2001 2000
--------- --------- ---------
(In thousands, except per share amounts)
Net income (loss)
Reported income (loss) $ (5,149) $ (2,387) $ (7,810)
Compensation cost included in determination
of net income as reported, net of tax -- -- --
Compensation cost as if fair value based method
had been applied to all awards, net of tax (2,199) (1,208) (1,394)
--------- --------- ---------
Pro forma net income (loss) $ (7,348) $ (3,595) $ (9,204)
========= ========= =========
Basic earnings (loss) per share:
Reported earnings (loss) per share $ (0.32) $ (0.15) $ (0.50)
Compensation cost under fair value based method (0.14) (0.07) (0.09)
--------- --------- ---------
Pro forma basic per share income (loss) $ (0.46) $ (0.22) $ (0.59)
========= ========= =========
Diluted earnings (loss) per share:
Reported earnings (loss) per share $ (0.31) $ (0.15) $ (0.50)
Compensation cost under fair value based method (0.14) (0.07) (0.09)
--------- --------- ---------
Pro forma diluted earnings (loss) per share $ (0.45) $ (0.22) $ (0.59)
========= ========= =========
Retirement Plans
The Company accounts for its defined benefit pension plans and its
nonpension postretirement benefit plans using actuarial models required by
SFAS No. 87, "Employers' Accounting for Pensions" (SFAS 87)and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (SFAS 106), respectively. These models use an attribution
approach that generally spreads individual events over the service lives
of the employees in the plan. The Company accounts for other
post-employment benefits under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (SFAS 112), which requires the recognition of the
obligation to provide benefits awarded to certain individuals.
Recently Issued Accounting Standards
The Company adopted SFAS 142, "Goodwill and Other Intangible Assets"
(SFAS 142) in the first quarter of fiscal 2002. This statement requires
that goodwill and certain intangible assets deemed to have indefinite
useful lives no longer be amortized, but instead be subject to at least an
annual review for impairment. Other intangible assets with finite lives
are amortized over their useful lives. With the adoption of this
statement, the Company ceased amortization of goodwill and tradenames as
of February 3, 2002. Amortization of goodwill and tradenames totaled $5.0
million in fiscal 2001 and $5.2 million in fiscal 2000.
During the second quarter of fiscal 2002, the Company completed the
transitional impairment testing of goodwill as required by SFAS 142. Based
on the findings of its outside valuation advisor, the Company has
concluded that there was no impairment of either its goodwill or
tradenames at the adoption date of the new accounting standard, effective
February 3, 2002. The Company has elected to perform its annual tests for
potential impairment as of the first day of the Company's fourth quarter.
Based on its annual tests performed in the fourth quarter of fiscal 2002,
the Company has concluded that there was no impairment of its goodwill or
tradenames. As part of the restatement, the Company and its outside
valuation advisor reviewed the previously completed impairment testing and
confirmed that there was no impairment of either goodwill or tradenames.
The Financial Accounting Standards Board (FASB) has issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of SFAS
Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 states
that the rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in APB Opinion 30 for classification as an
extraordinary item shall be reclassified as operating expenses. The
Company will adopt SFAS 145 as of the beginning of fiscal 2003. As a
result, the loss on early extinguishment of debt reported as an
extraordinary item for the year ended February 1, 2003 will be
reclassified at that time. The pretax loss from the early extinguishment
of debt will be presented as a separate line
F-13
within interest and other (income) expenses and the related income tax
benefit will reduce the reported income tax provision. Other portions of
the statement are not applicable to the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The provisions of
this statement were effective for exit or disposal activities initiated
after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003.
The adoption had no effect on the Company's financial position or
operations.
The FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosures" (SFAS 148) which amends SFAS
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 148
provides alternate methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to
require more prominent and more frequent disclosures in the financial
statements about the effects of stock-based compensation. The Company has
adopted the disclosure provisions of SFAS 148 for fiscal 2002.
The FASB has also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143) and SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 143 provides
guidance for legal obligations arising from the retirement of long-lived
assets. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 was adopted during
fiscal 2002 and had no effect on the Company's financial position or
operations. SFAS 143 will be adopted during fiscal 2003 and is not
expected to have a material effect on the Company's financial position or
operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" (FIN 45). This
interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
Company adopted the fair value recognition provision of this
interpretation for guarantees issued or modified after December 31, 2002,
which did not have a material effect on the Company's financial position
or operations. The disclosure provisions of the interpretation have been
adopted for the year ended February 1, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). The Interpretation
requires certain variable interest entities, including certain special
purpose entities, to be consolidated by the primary beneficiary if the
equity investors in the entity do not have all the essential
characteristics of a controlling financial interest or do not have
sufficient equity at risk. The Interpretation immediately applies to
entities created after January 31, 2003, and at the beginning of the
Company's 2003 third quarter for existing variable interest entities.
Management is still assessing the impacts of this Interpretation on its
consolidated financial statements. However, it is reasonably possible that
the synthetic operating lease for the Highland Heights, Ohio facility will
require consolidation under this Interpretation. The consolidation will
require an additional $2.4 million in assets and liabilities on the
consolidated balance sheet.
In November 2002, the Emerging Issues Task Force of the FASB
("EITF") reached a consensus on Issue 02-16, "Accounting by a Reseller for
Cash Consideration Received from a Vendor" (Issue 02-16), which addresses
the accounting by a vendor for consideration given to a customer,
including both a reseller of the vendor's products and an entity that
purchases the vendor's products from a reseller. Certain aspects of the
issue were effective immediately, which were adopted and did not have a
significant impact on operations. The remaining portion of Issue 02-16
will be adopted during fiscal 2003 and is not expected to have a material
effect on the Company's financial position or operations.
(2) INVESTMENT IN AFFILIATES
Included in other assets is Cole National Corporation's minority
investment in Pearle Europe B.V. ("Pearle Europe"), which is in the retail
optical business in Europe. HAL Holding N.V. ("HAL") (see Note 8) owns a
68% interest, Cole National Corporation owns a 21% interest, and Pearle
Europe's management owns the remaining 11% interest in Pearle Europe. The
Company's common equity investment in Pearle Europe of $9.1 million and
$8.1 million at February 1, 2003 and February 2, 2002, respectively is
accounted for using the cost method since the third quarter of 2000 and
under the equity method prior to the third quarter of 2000.
Included in notes receivable are $19.6 million and $15.1 million of
loans and interest receivable from Pearle Europe and its subsidiaries at
February 1, 2003 and February 2, 2002, respectively. The loans provide for
interest at rates ranging from 5.0% to 12.7% with various maturities. The
Company accrued interest income of $1.8 million on the notes in fiscal
2002 as compared to $1.6 million and $1.4 million in fiscal 2001 and 2000,
respectively. During fiscal 2002 and 2001 the Company received no cash
interest payments. In fiscal 2000 the Company received interest payments
against the balances accrued totaling $1.3 million. The notes receivable
are classified as long-term based on the Company's past practice of
reinvesting amounts due. Currency gains (losses) recorded are $3.8
million, $(1.2) million and $(0.5) million in fiscal 2002, 2001 and 2000,
respectively.
F-14
In November 2000, Pearle Europe refinanced the loans made in
connection with its acquisitions in Germany and Austria by issuing a new
note to the Company and returning the remainder in cash. In May 2001, the
Company advanced $6.4 million to provide additional equity and loans in
connection with Pearle Europe's acquisition in Portugal. No cash payments
or advances have been made in fiscal year 2002. During fiscal 2001, the
Company converted $1.7 million in notes and interest receivables into
common shares of Pearle Europe. During fiscal year 2002, the Company
converted $1.0 million of notes receivable into common shares of Pearle
Europe.
Agreements between HAL, the Company and members of Pearle Europe
management require HAL and the Company to periodically offer to purchase
Pearle Europe shares held by the members of Pearle Europe Management. The
offer price is to be set by HAL and the Company by agreement, and is
required to be "fair in the opinion of" HAL and the Company. These offers
are required to be made (1) not later than September 3, 2003, (2) in May
2005, and (3) biannually in May commencing in 2007. The obligations to
fund the purchase of any shares as to which the offer to purchase is
accepted are pro rata to HAL and to the Company based on their respective
ownership interests on the date of the offer.
HAL and the Company have not yet agreed on the price to offer this
year or on the process to agree to the price or on the source of funding
for any purchases. Funds could be derived from payments by Pearle Europe,
from the separate resources of HAL and the Company, or from financings. In
the event that all of Pearle Europe's managers who are entitled to receive
an offer to purchase their shares were to accept that offer, the resulting
obligation to the Company could be material. The Company believes that it
will have sufficient liquidity to meet the obligation, if any, that may
result from their commitment in fiscal 2003.
(3) NOTES RECEIVABLE
Notes from Pearle Europe, which are denominated in foreign currency
and the notes receivable from Pearle's franchisees are included in notes
receivable. The franchise notes are collateralized by inventory,
equipment, and leasehold improvements at each location, generally bear
interest at the prime rate plus 3.0%, and require monthly payments of
principal and interest over periods of up to ten years.
In October 2002, the Company received a subordinated promissory note
from U.S. Vision, Inc. (USV) in exchange for a loan of $4.0 million. The
note bears interest at 8.75% per annum and is payable quarterly. The terms
also provide the Company with various collateral rights in the event of
default on the note or on other agreements between the parties. The note
matures December 1, 2003 and is included in the current portion of notes
receivable in the accompanying consolidated balance sheet at February 1,
2003.
Notes receivable at the end of fiscal years 2002 and 2001 are
comprised of the following (dollars in thousands):
2002 2001
-------- --------
Franchisee notes receivable, current $ 4,517 $ 2,723
Other receivables, current 4,107 101
-------- --------
Net current notes receivable $ 8,624 $ 2,824
======== ========
Long-term franchisee notes receivable $ 5,981 $ 9,918
Long-term Pearle Europe notes 19,648 15,067
Other receivables 309 417
Allowance for uncollectible accounts (3,010) (5,209)
-------- --------
Net long-term notes receivable $ 22,928 $ 20,193
======== ========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS 142 in the first quarter of fiscal 2002.
This statement requires that goodwill and certain intangible assets deemed
to have indefinite lives will no longer be amortized, but instead, will be
subject to review for impairment annually, or more frequently if certain
indicators arise. With the adoption of this statement, the Company ceased
amortization of goodwill and tradenames as of February 3, 2002.
The Company completed the transitional impairment testing of
goodwill and tradenames during the second quarter of fiscal 2002 as
required by SFAS 142. Based on the findings of its outside valuation
advisor, the Company has concluded that there was no impairment at the
adoption date of the new accounting standard, effective February 3, 2002.
The Company has elected to perform its annual tests for potential
impairment as of the first day of the
F-15
Company's fourth fiscal quarter. Based on its annual tests, performed at
the end of fourth quarter of fiscal 2002, the Company has concluded that
there was no impairment of its goodwill or tradenames.
The following table provides the comparable effects of adopting SFAS
142 for the three years ended February 1, 2003, February 2, 2002 and
February 3, 2001.
2002 2001 2000
--------- --------- ---------
(In thousands, except per share amount)
Income(loss) before extraordinary loss:
Reported income (loss) before extraordinary loss $ 2,093 $ (2,387) $ (7,810)
Goodwill amortization - Cole Vision -- 2,825 2,956
Goodwill amortization - Things Remembered -- 948 952
Tradename amortization - Cole Vision -- 1,237 1,260
Related tax adjustment -- (680) (700)
--------- --------- ---------
Adjusted income (loss) before extraordinary loss $ 2,093 $ 1,943 $ (3,342)
========= ========= =========
Basic earnings (loss) per share:
Reported income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50)
Goodwill and tradename amortization,
net of tax -- 0.27 0.29
--------- --------- ---------
Adjusted income (loss) before extraordinary loss $ 0.13 $ 0.12 $ (0.21)
========= ========= =========
Diluted earnings (loss) per share:
Reported income (loss) before extraordinary loss $ 0.13 $ (0.15) $ (0.50)
Goodwill and tradename amortization,
net of tax -- 0.27 0.29
--------- --------- ---------
Adjusted income (loss) before extraordinary loss $ 0.13 $ 0.12 $ (0.21)
========= ========= =========
F-16
2002 2001 2000
--------- --------- ---------
(In thousands, except per share amounts)
Net income (loss)
Reported net income (loss) $ (5,149) $ (2,387) $ (7,810)
Goodwill amortization - Cole Vision -- 2,825 2,956
Goodwill amortization - Things Remembered -- 948 952
Tradename amortization - Cole Vision -- 1,237 1,260
Related tax adjustment -- (680) (700)
--------- --------- ---------
Adjusted net income (loss) $ (5,149) $ 1,943 $ (3,342)
========= ========= =========
Basic earnings (loss) per share:
Reported net income (loss) $ (0.32) $ (0.15) $ (0.50)
Goodwill and tradename amortization,
net of tax -- 0.27 0.29
--------- --------- ---------
Adjusted net income (loss) $ (0.32) $ 0.12 $ (0.21)
========= ========= =========
Diluted earnings (loss) per share:
Reported net income (loss) $ (0.31) $ (0.15) $ (0.50)
Goodwill and tradename amortization,
net of tax -- 0.27 0.29
--------- --------- ---------
Adjusted net income (loss) $ (0.31) $ 0.12 $ (0.21)
========= ========= =========
Other intangible assets consist of (dollars in thousands):
2002 2001
-------- --------
Tradename $ 49,460 $ 49,460
Noncompete agreements 840 840
Contracts 8,847 3,460
-------- --------
59,147 53,760
Accumulated amortization (8,244) (7,614)
-------- --------
$ 50,903 $ 46,146
======== ========
The net carrying amount of goodwill at February 1, 2003, by business
segment, was $64.2 million at Cole Vision and $21.4 million at Things
Remembered. The increases in the net carrying amount of $14,000 for
goodwill was due to foreign currency translation of goodwill at Cole
Vision. Accumulated amortization of goodwill is $52.6 million for fiscal
2002 and 2001. The net carrying amount of $50.9 million for other
intangibles at February 1, 2003 was attributable to the Cole Vision
segment. Additional contingent payments related to the 1999 acquisition of
MetLife's managed vision care benefits business increased the net carrying
amount of contracts by $5.4 million, net of related amortization of $0.4
million. Amortization of other intangibles was $0.2 million in fiscal
2002. Amortization expense is expected to be $1.3 million for each of the
next five fiscal years.
F-17
(5) LONG-TERM DEBT
Long-term debt at February 1, 2003 and February 2, 2002 is summarized as
follows (dollars in thousands):
2002 2001
--------- ---------
8-7/8% Senior Subordinated Notes $ 150,000 $ --
8-5/8% Senior Subordinated Notes, including
fair market value adjustments related to
interest rate swap 125,807 125,000
9-7/8% Senior Subordinated Notes,
net of unamortized discount -- 149,318
5% Promissory Note 10,000 10,000
Capital lease obligations 978 515
--------- ---------
286,785 284,833
Less current portion (232) (259)
--------- ---------
Net long-term debt $ 286,553 $ 284,574
========= =========
On May 22, 2002, Cole National Group issued $150.0 million of 8-7/8%
Senior Subordinated Notes that mature on May 15, 2012. Interest on the
notes is payable semi-annually on each May 15 and November 15, commencing
November 15, 2002.
Net proceeds from the 8-7/8% note offering, together with cash on
hand, were used to retire $150.0 million of 9-7/8% senior subordinated
notes due December 31, 2006 and pay premiums and other costs associated
with retiring those notes. The Company's results for fiscal 2002 included
an extraordinary loss on early extinguishment of debt of approximately
$7.2 million, net of an income tax benefit of approximately $3.9 million,
representing the payment of premiums and other costs of retiring the notes
and the write-offs of unamortized discount and deferred financing fees.
On August 22, 1997, Cole National Group issued $125.0 million of
8-5/8% Senior Subordinated Notes that mature on August 15, 2007 with no
earlier scheduled redemption or sinking fund payments. Interest on the
8-5/8% notes is payable semi-annually on February 15 and August 15.
F-18
The 8-5/8% notes and the 8-7/8% notes are general unsecured
obligations of Cole National Group, subordinated in right of payment to
senior indebtedness of Cole National Group and senior in right of payment
to any current or future subordinated indebtedness of Cole National Group.
The indentures pursuant to which the 8-5/8% notes and the 8-7/8%
notes were issued restrict dividend payments to the Company. The
indentures also contain certain optional and mandatory redemption features
and other financial covenants. Cole National Group was in compliance with
these covenants at February 1, 2003.
On April 23, 1999, the Company issued a $10.0 million promissory
note bearing interest at 5.0% per annum in recognition of a commitment to
contribute $10.0 million to a leading medical institution, supporting the
development of a premier eye care research and surgical facility. The note
requires a $5.0 million principal payment to be made on April 23, 2004,
and principal payments in the amount of $1.0 million to be made on the
anniversary date of the note each successive year through 2009. Interest
only is payable annually for the first 5 years, and thereafter with each
payment of principal.
At February 1, 2003, the fair value of long-term debt was
approximately $270.0 million compared to a carrying value of $286.6
million. The fair value was estimated primarily by using quoted market
prices. The Company has no significant principal payment obligations under
its outstanding indebtedness until the $5.0 million principal payment due
in 2004 under the 5.0% promissory note.
During the third quarter of fiscal 2002, the Company entered into
interest rate swap agreements to take advantage of favorable market
interest rates. These agreements require the Company to pay an average
floating interest rate based on six-month LIBOR plus 4.5375% to a counter
party while receiving a fixed interest rate on a portion of the Company's
$125.0 million 8-5/8% senior subordinated notes due 2007. The counter
party is a major commercial bank. The agreements mature August 15, 2007
and qualify as fair value hedges. The aggregate notional amount of the
interest rate swap agreements is $50.0 million. At February 1, 2003, the
floating rate of swaps was approximately 5.9% and the fair value of the
swap agreements was an unrealized gain of approximately $0.8 million.
There was no impact to earnings for fiscal 2002 due to hedge
ineffectiveness.
(6) CREDIT FACILITY
The operating subsidiaries of Cole National Group, Inc. have a
working capital commitment of $75.0 million that extends until May 31,
2006. Borrowings under the credit facility presently bear interest based
on leverage ratios of Cole National Group at a rate equal to either (a)
the Eurodollar Rate plus 2.25% or (b) 1.25% plus the highest of (i) the
CIBC prime rate, (ii) the three-week moving average of the secondary
market rates for three-month certificates of deposit plus 1.0% or (iii)
the federal funds rate plus 0.5%. Cole National Group pays a commitment
fee of between 0.50% and 0.75% per annum on the total unused portion of
the facility based on the percentage of revolving credit commitments used.
The Company and Cole National Group guarantee this credit facility. The
credit facility is secured by the assets of the operating subsidiaries of
Cole National Group, Inc.
The credit facility requires the principal operating subsidiaries of
Cole National Group to comply with various operating covenants that
restrict corporate activities, including covenants restricting the ability
of the subsidiaries to incur additional indebtedness, pay dividends,
prepay subordinated indebtedness, dispose of certain investments or make
acquisitions. The credit facility also requires the subsidiaries of Cole
National Group to comply with certain financial covenants, including
covenants regarding interest coverage and maximum leverage. On November
25, 2002 the Company received a waiver, which expired on December 31, 2002
associated with the restatement of the financial statements. On December
19, 2002 the credit agreement was amended to accommodate the anticipated
changes due to the restatement. The Company received a waiver dated May 9,
2003 of the maximum leverage coverage test for the fiscal year end 2002
and the first quarter of fiscal 2003. During the waiver period the maximum
leverage test was adjusted to accommodate the effect of the restatement on
the Company's financial statements. This waiver will expire on the earlier
of May 17, 2003 if the Lenders do not receive the Form 10-K and 10-Q's for
the first through third fiscal quarters of 2002; on May 23, 2003 if
certain additional financial information is not received by the Lenders;
or June 30, 2003. The Company is in compliance with the covenants in the
credit agreement and expects to meet the waiver conditions. The Company
expects to complete a permanent amendment to the credit agreement on or
before June 30, 2003. However, there is no assurance that the Company will
be successful in its effort to complete such an amendment. The Company
believes that, even if it is unsuccessful in its effort to complete such
an amendment, it will have sufficient liquidity from internal and other
external sources.
The credit facility restricts dividend payments to Cole National
Group from its subsidiaries to amounts needed to pay interest on the
8-7/8% notes and the 8-5/8% notes, and certain amounts related to taxes,
along with up to 0.25% of Cole National Group's consolidated net revenue
annually for other direct expenses of the Company
F-19
or Cole National Group. The credit facility restricts dividend payments to
Cole National Group in an aggregate amount not to exceed $50.0 million to
allow for the repurchase of Senior Subordinated Notes.
As of fiscal year end 2002, the total commitment under the credit
facility was $75.0 million and availability under the credit facility
totaled $61.0 million after reduction for commitments under outstanding
letters of credit. There were no working capital borrowings outstanding as
of February 1, 2003 and February 2, 2002. The maximum amount of borrowings
outstanding during fiscal 2002 was $2.3 million. There were no borrowings
during fiscal 2001.
(7) STOCK COMPENSATION
At February 1, 2003, the Company had stock options outstanding under
various stock option plans and agreements. The right to exercise these
options generally commences between one and five years from the date of
grant and expires ten years from the date of grant. Both the number of
shares and the exercise price, which is based on the market price, are
fixed at the date of grant. As of February 1, 2003, there were 351,949
shares available for future grants to officers, key employees and
nonemployee directors under the Company's various stockholder approved
stock option plans. In addition, the Company may make, from time to time,
additional option awards outside such plans.
A summary of the status of stock options and related weighted
average exercise prices ("Price") as of the end of fiscal 2002, 2001 and
2000, and changes during each of the fiscal years is presented below:
2002 2001 2000
----------------------- ----------------------- -----------------------
Shares Price Shares Price Shares Price
--------- ------- --------- ------- --------- -------
Outstanding, beginning of year 2,370,066 $ 12.83 2,426,662 $ 12.58 2,035,587 $ 14.83
Granted 378,656 17.97 589,000 12.02 601,705 7.04
Exercised (173,859) 7.93 (388,452) 10.88 (2,000) 3.00
Canceled (84,829) 11.82 (257,144) 11.52 (208,630) 18.65
--------- --------- ---------
Outstanding, end of year 2,490,034 13.99 2,370,066 12.83 2,426,662 12.58
========= ========= =========
Exercisable at end of year 1,332,893 14.00 1,132,152 14.11 1,253,082 14.12
A summary of information for stock options outstanding at February
1, 2003 and related weighted average remaining contract life ("Life") and Price
is presented below:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Shares Life Price Shares Price
--------- --------- ------ --------- ------
$5.00 to $9.75 686,080 6.7 years $ 7.66 345,939 $ 7.31
$10.00 to $19.00 1,649,651 6.0 years 14.83 832,651 13.23
$26.13 to $44.94 154,303 3.9 years 33.16 154,303 33.16
--------- ---------
2,490,034 1,332,893
========= =========
Payment for certain options exercised in 1993 was made by executing
promissory notes of which $620,000 was outstanding at February 1, 2003
from the Company's Chairman. The promissory note is secured by shares of
restricted common stock and is payable in January 2004 and bears interest
at the rate of 6.01% per annum. The note is included in notes
receivable-stock options and awards within stockholders' equity.
On January 18, 2000, the Company granted two stock options not
included in the tables above in connection with the commencement of
employment of the Company's president. One option grant was awarded for
262,500 shares of common stock at an above-market exercise price of $10.00
per share. The options vested one-half each on the first and second
anniversary of the grant date and expire after ten years. The other option
for 100,000 shares was issued at the market price, vested immediately and
expired at the end of its 90-day exercise period. Also awarded at the same
time were 525,000 shares of restricted common stock. One-half of the
restricted shares became nonforfeitable on January 18, 2002; one-quarter
of the restricted shares became nonforfeitable on January 18, 2003 and the
remainder vest on January
F-20
18, 2004. The restricted shares may also become nonforfeitable prior to
January 18, 2004 based upon the attainment of certain market prices for
Cole National Corporation's common stock.
In fiscal 2001 and 2000, the Company and its president entered into
secured promissory notes for $1,669,000, an amount equal to a portion of
the income tax imposed on his award of restricted stock. In fiscal 2001,
the promissory notes were consolidated into one note that matures in
January 2004, and bears interest at 3.0% per annum. The note is secured by
a pledge of the restricted shares. The notes are included in notes
receivable-options and awards within stockholders' equity.
During fiscal 2002, the Company granted 25,000 restricted shares to
its new Chief Financial Officer. These shares become nonforfeitable over
four years with half of the restricted shares vesting July 15, 2005 and
the remainder vesting on July 15, 2006. During fiscal 2002 and 2001, the
Company granted 3,000 and 20,000 restricted shares, respectively to
divisional executives. These shares become nonforfeitable over a three
year period following the date of the award. During 1999, the Company
granted 20,000 restricted shares to two divisional executives. In fiscal
2000, one of these grants for 10,000 shares was canceled. During fiscal
2002, 5,000 shares became nonforfeitable while the remaining 5,000 were
canceled.
At February 1, 2003, 123,750 restricted shares of common stock are
outstanding under an award made to the Company's Chairman in December 1998
under the 1998 Equity and Incentive Performance Plan. Vesting may occur
after the third anniversary of the grant date based upon the attainment of
certain market prices for the Company's common stock or on March 1, 2004.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its stock-based compensation plans. In connection with
the restricted stock awards described above, compensation cost of $1.4
million, $1.3 million and $1.2 million has been charged to expense in
fiscal 2002, fiscal 2001 and fiscal 2000, respectively. Unamortized
restricted stock awards of $1.7 million are expected to be amortized over
future vesting periods.
On March 8, 2001, the Company awarded restricted stock units
representing shares of common stock to 568 employees and as of March 8,
2002, 76,627 shares of common stock were issued. At February 1, 2003,
restricted stock unit awards representing 126,765 common shares were
outstanding. The compensation cost related to the granting of the
restricted stock units is being charged to the three-year period over
which the common shares will vest assuming continuing employment.
Compensation expense of $488,000 and $549,000 was charged to fiscal 2002
and fiscal 2001, respectively.
In fiscal 1999, the Company established its Employee Stock Purchase
Plan under which participants may contribute up to 15% of their annual
compensation (subject to certain limits) to acquire shares of common stock
at 85% of the lower market price on one of two specified dates in each
plan period. The initial plan period included the five months ended
December 31, 1999. Subsequent plan periods are semi-annual. However, there
have been no plan periods since July 2002. Of the 700,000 shares of common
stock authorized for purchase under the plan, 32,206, 96,013 and 180,378
shares were purchased in fiscal 2002, fiscal 2001 and fiscal 2000,
respectively, by approximately 650 participating employees.
The Company's Nonemployee Director Equity and Deferred Compensation
Plan allows nonemployee directors to receive their annual retainer and
other director fees in the form of shares of common stock. The plan also
allows them to defer payment of all or part of that income. Certain
nonemployee directors elected to defer payment and received credits
payable in shares of common stock. Credits earned during fiscal 2002 and
outstanding as of February 1, 2003 represented 6,204 shares and 36,456
shares, respectively. During fiscal 2002, 1,719 shares were issued to a
director in connection with a prior period deferred election.
(8) STOCKHOLDERS' EQUITY
At February 1, 2003 and February 2, 2002, there were 16,154,916, and
15,905,147, respectively, shares of common stock, par value $.001 per
share, outstanding and no preferred stock issued and outstanding. Common
stock held in treasury at February 1, 2003 and February 2, 2002 totaled
577,867 and 578,546 shares, respectively. At February 1, 2003, there were
40,000,000 authorized shares of common stock and 5,000,000 authorized
shares of preferred stock, 400,000 of which are designated as Series A
Junior Participating Preferred stock and 4,600,000 of which are
undesignated preferred stock.
F-21
On November 18, 1999 the Board of Directors authorized the
redemption of the Company's existing Stockholders' Rights Plan, adopted in
1995, and replaced it with a new plan. The new plan permits HAL to acquire
up to 25% of the Company's then-outstanding common shares. As of March 31,
2003 HAL owned 20% of the Company's common stock. As a result of the
redemption of the rights issued under the original plan, shareholders
received payment of $0.01 per share of common stock in fiscal 1999. Under
the new rights plan, one share purchase right was distributed in respect
of each outstanding share of the Company's common stock held of record as
of the close of business on December 6, 1999 and one right will be
distributed in respect of each share of the Company's common stock that
becomes outstanding prior to the earlier of the final expiration date of
the rights or the first date upon which the rights become exercisable.
Each right initially entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, without par value, at a price of $40, subject to
adjustment. The rights are only exercisable if a person or group other
than HAL Holdings N.V. buys or announces a tender or exchange offer for
15% or more of the Company's common stock or if HAL buys or announces a
tender or exchange offer for 25% or more of the Company's common stock. In
the event such a transaction occurs, rights that are beneficially owned by
all other persons would be adjusted and such holders would thereafter have
the right to receive, upon exercise thereof at the then current exercise
price of the right, that number of shares of common stock (or, under
certain circumstances, an economically equivalent security of the Company)
having a market value of two times the exercise price of the right. The
rights will expire on December 6, 2009, unless extended or unless the
rights are redeemed earlier by the Company in whole, but not in part, at a
price of $0.01 per right, or exchanged.
The Board of Directors authorized the repurchase of up to 500,000
shares of common stock in November 1997 and an additional 500,000 shares
in November 1998 from time to time through open market or block
transactions. The Company has purchased a total of 318,000 shares for
$6.6 million. No shares were purchased in fiscal 2002, 2001 and 2000. As
of February 1, 2003, the Company has authority to purchase up to 682,000
additional shares. The share purchases are reflected in treasury stock
within stockholders' equity.
(9) INCOME TAXES
The income tax provision reflected in the accompanying consolidated
statements of operations for fiscal 2002, 2001 and 2000 are detailed below
(dollars in thousands):
2002 2001 2000
------- ------- -------
Current payable -
Federal $ 522 $ 750 $ 1,336
State and local 538 1,335 449
Foreign 633 295 314
------- ------- -------
1,693 2,380 2,099
------- ------- -------
Deferred -
Federal 3,046 2,650 (2,792)
State and local 183 32 (525)
Foreign (27) 43 278
------- ------- -------
3,202 2,725 (3,039)
------- ------- -------
Income tax provision $ 4,895 $ 5,105 $ (940)
======= ======= =======
The exercise of nonqualified stock options during fiscal 2002
resulted in $498,000 of income tax benefits to the Company derived from
the difference between the market price at the date of exercise and the
option price. These tax benefits were recorded in additional paid-in
capital. Tax benefits from option exercises in fiscal 2001 and 2000 were
not significant.
F-22
The income tax provision differs from the federal statutory rate as
follows (dollars in thousands):
2002 2001 2000
------- ------- -------
Income tax provision at statutory rate $ 2,446 $ 951 $(3,111)
Tax effect of-
Goodwill -- 1,451 1,972
State income taxes, net of federal
tax benefit 533 900 (233)
Foreign income 199 59 94
Valuation allowance 484 988 --
Stock Compensation 388 427 128
Nondeductible expenses 296 331 303
Equity earnings -- -- (49)
Adjustment to prior year taxes 522 354 246
Research and development credit -- (265) --
Other, net 27 (91) (290)
------- ------- -------
Income tax provision $ 4,895 $ 5,105 $ (940)
======= ======= =======
The tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax assets and deferred tax
liabilities at February 1, 2003 and February 2, 2002 are as follows
(dollars in thousands):
2002 2001
-------- --------
Deferred tax assets:
Accrued compensation and benefits $ 12,017 $ 4,802
Deferred revenue 22,659 21,510
Other nondeductible accruals 12,095 12,699
Net operating loss carryforwards 8,961 6,801
Intangibles 4,373 6,008
Inventory basis differences 2,047 1,789
Leases 5,207 4,828
Contribution carryforward 1,223 1,820
Other 1,329 1,611
-------- --------
Total deferred tax assets 69,911 61,868
Valuation allowance (4,371) (4,809)
-------- --------
Net deferred tax assets 65,540 57,059
Deferred tax liabilities:
Depreciation (2,302) (2,006)
-------- --------
Net deferred tax assets $ 63,238 $ 55,053
======== ========
At February 1, 2003, the Company had approximately $17.8 million of
federal tax net operating loss carryforwards in the United States that
expire in years 2004 through 2022. Of that amount, $8.4 million resulted
from the Company's acquisition of American Vision Centers ("AVC"). Due to
the change in ownership requirements of the Internal Revenue Code,
utilization of the AVC net operating loss is limited to approximately
$0.3 million per year. Valuation allowances of $3.8 million and $0.6
million at February 1, 2003 have been established against net operating
losses and charitable contribution carryforwards to reduce the
corresponding deferred tax assets to the amount that will likely be
realized. The decrease in the valuation allowance in 2002 is due to the
expiration of certain tax carryforwards net of the current year provision
of $484,000.
No provision of United States federal and state income taxes has
been provided for the undistributed earnings of the Company's foreign
subsidiaries because those earnings are considered to be indefinitely
reinvested. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both United States income
taxes (subject to an adjustment of foreign tax credits) and withholding
taxes payable. Determination of the net amount of unrecognized U. S.
income tax with respect to these earnings is not practicable.
F-23
(10) RETIREMENT PLANS
The Company maintains a noncontributory defined benefit pension plan
that covers employees who have met eligibility service requirements and
are not members of certain collective bargaining units. The pension plan
calls for benefits to be paid to eligible employees at retirement based
primarily upon years of service and their compensation levels near
retirement. In January 2002, the Company approved a plan freeze for all
participants except for participants who are age 50 with 10 years of
benefit service as of March 31, 2002. These participants had their average
pay frozen as of March 31, 2002, and covered compensation frozen as of
December 31, 2001, but their benefit service will continue to grow. The
Company's policy is to fund amounts necessary to keep the pension plan in
full force and effect, in accordance with the Internal Revenue Code and
the Employee Retirement Income Security Act of 1974.
The Company also maintains a postretirement benefit plan in
connection with the acquisition of Pearle in 1996. This plan was closed to
new participants at the time of acquisition. Under this plan, the eligible
former employees are provided life insurance and certain health care
benefits through insurance premiums based on expected benefits to be paid
during the year. Substantial portions of the health care benefits are not
insured and are paid by the Company. For measurement purposes, a 13%
annual rate of increase for health care benefits was assumed for fiscal
2002. The rate was assumed to decrease gradually to 8% over ten years and
level thereafter. A one percentage point change in the assumed health care
cost trend rate would have the following effects:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- ---------------
Effect on total of service and interest cost $ 35,800 $ (29,600)
Effect on the postretirement benefit obligation $ 551,400 $ (455,700)
F-24
The following provides a reconciliation of benefit obligations, plan
assets and the funded status of the pension plan and postretirement
benefits.
Pension Benefits Postretirement Benefits
(SFAS 87) (SFAS 106)
2002 2001 2002 2001
-------- -------- ------- -------
(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 28,825 $ 27,720 $ 2,879 $ 2,650
Service cost 238 1,868 -- --
Interest cost 2,423 2,156 203 174
Actuarial loss 10,203 2,260 1,149 195
Effect of curtailment -- (3,751) -- --
Benefits paid (1,147) (1,056) (159) (184)
Participants contributions -- -- 37 44
Expenses paid (420) (372) -- --
-------- -------- ------- -------
Benefit obligation at end of period $ 40,122 $ 28,825 $ 4,109 $ 2,879
======== ======== ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year $ 28,861 $ 26,076 $ -- $ --
Actual return of plan assets (3,709) (483) -- --
Employer contributions 522 4,696 122 140
Participants contributions -- -- 37 44
Benefits paid (1,147) (1,056) (159) (184)
Expenses paid (420) (372) -- --
-------- -------- ------- -------
Fair value of plan assets at end of year $ 24,107 $ 28,861 $ -- $ --
======== ======== ======= =======
Reconciliation of funded status:
Benefit obligation at end of period $ 40,122 $ 28,825 $ 4,109 $ 2,879
Fair value of plan assets, primarily money market
and equity mutual funds 24,107 28,861 -- --
-------- -------- ------- -------
(Unfunded) funded status (16,015) 36 (4,109) (2,879)
Employer contributions after measurement date -- -- 10 11
Unrecognized prior service cost -- -- 103 112
Net unrecognized loss 20,992 4,554 2,614 1,548
Unamortized transition asset (340) (519) --
Charge to comprehensive loss (20,652) -- -- --
-------- -------- ------- -------
Plan (obligation) asset $(16,015) $ 4,071 $(1,382) $(1,208)
======== ======== ======= =======
F-25
Net pension expense and postretirement expense for fiscal 2002, 2001
and 2000 includes the following components (dollars in thousands):
Pension Benefits Postretirement Benefits
----------------------------------- ------------------------
2002 2001 2000 2002 2001 2000
------- ------- ------- ---- ---- ----
Service cost - benefits earned during the period $ 238 $ 1,868 $ 1,442 $ -- $ -- $ --
Interest cost on the projected benefit obligation 2,423 2,156 1,889 203 174 132
Less:
Return on plan assets -
Actual 3,709 483 (359) -- -- --
Deferred (6,234) (3,203) (2,086) -- -- --
------- ------- ------- ---- ---- ----
(2,525) (2,720) (2,445) -- -- --
Amortization of actuarial loss -- -- -- 83 76 30
Amortization of transition asset (179) (179) (179) -- -- --
Prior service cost -- 25 28 9 9 9
------- ------- ------- ---- ---- ----
Net expense (income) $ (43) $ 1,150 $ 735 $295 $259 $171
======= ======= ======= ==== ==== ====
Acturial assumptions:
Discount rate 6.5% 7.5% 7.8% 6.5% 7.5% 7.8%
Expected return on plan assets 9.0% 9.5% 9.5% -- -- --
Rate of compensation increase N/A 3 to 7% 3 to 7% -- -- --
The change in the discount rate reflects the overall decline in
market interest rates and has led to an increase in the projected benefit
obligation from February 2, 2002. In addition, stock market declines have
reduced the fair value of the pension plan's assets. As a result of these
factors, the pension plan was underfunded by $16.0 million as of February
1, 2003. The Company has written off the prepaid pension expense of $4.6
million and recorded the minimum pension liability by charging $20.6
million to accumulated other comprehensive income (loss) in stockholders'
equity. The amortization of this charge will result in higher pension
costs in future periods.
The Company has a defined contribution plan, including features
under Section 401(k) of the Internal Revenue Code, which provides
retirement benefits to its employees. Eligible employees may contribute up
to 17% of their compensation to the plan. In the United States, the
Company changed the plan beginning with the 2003 fiscal year to provide
for a mandatory company match of 25% of the first 4% of employee
contributions. During prior fiscal years, the plan provided a mandatory
company match of 10% of employee contributions. The Company may also make
a discretionary matching contribution for each plan year equal to such
dollar amount or percentage of employee contributions as determined by the
Company's Board of Directors. In Puerto Rico, the Company provides for a
mandatory match of 50% of the first 6% of employee contributions. The plan
provides for the investment of employer and employee contributions in the
Company's common stock and other investment alternatives. The Company's
matching contributions, net of forfeitures, of $1.0 million, $0.6 million
and $0.6 million were recorded as expense for fiscal years 2002, 2001 and
2000, respectively.
The Company has a Supplemental Executive Retirement Plan (SERP),
which provides for the payment of retirement benefits for certain
management and highly compensated employees supplementing amounts payable
under the Company's non-contributory defined contribution plan. The
benefits are unfunded and each participant's SERP account is credited with
a percentage of their base salary for the year. Expenses for this plan for
fiscal 2002, 2001 and 2000 were $0.4 million, $0.6 million and $0.6
million, respectively. The plan liability recorded in long-term
liabilities was $2.3 million and $2.1 million at February 1, 2003 and
February 2, 2002, respectively.
The Company has a deferred compensation plan for executives and
other senior management which allows deferral of income without regard to
limitations imposed by the Company's 401(k) plan. The Company generally
makes a contribution of its common stock equal to 10% of the participant's
deferrals, however, in fiscal 2002 the Company made a cash contribution.
The deferred compensation together with the Company's contributions is
funded through various marketable securities based on the election of the
participant. As of fiscal year end 2002 and 2001, the Company had accrued
$2.1 million and $1.3 million, respectively for its obligations under
these plans in other long-term liabilities. The Company's expense, which
includes the participants' deferral and Company contributions was $0.8
million, $0.7 million and $0.5 million for fiscal 2002, 2001 and 2000,
respectively. The investments made on behalf of the participants are
included in other noncurrent assets and were $2.1 million, and $1.3
million for fiscal 2002 and 2001, respectively.
F-26
The Company provides under certain conditions postemployment
benefits for continuation of health care benefits and life insurance
coverage to former employees after employment but before retirement.
Pursuant to SFAS 112, the accrued cost for postemployment benefits was
$2.6 million and $1.7 million at February 1, 2003 and February 2, 2002,
respectively. The net postemployment benefits expense (income) was $0.9
million, $(0.2) million and $0.1 million in 2002, 2001 and 2000,
respectively.
The Company has certain individual deferred compensation agreements,
which provide guaranteed retirement benefits per year for life. The
benefits are accrued over the estimated period in which the employee is to
render service and becomes eligible for the benefit. The benefits are
unfunded. Expenses for these agreements for fiscal 2002, 2001 and 2000
were $0.5 million, $0.4 million and $0.3 million, respectively. At
February 1, 2003 and February 2, 2002, the liability, which was recorded
in other long-term liabilities, was $3.4 million and $2.8 million,
respectively.
(11) SEGMENT INFORMATION
The Company has two reportable segments: Cole Vision and Things
Remembered. Most of Cole Vision's revenue is provided primarily by sales
of prescription eyewear, accessories and services through its Cole
Licensed Brands and Pearle retail locations. Cole Vision's revenue is also
provided by sales of merchandise to franchisees and other outside
customers, by royalties based on sales and initial franchise fees from
franchisees and by fees from managed vision care programs. Cole Vision is
subject to various state regulations related to the dispensing of
prescription eyewear, its relationship with the doctors of optometry and
other matters. The Cole Licensed Brands and Pearle Vision business units
have been aggregated in accordance with SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" (SFAS 131), based on
the similarity of their economic characteristics, nature of products,
services and production processes, types of customers, distribution
methods and regulatory environment. Things Remembered's revenue is
provided by sales of engraveable gift merchandise, personalization and
other services primarily through retail stores and kiosks. The accounting
policies of the segments are the same as those described in the Summary of
Significant Accounting Policies (see Note 1).
The reportable segments are strategic business units that offer
different products and services. They are managed separately as each
business requires different technology and marketing strategies.
Performance is evaluated based on operating income. Reported segment
revenue, depreciation and amortization, and income or loss, with
reconciliations to consolidated amounts are as follows (dollars in
thousands):
2002 2001 2000
----------- ----------- -----------
Net revenue:
Cole Vision $ 877,550 $ 836,869 $ 802,518
Things Remembered 270,569 272,254 276,116
----------- ----------- -----------
Consolidated net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634
=========== =========== ===========
Depreciation and amortization:
Cole Vision $ 22,554 $ 25,508 $ 26,827
Things Remembered 10,297 10,520 9,857
----------- ----------- -----------
Total segment depreciation and amortization 32,851 36,028 36,684
Corporate 3,581 4,045 4,018
----------- ----------- -----------
Consolidated depreciation and amortization $ 36,432 $ 40,073 $ 40,702
=========== =========== ===========
Income:
Cole Vision $ 30,596 $ 15,111 $ 7,974
Things Remembered 15,060 24,149 22,507
----------- ----------- -----------
Total segment operating income 45,656 39,260 30,481
Unallocated amounts, corporate expenses (18,659) (11,017) (14,081)
----------- ----------- -----------
Consolidated operating income 26,997 28,243 16,400
Interest and other (income) expense, net 20,009 25,525 25,289
----------- ----------- -----------
Income (loss) before income taxes $ 6,988 $ 2,718 $ (8,889)
=========== =========== ===========
F-27
Reported segment assets, expenditures for capital additions and
systems development costs and acquisitions of businesses, with
reconciliations to consolidated amounts, are as follows (dollars in
thousands):
2002 2001 2000
----------- ----------- -----------
Segment assets:
Cole Vision $ 420,911 $ 408,909 $ 433,868
Things Remembered 119,105 118,069 119,101
----------- ----------- -----------
Total segment assets 540,016 526,978 552,969
Corporate cash and temporary cash investments 28,435 50,333 26,306
Other corporate assets 75,156 58,283 54,481
----------- ----------- -----------
Consolidated assets $ 643,607 $ 635,594 $ 633,756
=========== =========== ===========
Expenditures for capital additions
and systems development costs:
Cole Vision $ 31,502 $ 26,445 $ 18,817
Things Remembered 10,342 12,582 11,192
----------- ----------- -----------
Total segment expenditures 41,844 39,027 30,009
Corporate 3,142 1,682 7,368
----------- ----------- -----------
Consolidated expenditures $ 44,986 $ 40,709 $ 37,377
=========== =========== ===========
Contingent payments for acquisition of business
Cole Vision $ 1,645 $ 847 $ --
=========== =========== ===========
Revenue from external customers of each group of similar products
and services is as follows (dollars in thousands):
2002 2001 2000
----------- ----------- -----------
Sales of optical products and services $ 783,765 $ 751,680 $ 729,870
Royalties and initial franchise fees 19,450 18,744 19,655
Fees from managed vision care programs 74,335 66,445 52,993
----------- ----------- -----------
Total Cole Vision net revenue 877,550 836,869 802,518
Retail sales of gift merchandise and services 270,569 272,254 276,116
----------- ----------- -----------
Consolidated net revenue $ 1,148,119 $ 1,109,123 $ 1,078,634
=========== =========== ===========
The Company operates primarily in the United States. Net revenue
attributable to Cole Vision's Canadian operations was $28.6 million, $30.0
million and $31.1 million in fiscal 2002, 2001 and 2000, respectively.
Long-lived assets located in Canada at February 1, 2003 and February 2,
2002 totaled $2.7 million and $3.0 million, respectively. The Company also
has an investment in and notes receivable from Pearle Europe (see Note 2).
(12) COMMITMENTS AND CONTINGENCIES
The Company leases a substantial portion of its computers, equipment
and facilities including laboratories, office and warehouse space, and
retail store locations. These leases generally have initial terms of up to
10 years and often contain renewal or purchase options. Operating and
capital lease obligations are based upon contractual minimum rates and, in
most leases covering retail store locations, additional rents are payable
based on store sales. In addition, Cole Vision operates departments in
various host stores paying occupancy costs solely as a percentage of sales
under agreements containing short-term cancellation clauses. Generally,
the Company is required to pay taxes and normal expenses of operating the
premises for laboratory, office, warehouse and retail store leases; the
host stores pay these expenses for departments operated on a
percentage-of-sales basis. The following amounts represent rental expense
for fiscal 2002, 2001 and 2000 (dollars in thousands):
F-28
2002 2001 2000
----------- ----------- -----------
Occupancy costs based on sales $ 59,143 $ 57,379 $ 54,748
All other rental expense 91,446 89,616 86,532
Sublease rental income (18,422) (19,719) (21,354)
----------- ----------- -----------
Total rental expense, net $ 132,167 $ 127,276 $ 119,926
=========== =========== ===========
At February 1, 2003, future minimum lease payments and sublease
income receipts under noncancelable leases and the present value of future
minimum lease payments for capital leases are as follows (dollars in
thousands):
Operating Leases
Capital ------------------------
Leases Payments Receipts
------- -------- --------
2003 $ 328 $ 82,904 $ (10,765)
2004 310 73,503 (8,759)
2005 266 59,779 (7,066)
2006 223 48,687 (5,625)
2007 83 39,530 (4,168)
2008 and thereafter - 114,676 (6,840)
----- --------- ---------
Total future minimum lease payments 1,210 $ 419,079 $ (43,223)
========= =========
Amount representing interest (232)
-----
Present value of future minimum lease payments $ 978
=====
In fiscal 2001, under a sale and leaseback agreement, the Company
received approximately $5.7 million, net of related costs, from the sale
of its Pearle Vision lab and distribution facility in Dallas, Texas and
leased it back under a fifteen-year operating lease agreement with four
five-year renewal options. The transaction produced a gain of
approximately $0.6 million that was deferred and is being amortized over
the fifteen year lease period.
In fiscal 2000, the Company entered into a sale and leaseback
agreement and received approximately $13.5 million, net of related costs,
from the sale of its office facility in Twinsburg, Ohio and leased it back
under an eighteen-year operating lease agreement with two ten year renewal
options. The transaction was completed in June 2001 and produced a gain of
approximately $4.8 million that was deferred and is being amortized over
the eighteen year initial lease period. The transaction was accounted for
under the finance method of accounting. At the time of the transaction,
the Company had a continuing involvement. In July 2001, the continuing
involvement ended and the transaction was reflected as a sale and
leaseback. The Company received approximately $13.5 million in fiscal
2000, net of related costs.
The Company also leases an office and general operating facility in
Highland Heights, Ohio under a four-year operating lease with annual
renewal options up to six years. The lease provides for regular payments
based on LIBOR plus 1.50%. In accordance with this agreement, the Company
must maintain compliance with a minimum net worth covenant. At the end of
this lease in 2007, the Company has the option to purchase the property or
arrange for the sale of the property. If the Company does not exercise its
purchase option at the end of the lease, it is contingently liable for up
to $1.7 million. The Company does not believe it will have any payment
obligation at the end of the lease because either the Company will
exercise the purchase option, or the net proceeds from the sale of the
property will exceed the amount payable to the lessor. Management is still
assessing the impact of FIN 46, however, it is reasonably possible this
lease will require consolidation under this Interpretation. The
consolidation will require an additional $2.4 million in assets and
liabilities on the consolidated balance sheet.
The Company guarantees future minimum lease payments for certain
store locations leased directly by franchisees. These guarantees totaled
approximately $13.8 and $13.7 million as of February 1, 2003 and February
2, 2002. Performance under a guarantee by the Company is triggered by
default of a franchisee in their lease commitment. Generally, these
guarantees also extend to payments of taxes and other normal expenses
payable under these leases, the amounts of which are not readily
quantifiable. The term of the guarantees range from one to ten years of
which many are limited to periods that are less than the full term of the
leases involved. Under the terms of the guarantees, the Company has the
right to assume the primary obligation and begin operating as a
company-owned store. In addition, as part of many franchise agreements,
the Company may recover any amounts paid under a guarantee from the
defaulting franchisee. The Company has recorded a liability of $5,700,
which represents the fair value of the Company's obligations from
guarantees entered into or modified after December 31, 2002 using an
expected present value calculation.
F-29
As discussed in Note 2, agreements between HAL, the Company and
members of Pearle Europe management require HAL and the Company to
periodically offer to purchase Pearle Europe shares held by the members of
Pearle Europe Management. These offers are required to be made (1) not
later than September 3, 2003, (2) in May 2005, and (3) biannually in May
commencing in 2007. The obligations to fund the purchase of any shares as
to which the offer to purchase is accepted are pro rata to HAL and to the
Company based on their respective ownership interests on the date of the
offer. HAL and the Company have not yet agreed on the price to offer this
year or on the process to agree to the price or on the source of funding
for any purchases. Funds could be derived from payments by Pearle Europe,
from the separate resources of HAL and the Company, or from financings. In
the event that all of Pearle Europe's managers who are entitled to receive
an offer to purchase their shares were to accept that offer, the resulting
obligation to the Company could be material. The Company believes that it
will have sufficient liquidity to meet the obligation, if any, that may
result from their commitment in fiscal 2003.
(13) RESTRUCTURING CHARGES
During fiscal 2002, the Company recorded a restructuring liability
against operating expense of $1.1 million. Of this amount, $0.6 was paid
in fiscal 2002 $0.5 million was accrued for ongoing benefits, salary
continuation and placement costs. Charges to the liability are expected to
total $0.4 million through the end of the first quarter of fiscal 2003,
with the remaining costs continuing through the fourth quarter of fiscal
2003. The restructuring charge was related to a reduction in workforce of
60 individuals in the corporate office and field management. The Company
expects the functions performed by these individuals to be absorbed by
others. The Company also recorded a charge of $0.3 million in fiscal 2002
related to the closing of the corporate office and relocating it to the
Company's facility in Twinsburg, Ohio, which is expected to be completed
in fiscal 2003.
During fiscal 2000, the Company recorded a restructuring charge
against operating expense of $1.8 million. Of this amount, $1.6 million
was paid and $0.2 million was accrued to accrued liabilities for salary
continuation. Charges to the liability were $0.2 million in fiscal 2001.
The restructuring charge was related to a reduction in workforce of 44
individuals in the corporate office and field management. The function
performed by these individuals was absorbed by others.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
As discussed in Note 17, the 2001 Consolidated Financial Statements
have been restated to appropriately account for certain transactions.
Certain of these items also affect the Company's previously filed 2001 and
2002 interim financial information. The following is a summary of
quarterly financial data for the 52 weeks ended February 1, 2003 and
February 2, 2002. Quarterly financial data for the four quarters of 2001
and the first two quarters of 2002 have been derived from restated
financial statements.
Fiscal 2002
(In thousands, except per share amounts)
1st Quarter 2nd Quarter 3rd 4th
As reported Restated As reported Restated Quarter Quarter
----------- -------- ----------- -------- ------- -------
Net revenue $290,109 $285,441 $288,857 $292,390 $275,501 $294,787
Gross margin 194,461 193,919 194,337 197,163 183,553 194,780
Income (loss) before income taxes 4,578 2,889 2,769 5,184 (6,421) 5,336
Income (loss) before extraordinary loss 3,543 866 2,691 1,556 (1,927) 1,598
Net income (loss) $ 3,543 $ 866 $ (4,943) $ (5,686) $ (1,927) $ 1,598
======== ======== ======== ======== ======== ========
Basic earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.22 $ 0.05 $ 0.16 $ 0.10 $ (0.12) $ 0.10
Extraordinary loss (0.47) (0.45)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 0.22 $ 0.05 $ (0.31) $ (0.35) $ (0.12) $ 0.10
======== ======== ======== ======== ======== ========
Diluted earnings (loss) per common share:
Income (loss) before extraordinary loss $ 0.22 $ 0.05 $ 0.16 $ 0.10 $ (0.12) $ 0.10
Extraordinary loss (0.46) (0.44)
-------- -------- -------- -------- -------- --------
Net income (loss) $ 0.22 $ 0.05 $ (0.30) $ (0.34) $ (0.12) $ 0.10
======== ======== ======== ======== ======== ========
In the fourth quarter of 2002 the Company incurred charges of $3.4
million for outside audit fees related to the reaudit of its restated financial
statements from the previous two years. Also, during the fourth quarter of 2002
the Company recorded a restructuring charge of $1.1 million.
F-30
Fiscal 2001
(In thousands, except per share amounts)
1st Quarter 2nd Quarter
As reported Restated As reported Restated
----------- ----------- ----------- -----------
Net revenue $ 270,291 $ 271,774 $ 273,348 $ 275,334
Gross margin 182,569 186,597 182,041 185,305
Income (loss) before income taxes 1,485 1,109 3,008 3,437
Income (loss) before extraordinary loss 645 (970) 1,459 (3,014)
Net income (loss) $ 645 $ (970) $ 1,459 $ (3,014)
=========== =========== =========== ===========
Basic earnings (loss) per common share:
Income before extraordinary loss $ 0.04 $ (0.06) $ 0.09 $ (0.19)
Extraordinary loss -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ 0.04 $ (0.06) $ 0.09 $ (0.19)
=========== =========== =========== ===========
Diluted earnings (loss) per common share:
Income before extraordinary loss $ 0.04 $ (0.06) $ 0.09 $ (0.19)
Extraordinary loss -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ 0.04 $ (0.06) $ 0.09 $ (0.19)
=========== =========== =========== ===========
3rd Quarter 4th Quarter
As reported Restated As reported Restated
----------- ----------- ----------- -----------
Net revenue $ 261,488 $ 263,349 $ 296,206 $ 298,666
Gross margin 173,976 175,955 197,995 196,874
Income (loss) before income taxes (5,017) (7,023) 11,540 5,195
Income (loss) before extraordinary loss (2,256) 6,155 5,347 (4,558)
Net income (loss) $ (2,256) $ 6,155 $ 5,347 $ (4,558)
=========== =========== =========== ===========
Basic earnings (loss) per common share:
Income (loss) before extraordinary loss $ (0.14) $ 0.38 $ 0.34 $ (0.28)
Extraordinary loss -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (0.14) $ 0.38 $ 0.34 $ (0.28)
=========== =========== =========== ===========
Diluted earnings (loss) per common share:
Income (loss) before extraordinary loss $ (0.14) $ 0.38 $ 0.33 $ (0.28)
Extraordinary loss -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ (0.14) $ 0.38 $ 0.33 $ (0.28)
=========== =========== =========== ===========
In the fourth quarter of 2001 the Company recorded asset impairment
charges of $3.5 million.
F-31
(15) LEGAL PROCEEDINGS
The Company and its optical subsidiaries have been sued by the State
of California, which alleges claims for various statutory violations
related to the operation of 24 Pearle Vision Centers in California. The
claims include untrue or misleading advertising, illegal dilation fees,
unlawful advertising of eye exams, maintaining an optometrist on or near
the premises of a registered dispensing optician, unlawful advertising of
an optometrist, unlicensed practice of optometry, and illegal
relationships between dispensing opticians, optical retailers and
optometrists. The action seeks unspecified damages, restitution and
injunctive relief. Although the State of California obtained a preliminary
injunction to enjoin certain advertising practices and from charging
dilation fees in July 2002, the terms of the injunction have not had and
are not expected to have any material effect on the Company's operations.
In addition, both the State and the Company have appealed the preliminary
injunction. The injunction is not expected to have a material effect on
the Company's operations. Although the Company believes it is in
compliance with California law and intends to continue to defend the
issues raised in the case vigorously, it may be required to further modify
its activities or might be required to pay damages and or restitution in
currently undeterminable amount if it is not successful, the cost of
which, as well as continuing defense costs, might have a material adverse
effect on the Company's operating results and cash flow in one or more
periods.
Things Remembered, Inc. is in the process of settling a class action
complaint in California alleging that the putative class (alleged to
include 200 members) were improperly denied overtime compensation in
violation of a California law. The action sought unspecified damages,
interest, restitution, as well as declaratory and injunctive relief and
attorneys' fees. On February 3, 2003, Things Remembered and the plaintiffs
reached an agreement to resolve the lawsuit for $562,500. The settlement
is subject to court approval. A liability of $562,500 was recorded in the
fourth quarter of 2002.
Cole National Corporation is defending a purported class action
lawsuit alleging claims for various violations of federal securities laws
related to the Company's publicly reported revenues and earnings. The
action, which proposes a class period of March 23, 1999 through November
26, 2002 and names the Company and certain present and former officers and
directors as defendants, seeks unspecified compensatory damages, punitive
damages "where appropriate", costs, expenses and attorneys fee. Following
the Company's announcement in November 2002 of the restatement of the
Company's financial statements (see Note 17 of the Notes to Consolidated
Financial Statements), the Securities and Exchange Commission began an
inquiry into the Company's previous accounting. The course of this or
further litigation or investigations arising out of the restatement of the
Company's financial statements cannot be predicted. In addition, under
certain circumstances the Company would be obliged to indemnify the
individual current and former directors and officers who are named as
defendants in litigation or who are or become involved in an
investigation. The Company believes it has insurance that should be
available with respect to litigation and any indemnification obligations.
However, if the Company is unsuccessful in defending against any such
litigation, and if its insurance coverage is not available or is
insufficient to cover its expenses, indemnity obligations and liability,
if any, the litigation and/or investigation may have a material adverse
effect on the Company's financial condition, cash flow and results of
operations.
Cole National Group, Inc. has been named as a defendant along with
numerous other retailers, in patent infringement litigation challenging
the defendants' use of bar code technology. The Company believes it has
available defenses and does not expect any liability. However, if Cole
National Group, Inc. were to be found liable for an infringement, it might
have a material adverse effect on our operating results and cash flow in
the period incurred.
In the ordinary course of business, the Company is involved in
various other legal proceedings. The Company is of the opinion that the
ultimate resolution of these matters will not have a material adverse
effect on the results of operations, liquidity or financial position of
the Company.
(16) SUBSEQUENT EVENTS
As discussed in Note 6, the Company received a waiver dated May 9,
2003 of the maximum leverage coverage test for the fiscal year end 2002
and the first quarter of fiscal 2003. During the waiver period the maximum
leverage test was adjusted to accommodate the effect of the restatement on
the Company's financial statements. This waiver will expire on the earlier
of May 17, 2003 if the Lenders do not receive the Form 10-K and 10-Q's for
the first through third fiscal quarters of 2002; on May 23, 2003 if
certain additional financial information is not received by the Lenders;
or June 30, 2003. The Company is in compliance with the covenants in the
credit agreement and
F-32
expects to meet the waiver conditions. The Company expects to complete a
permanent amendment to the credit agreement on or before June 30, 2003.
However, there is no assurance that the Company will be successful in its
effort to complete such an amendment. The Company believes that, even if
it is unsuccessful in its effort to complete such an amendment, it will
have sufficient liquidity from internal and other external sources.
(17) RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the second quarter of fiscal 2002, the Company determined
it needed to restate its previously issued financial statements for
numerous items, each of which was an "error" within the meaning of
Accounting Principles Board Opinion No. 20, "Accounting Changes". In
addition to the restatement of its annual financial statements, the
Company has also restated its previously issued quarterly financial
statements for fiscal years 2002 and 2001. The principal reasons and
significant effects of the restatement adjustments on the accompanying
financials statements from amounts previously reported are summarized as
follows:
As of and for As of and for As of
the Fiscal Year Ended the Fiscal Year Ended January 29,
February 2, 2002 February 3, 2001 2000
---------------------------- ----------------------------- -----------
Increase Increase
Accumulated (decease) Accumulated (decease) Accumulated
Dollars in thousands Deficit in net income Deficit in net income Deficit
----------- ------------- ----------- ------------- -----------
As reported $ (92,560) $ 5,195 $ (97,755) $ 2,229 $ (99,984)
Significant restatement items:
Sale of extended warranty contracts (40,483) (1,580) (38,903) (104) (38,799)
Other revenue recognition adjustments (12,416) 3,229 (15,645) (2,531) (13,114)
Valuation of long-lived assets (5,601) (2,455) (3,146) (4,352) 1,206
Inventories and cost of goods sold (1,845) (451) (1,394) (154) (1,240)
Accruals for operating expenses (9,087) (5,116) (3,971) (7,265) 3,294
1998 settlement from former owner of Pearle (5,806) 175 (5,981) (218) (5,763)
Investment in Pearle Europe (2,807) (2,100) (707) (778) 71
Deferred income taxes and income tax liabilities 30,056 716 29,340 5,363 23,977
---------- -------- ---------- -------- ---------
Total restatement items (47,989) (7,582) (40,407) (10,039) (30,368)
As restated $ (140,549) $ (2,387) $ (138,162) $ (7,810) $(130,352)
========== ======== ========== ======== =========
Recognition of Revenues Earned on the Sale of Extended Warranty Contracts.
Customers purchasing eyeglasses from the Company's retail stores are
offered the option of buying a warranty for up to two years, paying in
full for the warranty at the time of sale. The Company historically
recognized the revenue at the time of the sale. The Company has made
restatement adjustments to record the warranty payment received at the
time of the sale as deferred revenue and recognizes the revenue on a
straight-line basis over the warranty period.
Other Revenue Recognition Adjustments. Previously, the Company recognized
certain sales transactions as revenue when the customer placed the order
and a deposit was taken. Restatement adjustments were made to defer such
revenue until (i) customer receipt or when the related goods were shipped
direct to the customer and (ii) all significant obligations of the Company
were satisfied. In addition, revenue adjustments have been made to
establish adequate allowances for returns and remakes. Historically, the
Company had recorded returns and remakes based on actual product returned
during the period.
Valuation of Long-lived Assets. Historically, the Company did not consider
certain mature stores with negative cash flows in its asset impairment
tests. In addition, in testing for SFAS 121 impairment, the Company did
not allocate goodwill to the respective stores. As part of the
restatement, the Company applied a methodology which includes all mature
stores in its asset impairment tests and includes an allocation of
goodwill for years prior to fiscal 2002. The restated financial statements
also reflect the recognition of losses on the disposal of fixed assets in
the appropriate periods. Additional adjustments were made to record
depreciation expense for certain depreciable fixed assets which were not
previously being depreciated. Also included is an adjustment to record
capital lease assets and the corresponding lease obligation for leases
that had previously been accounted for as operating leases.
F-33
Inventories and Cost of Goods Sold. The Company's restated financial
statements reflect adjustments relating to inventories and cost of goods
sold primarily to i) recognize obsolescence reserves in appropriate
periods and amounts, correct calculation errors and recognize certain
inventory costs in appropriate periods and ii) reflect certain vendor
allowances previously recorded in operations but not yet earned as a
reduction in the inventory balances.
Accruals for Operating Expenses. Historically, the Company did not always
record changes in estimates in the period of change, and established
accruals for certain expenses that had not yet been incurred. The restated
financial statements reflect adjustments to recognize certain operating
expenses in the period in which they were incurred and to record the
corresponding liability for those items not paid at the end of the period.
Such operating expenses primarily consist of advertising, self-insurance,
IBNR claims, retirement and post employment benefits, vacation, allowance
for uncollectible accounts and miscellaneous operating expenses.
1998 Settlement from Former Owner of Pearle. The Company's 1998 financial
statements included the recognition of $6.0 million of income from a $13.0
million cash settlement with the former owner of Pearle. The terms of the
related agreement included the settlement of certain claims and
indemnifications associated with the purchase agreement. In addition, as
part of the settlement, the Company agreed to assume certain contingent
liabilities from the former owner. The restated financial statements
reflect the treatment of this $6.0 million from the settlement as an
adjustment to the purchase price of Pearle, thereby reducing the goodwill
that was established in connection with the Pearle acquisition and
associated amortization expense.
Investment in Pearle Europe. The Company owns a 21% equity interest in
Pearle Europe, B.V. ("Pearle Europe") which operates a retail optical
business in Europe. HAL Holding N.V. ("HAL"), a Dutch investment Company,
owns 68% of Pearle Europe and individual members of Pearle Europe's
management own the remaining 11%. The Company has owned its interest in
Pearle Europe and predecessor companies since 1996. The Company has
historically accounted for its investment in Pearle Europe under the
equity method, pursuant to which the Company's net income has included its
equity share in Pearle Europe's earnings. The Company previously
classified its equity in the net income of Pearle Europe within interest
and other income, net in its consolidated statement of operations. Under
APB Opinion 18 "The Equity Method of Accounting for Investments in Common
Stock," use of the equity method is appropriate when an investor has the
ability to exercise significant influence over the operating and financial
policies of the investee. The Company has one of five seats on Pearle
Europe's Supervisory Board, and the Pearle Europe management shareholders
control one seat. HAL controls two seats, and appoints the President of
the Supervisory Board, with the consent of the Company. Between 1996 and
June 2000, the contractual arrangements between the parties gave the
Company the ability to exercise significant influence over the operating
and financial policies of Pearle Europe. In Pearle Europe's early years,
the Company provided management advice and support. The contractual
relationships between the parties changed significantly in June 2000, so
that the Company no longer had the ability to exercise significant
influence over the operating and financial policies of Pearle Europe. The
restated financial statements reflect a change in the Company's method of
accounting for its investment in Pearle Europe from the equity method of
accounting to the cost method of accounting beginning with the third
quarter of 2000. Under the cost method, the Company has recorded its
investment in the Pearle Europe shares at the carrying value as of the end
of second quarter fiscal 2000. Starting at the same time, the Company
included foreign currency gains and losses related to the Pearle Europe
notes in net income. The Company will recognize as income any dividends
received from Pearle Europe that are distributed from Pearle Europe's net
accumulated earnings.
Deferred Income Taxes and Income Tax Liabilities. The Company reviewed all
of its temporary differences and loss and tax credit carryforwards, and
made adjustments to its deferred tax assets and liabilities. Adjustments
were made to provide for state and local income tax deferred tax assets
and liabilities, which were previously not recorded. The Company evaluated
the adequacy of the tax liabilities established for the current and open
tax years and adjusted the amounts maintained in the tax liability
accounts. Also included is the tax effect of the restatement items.
Summary. The consolidated financial statements for the years ended
February 2, 2002 and February 3, 2001 contained herein have been restated
to reflect all of the above discussed adjustments. In addition, the
Company has restated accumulated deficit as of January 29, 2000 by $30.4
million to reflect the cumulative impact of the restatement adjustments
on prior years. The following is a summary of the effects of the
restatement.
F-34
AS OF FEBRUARY 2, 2002
As Cumulative
Previously Effect of Prior Fiscal 2001
Reported Years Changes(1) Adjustments As Restated
-------- ---------------- ----------- -----------
Assets (Dollars in thousands)
Current assets:
Cash and cash equivalents $ 63,656 $ 493 $ (731) $ 63,418
Accounts receivable, less allowances of
$3,228 in 2001 39,609 718 1,038 41,365
Current portion of notes receivable 2,926 (825) 723 2,824
Inventories 111,098 6,987 1,118 119,203
Refundable income taxes 502 (1,237) 735 --
Prepaid expenses and other 22,757 10,499 (4,042) 29,214
Deferred income taxes 477 24,949 1,826 27,252
--------- -------- -------- ---------
Total current assets 241,025 41,584 667 283,276
Property and equipment, at cost 297,649 13,461 (5,691) 305,419
Less - accumulated depreciation and amortization (174,300) (7,481) (3,204) (184,985)
--------- -------- -------- ---------
Total property and equipment, net 123,349 5,980 (8,895) 120,434
Notes receivable, excluding current portion, less allowances
of $5,209 in 2001 19,056 246 891 20,193
Deferred income taxes 23,119 5,006 (324) 27,801
Other assets 51,101 391 709 52,201
Other intangibles, net 42,992 2,943 211 46,146
Goodwill, net 103,552 (17,273) (736) 85,543
--------- -------- -------- ---------
Total assets $ 604,194 $ 38,877 $ (7,477) $ 635,594
========= ======== ======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 85 $ 13,585 $(13,411) $ 259
Accounts payable 57,647 8,420 (943) 65,124
Accrued interest 6,539 73 136 6,748
Accrued liabilities(2) 78,254 15,065 (742) 92,577
Accrued income taxes 3,501 3,184 1,919 8,604
Deferred revenue(2) 1,468 29,740 4,193 35,401
--------- -------- -------- ---------
Total current liabilities 147,494 70,067 (8,848) 208,713
Long-term debt, net of discount and current portion 284,318 249 7 284,574
Other long-term liabilities 16,775 (868) 7,035 22,942
Deferred revenue, long-term -- 10,437 612 11,049
Stockholders' equity:
Preferred stock -- -- -- --
Common stock 16 -- -- 16
Paid-in capital 268,729 (164) 144 268,709
Accumulated other comprehensive loss (5,840) (485) 1,430 (4,895)
Accumulated deficit (92,560) (40,407) (7,582) (140,549)
Treasury stock at cost (9,769) -- (233) (10,002)
Unamortized restricted stock awards (2,634) 48 (42) (2,628)
Notes receivable - stock option and awards (2,335) -- -- (2,335)
--------- -------- -------- ---------
Total stockholders' equity 155,607 (41,008) (6,283) 108,316
--------- -------- -------- ---------
Total liabilities and stockholders' equity $ 604,194 $ 38,877 $ (7,477) $ 635,594
========= ======== ======== =========
(1) The cumulative amount reflects the effect of fiscal year 2000 and prior on
the previously reported fiscal 2001 balance sheet.
(2) Deferred revenues as of February 2, 2002 has been reclassified from
accrued liabilities to deferred revenue.
F-35
FOR THE YEAR ENDED FEBRUARY 2, 2002
As Previously
Reported Adjustments As Restated
-------- ----------- -----------
(In thousands, except per share amounts)
Net revenue $ 1,101,333 $ 7,790 1,109,123
Cost and expenses:
Cost of goods sold 364,752 (360) 364,392
Operating expenses 696,168 15,310 711,478
Goodwill and tradename amortization 5,769 (759) 5,010
----------- -------- -----------
Total costs and expenses 1,066,689 14,191 1,080,880
----------- -------- -----------
Operating income 34,644 (6,401) 28,243
Interest and other (income) expense:
Interest expense 28,146 1,271 29,417
Interest and other (income) (4,518) 626 (3,892)
----------- -------- -----------
Total interest and other (income) expense, net 23,628 1,897 25,525
----------- -------- -----------
Income (loss) before income taxes 11,016 (8,298) 2,718
Income tax provision (benefit) 5,821 (716) 5,105
----------- -------- -----------
Net income (loss) $ 5,195 $ (7,582) $ (2,387)
=========== ======== ===========
Earnings (loss) per common share:
Basic $ 0.33 $ (0.48) $ (0.15)
Diluted $ 0.32 $ (0.47) $ (0.15)
Weighted average shares:
Basic 15,822 197 16,019
Diluted 16,073 (54) 16,019
F-36
FOR THE YEAR ENDED FEBRUARY 3, 2001
As Previously
Reported Adjustments As Restated
-------- ----------- -----------
(In thousands, except per share amounts)
Net revenue $ 1,077,147 $ 1,487 $ 1,078,634
Cost and expenses:
Cost of goods sold 358,030 1,578 359,608
Operating expenses 680,411 17,047 697,458
Goodwill and tradename amortization 5,840 (672) 5,168
----------- -------- -----------
Total costs and expenses 1,044,281 17,953 1,062,234
----------- -------- -----------
Operating income 32,866 (16,466) 16,400
Interest and other (income) expense:
Interest expense 29,078 43 29,121
Interest and other (income) (2,864) (968) (3,832)
----------- -------- -----------
Total interest and other (income) expense, net 26,214 (925) 25,289
----------- -------- -----------
Income (loss) before income taxes 6,652 (15,541) (8,889)
Income tax provision (benefit) 4,423 (5,363) (940)
----------- -------- -----------
Income (loss) after taxes 2,229 (10,178) (7,949)
Equity in net income of Pearle Europe -- 139 139
----------- -------- -----------
Net income (loss) $ 2,229 $(10,039) $ (7,810)
=========== ======== ===========
Earnings (loss) per common share:
Basic $ 0.14 $ (0.64) (0.50)
Diluted $ 0.14 $ (0.64) (0.50)
Weighted average shares:
Basic 15,585 (21) 15,564
Diluted 15,620 (56) 15,564
F-37
SCHEDULE I
COLE NATIONAL CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
COLE NATIONAL CORPORATION
CONDENSED BALANCE SHEETS
FEBRUARY 1, 2003 AND FEBRUARY 2, 2002
(Dollars in millions)
2002 2001
------- -------
(As restated)
Assets:
Receivable from subsidiaries $ 78.5 $ 87.6
Investment in subsidiaries (5.3) 14.9
Notes and interest receivable 24.1 15.6
Property and equipment, net 1.4 2.1
Deferred income tax and other 14.6 14.6
--------- ---------
Total assets $ 113.3 $ 134.8
========= =========
Liabilities and stockholders' equity:
Accounts payable and accrued expenses $ 5.0 $ 11.4
Long-term debt 10.0 10.0
Other long-term liabilities 5.0 5.1
Stockholders' equity 93.3 108.3
--------- ---------
Total liabilities and stockholders' equity $ 113.3 $ 134.8
========= =========
F-38
SCHEDULE I
(CONTINUED)
COLE NATIONAL CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS
52 WEEKS ENDED FEBRUARY 1, 2003,
52 WEEKS ENDED FEBRUARY 2, 2002 AND
53 WEEKS ENDED FEBRUARY 3, 2001
(Dollars in millions)
February 1, February 2, February 3,
Condensed Statements of Operations 2003 2002 2001
- ---------------------------------- ------- ------- -------
(As Restated)
Revenue - services to affiliates $ 3.2 $ 3.3 $ 4.2
Operating expenses 4.5 4.7 5.4
Interest and other (income) expenses, net (5.3) (4.3) (0.8)
Income (loss) before taxes 4.0 2.9 (0.4)
Income tax provision (benefit) 1.8 (0.2) (0.2)
------- ------- -------
Income (loss) before equity in undistributed earnings (loss)
of subsidiaries 2.2 3.1 (0.2)
Equity in undistributed earnings (loss) of subsidiaries (7.3) (5.5) (7.6)
------- ------- -------
Net income (loss) $ (5.1) $ (2.4) $ (7.8)
======= ======= =======
Condensed Statements of Cash Flows
- ----------------------------------
Net cash (used for) provided by operating activities $ (7.5) $ 2.9 $ 16.1
------- ------- -------
Investing activities:
Advances from (to) affiliates 9.1 3.0 (14.0)
Purchase of property and equipment, net -- -- (3.3)
Investment in Pearle Europe, net -- (6.5) 2.9
Note from third party (4.0) -- --
Other, net 0.4 -- --
------- ------- -------
Net cash provided by (used for) investing activities 5.5 (3.5) (14.4)
------- ------- -------
Financing activities:
Repayment of long-term debt (0.1) -- (1.1)
Repayment (issuance) of notes receivable-stock options and awards -- (0.3) (1.3)
Net proceeds from exercise of stock options 1.1 0.4 --
Other, net 1.0 0.5 0.7
------- ------- -------
Net cash provided by (used for) financing activities 2.0 0.6 (1.7)
------- ------- -------
Net change in cash -- -- --
Cash, beginning of period -- -- --
------- ------- -------
Cash, end of period $ -- $ -- $ --
======= ======= =======
F-39
SCHEDULE I
(CONTINUED)
NOTE TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The accompanying financial information of Cole National Corporation is as
of February 1, 2003 and February 2, 2002, and for the 52 weeks ended February 1,
2003 and February 2, 2002, and for the 53 weeks ended February 3, 2001. Cole
National Corporation is a holding company for its wholly owned subsidiaries,
including Cole National Group, Inc., and consisted of no other operations.
This financial information should be read in connection with the
Consolidated Financial Statements and notes thereto of Cole National Corporation
and Subsidiaries, contained elsewhere in this Form 10-K.
F-40
COLE NATIONAL CORPORATION AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
52 WEEKS ENDED FEBRUARY 1, 2003,
52 WEEKS ENDED FEBRUARY 2, 2002 AND
53 WEEKS ENDED FEBRUARY 3, 2001
(Dollars in millions)
Charges
Balance at (Reversals) Balance
Beginning to Cost and End of
Description of Period Expenses Transfers(C) Deductions(A) Period
----------- --------- -------- ------------ ------------- ------
FEBRUARY 1, 2003
Allowance for uncollectible accounts $3.2 $2.0 $ -- $(2.1) $3.1
Franchise note allowance for uncollectible accounts 5.2 (0.7) -- (1.5) 3.0
FEBRUARY 2, 2002
Allowance for uncollectible accounts (B) $6.3 $1.1 $(1.2) $(3.0) $3.2
Franchise note allowance for uncollectible accounts (B) 4.7 0.3 1.2 (1.0) 5.2
FEBRUARY 3, 2001
Allowance for uncollectible accounts (B) $7.7 $2.6 $ -- $(4.0) $6.3
Franchise note allowance for uncollectible accounts (B) 2.2 2.8 -- (0.3) 4.7
p
(A) Receivable balances written off, net of recoveries
(B) As restated, see Note 17 to the Notes to Consolidated Financial
Statements.
(C) Transfers resulted from conversion of accounts receivables to notes
receivables.
Allowance balances presented in the Notes to Consolidated Financial
Statements are represented on this schedule.
F-41
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1(i) Restated Certificate of Incorporation of Cole National
Corporation, incorporated by reference to Exhibit 3.1 (i) of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
3.1(ii) Certificate of Amendment of the Restated Certificate of
Incorporation, incorporated by reference to Exhibit 3.1(ii) to
Cole National Corporation's Annual Report on Form 10-K for the
period ended January 31, 1998 (File No. 1-12814).
3.2(ii) Amended and Restated By-Laws of Cole National Corporation,
incorporated by reference to Exhibit 3.2(ii) of Cole National
Corporation's Annual Report on Form 10-K for the year ended
February 3, 1996 (File No. 1-12814).
3.3+ Amended Certificate of Designations of Series A Junior
Participating Preferred Stock, dated November 22, 1999.
4.1 Indenture dated May 22, 2002, by and among Cole National
Group, Inc. and Wells Fargo Bank Minnesota, National
Association, as trustee, relating to the 8-7/8% Senior
Subordinated Notes due 2012 (the form of which Senior
Subordinated Note is included in such Indenture), incorporated
by reference to Exhibit 10.2 of Cole National Corporation's
Quarterly Report on Form 10-Q, filed on June 13, 2002 (File
No. 1-12814).
4.2 Indenture dated August 22, 1997, between Cole National Group,
Inc. and Norwest Bank Minnesota, National Association, as
Trustee, relating to the 8-5/8% Senior Subordinated Notes Due
2007, incorporated by reference to Exhibit 4.4 of Cole
National Group, Inc.'s Registration Statement on Form S-1
(Registration No. 333-34963).
4.3 Rights Agreement and Form of Right Certificate dated as of
November 22, 1999 by and between Cole National Corporation and
National City Bank, as Rights Agent, incorporated by reference
to Exhibit 4.1 of Cole National Corporation's Registration
Statement on Form 8-A dated November 24, 1999 (File No.
1-12814).
4.4 Cole National Corporation by this filing agrees, upon request,
to file with the Commission the instruments defining the
rights of holders of long-term debt of Cole National
Corporation and its subsidiaries where the total amount of
securities authorized thereunder does not exceed 10% of the
total assets of Cole National Corporation and its subsidiaries
on a consolidated basis.
10.1* Employment Agreement entered into as of December 17, 1998 by
and among Cole National Corporation, Cole National Group,
Inc., Cole Vision Corporation, Pearle, Inc., Things
Remembered, Inc. and Jeffrey A. Cole, incorporated by
reference to Exhibit 10.1 to Cole National Corporation's
Annual Report on Form 10-K for the year ended January 30, 1999
(File No. 1-12814).
10.2* Agreement dated March 27, 1993 between Cole National
Corporation and Joseph Gaglioti regarding termination of
employment, incorporated by reference to Exhibit 10.8 to CNG's
Registration Statement on Form S-1 (Registration No.
33-66342).
10.4* Cole National Corporation 1993 Management Stock Option Plan,
including forms of Nonqualified Stock Option Agreement (1993
Time Vesting) and form of secured promissory notes and stock
pledge agreement, incorporated by reference to Exhibit 10.29
to Cole National Group, Inc.'s Registration Statement on Form
S-1 (Registration No. 33-66342).
10.5* Form of Nonqualified Stock Option Agreement for Directors of
the Company, dated March 1993 incorporated by reference to
Exhibit 10.41 to Cole National Corporation 's Registration
Statement on Form S-1 (Registration No. 33-74228).
X-1
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.6* Amendment No. 1 to the Amended and Restated Nonqualified Stock
Option Plan for Nonemployee Directors, incorporated by
reference to Exhibit 10.1 of Cole National Corporation's
Quarterly Report on Form 10-Q for the period ended November 5,
2001 (File No. 1-12814).
10.7* Cole National Corporation 1996 Management Stock Option Plan,
including forms of Nonqualified Stock Option Agreement (1996
Time Vesting), incorporated by reference to Exhibit 10.10 of
Cole National Corporation's Annual Report on Form 10-K for the
year ended February 3, 1996 (File No. 1-12814).
10.8* Management Incentive Bonus Program (Amended and Restated June
14, 2001), incorporated by reference to Exhibit B to Cole
National Corporation's definitive Proxy Statement dated May
10, 2001 (File No. 1-12814).
10.9* Form of Nonqualified Stock Option Agreement (1997 Time
Vesting), incorporated by reference to Exhibit 10.12 to Cole
National Corporation's Annual Report on Form 10-K for the
period ended January 31, 1998 (File No. 1-12814).
10.10* Executive Life Insurance Plan of Cole National Corporation,
incorporated by reference to Exhibit 10.12 to Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 33-66342).
10.11* Medical Expense Reimbursement Plan of Cole National
Corporation effective as of February 1, 1992, incorporated by
reference to Exhibit 10.13 to Cole National Group, Inc.'s
Registration Statement on Form S-1 (Registration No.
33-66342).
10.12 Agreement for the Allocation of Federal Income Tax Liability
and Benefits among Members of the Parent Group dated August
23, 1985, as amended, incorporated by reference to Exhibit
10.26 to Cole National Group, Inc.'s Registration Statement on
Form S-1 (Registration No. 33-66342).
10.13 Assignment and Assumption Agreement dated as of September 30,
1993 between the Company and Cole National Group, incorporated
by reference to Exhibit 10.24 of Cole National Corporation's
Annual Report on Form 10-K for the year ended February 3, 1996
(File No. 1-12814).
10.14 Form of Indemnification Agreement for Directors of Cole
National Corporation, incorporated by reference to Exhibit
10.19 to Cole National Group, Inc.'s Registration Statement on
Form S-1 (Registration No. 33-66342).
10.15 Form of Indemnification Agreement for Officers of Cole
National Corporation, incorporated by reference to Exhibit
10.20 to Cole National Group, Inc.'s Registration Statement on
Form S-1 (Registration No. 33-66342).
10.16* Supplemental Retirement Benefit Plan of Cole National
Corporation, incorporated by reference to Exhibit 10.38 to
Cole National Corporation's Registration Statement on Form S-1
(Registration No. 33-74228).
10.17* Supplemental Pension Plan of Cole National Corporation,
incorporated by reference to Exhibit 10.48 to Cole National
Corporation's Registration Statement on Form S-1 (Registration
No. 33-74228).
10.18 Credit Agreement, dated as of November 15, 1996, among Cole
Vision Corporation, Things Remembered, Inc., Cole Gift
Centers, Inc., Pearle, Inc. and Pearle Service Corporation and
Canadian Imperial Bank of Commerce, incorporated by reference
to Exhibit 99.1 of Cole National Corporation's Report on Form
8-K, filed on December 2, 1996 (File No. 1-12814).
10.19 First Amendment to the Credit Agreement, dated as of January
13, 1997, among Cole Vision Corporation, Things Remembered,
Inc., Cole Gift Centers, Inc., Pearle, Inc., and Pearle
Service Corporation and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.33 of Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-34963).
X-2
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.20 Second Amendment to Credit Agreement, dated as of August 8,
1997, among Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.34 of the Cole
National Group, Inc.'s Registration Statement on Form S-1
(Registration No. 333-34963).
10.21 Cole National Group, Inc. Guarantee and Cash Collateral
Agreement, dated as of November 15, 1996, by Cole National
Group and Cole National Corporation, incorporated by reference
to Exhibit 99.3 of Cole National Corporation's Report on Form
8-K, filed on December 2, 1996 (File No. 1-12814).
10.22 Guarantee and Collateral Agreement dated as of November 15,
1996, by Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Pearle Service
Corporation and Canadian Imperial Bank of Commerce,
Incorporated by reference to Exhibit 99.4 of Cole National
Corporation's Report on Form 8-K, filed on December 2, 1996
(File No. 1-12814).
10.23* Agreement, dated August 4, 1997, between the Company and
Leslie D. Dunn regarding termination of employment,
incorporated by reference to Exhibit 10.37 of Cole National
Group, Inc.'s Registration Statement on Form S-1 (Registration
No. 333-34963).
10.24* Form of Cole National Corporation Nonqualified Stock Option
Agreement (Nonemployee Directors), incorporated by reference
to Exhibit 10.5 of Cole National Corporation's Quarterly
Report on Form 10-Q for the period ended August 2, 1997 (File
No. 1-12814).
10.25* Form of Cole National Corporation Nonemployee Director Equity
and Deferred Compensation Plan, incorporated by reference to
Exhibit B to Cole National Corporation's definitive Proxy
Statement dated May 6, 1997 (File No. 1-12814).
10.26* Form of Cole National Corporation Nonemployee Director Equity
and Deferred Compensation Plan Participation Agreement,
incorporated by reference to Exhibit 10.7 of Cole National
Corporation's Quarterly Report on Form 10-Q for the period
ended August 2, 1997 (File No. 1-12814).
10.27* Form of Cole National Corporation's 1998 Equity and
Performance Incentive Plan (Amended and Restated June 10,
1999), incorporated by reference to Annex B to Cole National
Corporation's definitive Proxy Statement dated May 3, 1999
(File No. 1-12814).
10.28 Third Amendment to the Credit Agreement, dated as of May 15,
1998, among Cole Vision Corporation and Canadian Imperial Bank
of Commerce, incorporated by reference to Exhibit 10.1 of Cole
National Corporation's Quarterly Report on Form 10-Q for the
period ended May 2, 1998 (File No. 1-12814).
10.29 Fourth Amendment to the Credit Agreement, dated as of March 5,
1999, among Cole Vision Corporation, Things Remembered, Inc.
and Pearle, Inc., and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.45 of Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 30, 1999 (File No. 1-12814).
10.30* Nonqualified Stock Option Agreement between Cole National
Corporation and Jeffrey A. Cole dated as of December 17, 1998,
incorporated by reference to Exhibit 10.46 of Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 30, 1999 (File No. 1-12814).
10.31* Form of Nonqualified Stock Option Agreement for Executive
Officers under the Cole National Corporation 1998 Equity
Performance and Incentive Plan, incorporated by reference to
Exhibit 10.48 of Cole National Corporation's Annual Report on
Form 10-K for the period ended January 30, 1999 (File No.
1-12814).
X-3
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.32* Restricted Stock Agreement between Cole National Corporation
and Jeffrey A. Cole dated as of December 17, 1998,
incorporated by reference to Exhibit 10.49 of Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 30, 1999 (File No. 1-12814).
10.33* Cole National Group, Inc. 1999 Supplemental Retirement Benefit
Plan dated as of December 17, 1998, incorporated by reference
to Exhibit 10.51 of Cole National Corporation's Annual Report
on Form 10-K for the period ended January 30, 1999 (File No.
1-12814).
10.34* Cole National Group, Inc. Deferred Compensation Plan effective
as of February 1, 1999, incorporated by reference to Exhibit
10.53 of Cole National Corporation's Annual Report on Form
10-K for the period ended January 30, 1999 (File No. 1-12814).
10.35* Amendment No. 1, dated as of December 17, 1998, to the Cole
National Group, Inc. Supplemental Pension Plan, incorporated
by reference to Exhibit 10.54 of Cole National Corporation's
Annual Report on Form 10-K for the period ended January 30,
1999 (File No. 1-12814).
10.36 Fifth Amendment to the Credit Agreement, dated as of August
20, 1999, among Cole Vision Corporation, Things Remembered,
Inc. and Pearle, Inc., and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.1 of Cole National
Corporation's Quarterly Report on Form 10-Q for the period
ended July 31, 1999 (File No. 1-12814).
10.37 Sixth Amendment and Waiver to the Credit Agreement, dated as
of March 7, 2000, among Cole Vision Corporation, Things
Remembered, Inc. and Pearle, Inc., and Canadian Imperial Bank
of Commerce, incorporated by reference to Exhibit 10.50 of
Cole National Corporation's Annual Report on Form 10-K for the
period ended January 29, 2000 (File No. 1-12814).
10.38 Cole National Corporation Guarantee, in favor of Canadian
Imperial Bank of Commerce, dated as of March 7, 2000, among
Cole Vision Corporation, Things Remembered, Inc. and Pearle,
Inc., incorporated by reference to Exhibit 10.51 of Cole
National Corporation's Annual Report on Form 10-K for the
period ended January 29, 2000 (File No. 1-12814).
10.39* Employment Agreement entered into as of January 18, 2000 by
and among Cole National Corporation and Larry Pollock,
incorporated by reference to Exhibit 10.52 of Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 29, 2000 (File No. 1-12814).
10.40* Restricted Stock Agreement between Cole National Corporation
and Larry Pollock dated as of January 18, 2000, incorporated
by reference to Exhibit 10.53 of Cole National Corporation's
Annual Report on Form 10-K for the period ended January 29,
2000 (File No. 1-12814).
10.41* Nonqualified Stock Option Agreement #1 between Cole National
Corporation and Larry Pollock dated as of January 18, 2000,
incorporated by reference to Exhibit 10.54 of Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 29, 2000 (File No. 1-12814).
10.42 Standstill Agreement, dated as of November 22, 1999, by and
between Cole National Corporation and HAL International N.V.,
incorporated by reference to Exhibit 10.56 of Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 29, 2000 (File No. 1-12814).
10.43* Form of Cole National Corporation's 1999 Employee Stock
Purchase Plan (Amended and Restated June 14, 2001),
incorporated by reference to Exhibit C of Cole National
Corporation's definitive Proxy Statement dated May 10, 2001
(File No. 1-12814).
10.44* Addendum to Employment Agreement dated June 4, 1999 among
Jeffrey A. Cole, Cole National Corporation and certain of its
subsidiaries, incorporated by reference to Exhibit 10.67 of
Cole National Corporation's Annual Report on Form 10-K for the
period ended January 29, 2000 (File No. 1-12814).
X-4
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.45* Amended and Restated Split-Dollar Agreement dated as of
January 25, 2002 between Cole National Corporation and Jo
Merrill, as Trustee of the Jeffrey A. Cole Insurance Trust,
incorporated by referenced to Exhibit 10.57 to Cole National
Corporation's Annual Report on Form 10-K for the period ended
February 2, 2002 (File No. 1-12814).
10.46 Seventh Amendment to the Credit Agreement, dated as of April
21, 2000, among Cole Vision Corporation, Things Remembered,
Inc. and Pearle, Inc., and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.69 of Cole National
Corporation's Annual Report on Form 10-K for the period ended
January 29, 2000 (File No. 1-12814).
10.47 Eighth Amendment to the Credit Agreement, dated as of June 9,
2000 among Cole Vision Corporation, Things Remembered, Inc.,
and Pearle, Inc. and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.1 of Cole National
Corporation's Quarterly Report on Form 10-Q for the period
ended July 29, 2000 (File No. 1-12814).
10.48* Secured Promissory Note between Cole National Corporation and
Jeffrey A. Cole as of November 17, 2000, incorporated by
reference to Exhibit 10.1 of Cole National Corporation's
Quarterly Report on Form 10-Q for the period ended October 28,
2000 (File No. 1-12814).
10.49* Stock Pledge and Security Agreement between Cole National
Corporation and Jeffrey A. Cole dated as of November 17, 2000,
incorporated by reference to Exhibit 10.2 of Cole National
Corporation's Quarterly Report on Form 10-Q for the period
ended October 28, 2000 (File No. 1-12814).
10.50* Amended and Restated 1999 Broad-Based Employee Stock Plan
(Amended and Restated February 28, 2001), incorporated by
reference to Exhibit 4.6 of Cole National Corporation's
Registration Statement on Form S-8 filed on February 11, 2002
(Registration No. 333-822714).
10.51* Amendment No. 1 to the Cole National Group, Inc. Deferred
Compensation Plan for Senior Executives and other Senior
Management, dated January 25, 2002, incorporated by referenced
to Exhibit 10.63 to Cole National Corporation's Annual Report
on Form 10-K for the period ended February 2, 2002 (File No.
1-12814).
10.52* Amendment No. 2 to the Cole National Group, Inc. Supplemental
Pension Plan, dated January 25, 2002, incorporated by
referenced to Exhibit 10.64 to Cole National Corporation's
Annual Report on Form 10-K for the period ended February 2,
2002 (File No. 1-12814).
10.53* Nonqualified Stock Option Agreement between Cole National
Corporation and Jeffrey A. Cole dated January 25, 2002,
incorporated by referenced to Exhibit 10.65 to Cole National
Corporation's Annual Report on Form 10-K for the period ended
February 2, 2002 (File No. 1-12814).
10.54* Amendment No. 2 to the Cole National Group, Inc. Supplemental
Retirement Benefit Plan, dated January 25, 2002, incorporated
by referenced to Exhibit 10.66 to Cole National Corporation's
Annual Report on Form 10-K for the period ended February 2,
2002 (File No. 1-12814).
10.55* Amendment No. 1 to the Cole National Group, Inc. 1999
Supplemental Retirement Benefit Plan, dated January 25, 2002,
incorporated by referenced to Exhibit 10.67 to Cole National
Corporation's Annual Report on Form 10-K for the period ended
February 2, 2002 (File No. 1-12814).
10.56 Amended and Restated Credit Agreement, dated as of May 23,
2002, among Cole Vision Corporation, Things Remembered, Inc.,
Cole Gift Centers, Inc., Pearle, Inc. and Canadian Imperial
Bank of Commerce, incorporated by reference to Exhibit 10.1 of
Cole National Corporation's Quarterly Report on Form 10-Q for
the period ended May 4, 2002 (File No. 1-12814).
X-5
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.57* Letter dated April 14, 2002 from Cole National Corporation to
Lawrence E. Hyatt incorporated by reference to Exhibit 10.1 of
Cole National Corporation's Quarterly report on Form 10-Q for
the period ended August 3, 2002 (File No. 1-12814).
10.58* Letter Agreement dated April 19, 2002 between Cole National
Corporation and Lawrence E. Hyatt regarding termination of
employment, incorporated by reference to Exhibit 10.2 of Cole
National Corporation's Quarterly report on Form 10-Q for the
period ended August 3, 2002 (File No. 1-12814).
10.59* Restricted Stock Agreement between Cole National Corporation
and Lawrence E. Hyatt dated as of July 15, 2002, incorporated
by reference to Exhibit 10.3 of Cole National Corporation's
Quarterly report on Form 10-Q for the period ended August 3,
2002 (File No. 1-12814).
10.60* Nonqualified Stock Option Agreement, between Cole National
Corporation and Lawrence E. Hyatt dated as of July 15, 2002,
incorporated by reference to Exhibit 10.4 of Cole National
Corporation's Quarterly report on Form 10-Q for the period
ended August 3, 2002 (File No. 1-12814).
10.61 First Amendment to Credit Agreement, dated as of August 23,
2002, among Cole Vision Corporation, Things Remembered, Inc.
and Pearle, Inc. and Canadian Imperial Bank of Commerce,
incorporated by reference to Exhibit 10.5 of Cole National
Corporation's Quarterly report on Form 10-Q for the period
ended August 3, 2002 (File No. 1-12814).
10.62 Second Amendment to Credit Agreement, dated as of September
13, 2002, among Cole Vision Corporation, Things Remembered,
Inc. and Pearle, Inc. and Canadian Imperial Bank of Commerce
incorporated by reference to Exhibit 10.6 of Cole National
Corporation's Quarterly report on Form 10-Q for the period
ended August 3, 2002 (File No. 1-12814).
10.63 Amendment No. 1 to the Cole National Group, Inc. Retirement
Plan (Amended and Restated) as of January 1, 2001), effective
March 31, 2002, incorporated by reference to Exhibit 10.7 of
Cole National Corporation's Quarterly report on Form 10-Q for
the period ended August 3, 2002 (File No. 1-12814).
10.64*+ Letter dated December 2, 2002 from Cole National Corporation
to Ann M. Holt.
10.65*+ Letter Agreement dated May 31, 2000 between Cole National
Corporation and Ann M. Holt regarding termination of
employment.
10.66+ Third Amendment to Credit Agreement, dated December 16, 2002,
among Cole Vision Corporation, Things Remembered, Inc. and
Pearle, Inc. and Canadian Imperial Bank of Commerce.
10.67*+ Amended and Restated Instrument Designating Participants of
the Cole National Group, Inc. 1999 Supplemental Retirement
Benefit Plan dated January 25, 2002.
10.68+ Form of License/Lease Agreement for Sears Optical.
10.69+ Cole National Corporation 401(k) Plan dated March 27, 2003
effective March 1, 2002.
10.70+ Bank Waiver to the Credit Agreement, dated May 9, 2003, among
Cole Vision Corporation, Things Remembered, Inc. and Pearle,
Inc. and Canadian Imperial Bank of Commerce.
21+ Subsidiaries of Cole National Corporation.
23.1+ Independent Auditors' Consent.
24+ Power of Attorney.
X-6
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
99.1 Letter to Securities and Exchange Commission regarding Arthur
Andersen LLP, incorporated by referenced to Exhibit 99 to Cole
National Corporation's Annual Report on Form 10-K for the
period ended February 2, 2002 (File No. 1-12814).
99.2+ Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act 2002.
* Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
Form 10-K.
+ Filed herewith.
X-7